Nutter Bank Report: July 2020Print PDF
- SBA Issues Instructions to Lenders on Submitting PPP Loan Forgiveness Applications
- OCC Proposes True Lender Rule for Bank-Fintech Lending Arrangements
- FinCEN Issues BSA/AML Compliance Guidance for Hemp-Related Business Customers
- OCC: National Banks and Federal Thrifts May Provide Cryptocurrency Custody Services
- Other Developments: Foreclosure Moratorium and CFPB Leadership
1. SBA Issues Instructions to Lenders on Submitting PPP Loan Forgiveness Applications
The U.S. Small Business Administration (the “SBA”) has issued a procedural notice announcing that the SBA will begin accepting forgiveness applications from Paycheck Protection Program (“PPP”) lenders, including banks, on August 10, 2020. The SBA notice issued on July 23 provides information about the process for submitting applications for PPP loan forgiveness to the SBA, requesting payment of the forgiveness amount determined by the PPP lender, SBA loan forgiveness application reviews, and payment of the loan forgiveness amount determined by the SBA. According to the notice, a PPP borrower must first complete and submit the Loan Forgiveness Application (SBA Form 3508, 3508EZ, or the lender’s equivalent form) to its PPP lender. The lender must then review the Loan Forgiveness Application in accordance with certain requirements specified by the SBA, and issue a decision to the SBA along with certain required documents, within 60 days after receipt of a complete application from the borrower. According to the notice, the lender’s decision on a PPP borrower’s Loan Forgiveness Application may be an approval (in whole or in part), a denial, or, if directed by the SBA, a denial without prejudice due to a pending SBA review of the loan. The notice clarifies that, if the lender determines that the borrower is entitled to forgiveness of all or part of the loan, the lender must request payment from the SBA at the time the lender delivers its decision to the SBA. Click here for a copy of the SBA’s notice.
Nutter Notes: The SBA’s notice also provides guidance on the review procedures a PPP lender must follow when a PPP borrower submits a Loan Forgiveness Application to the lender. Among other things, the SBA requires that the lender confirm receipt of the borrower certifications contained in the Loan Forgiveness Application form, and confirm receipt of the documentation that the borrower must submit to verify the borrower’s payroll and nonpayroll costs. The lender is also required to confirm the borrower’s calculations on the borrower’s Loan Forgiveness Application, including “the dollar amount of the (A) Cash Compensation, Non-Cash Compensation, and Compensation to Owners claimed on Lines 1, 4, 6, 7, 8, and 9 on PPP Schedule A and (B) Business Mortgage Interest Payments, Business Rent or Lease Payments, and Business Utility Payments claimed,” by reviewing the documentation submitted with the application. In addition, the lender must confirm the borrower’s calculation of the loan forgiveness amount. The notice clarifies that it is the responsibility of the borrower to provide an accurate calculation of the loan forgiveness amount, and that the lender may rely on the borrower’s representations. However, the lender is expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents, according to the notice.
2. OCC Proposes True Lender Rule for Bank-Fintech Lending Arrangements
The OCC has issued a proposed rule that would determine when a national bank or federal savings association makes a loan and is the “true lender” in the context of a partnership between a bank and a third-party marketplace lender. According to the OCC, the true lender proposal released on July 20 is intended to resolve uncertainty about the legal framework that applies to loans made as part of these relationships, which often involve fintech companies relying on bank partnerships to offer consumer credit nationwide on uniform terms. The OCC expressed concern that, “this uncertainty may discourage banks and third parties from entering into relationships, limit competition, and chill the innovation that results from these partnerships—all of which may restrict access to affordable credit.” According to the OCC, the federal laws that authorize national banks and federal savings associations to extend credit do not describe how to determine when a bank has in fact, exercised this authority, and when, by contrast, the bank’s relationship partner has made a loan. In light of this statutory ambiguity, the OCC’s true lender proposal would clarify that a bank makes a loan whenever it, as of the date of origination of the loan, is named as the lender in the loan agreement or funds the loan. Public comments on the proposed rule must be submitted to the OCC by September 3, 2020. Click here for a copy of the proposed rule.
Nutter Notes: The true lender proposed rule follows the OCC’s recent adoption of its final rule on the “valid when made” doctrine. Both the true lender proposal and the final “valid when made” rule are intended to provide clarity and legal certainty to participants in bank partnerships or third-party arrangements in the wake of federal and state litigation. Consumer advocates are expected to be critical of the true lender proposal under the theory that it and the earlier “valid when made” rule may lend themselves to abuse by predatory lenders entering into “rent a charter” arrangements with national banks and federal savings associations. However, the OCC discounted concerns over potential abuse. The OCC’s statement accompanying the true lender proposal notes that when a bank makes a loan, “a robust Federal framework applies” which ensures that lending is done in a safe and sound manner and in compliance with applicable prudential and consumer financial protection laws and regulations. The OCC also cited its role as a prudential regulator of the lending activities of national banks and federal savings associations, and the applicability of the OCC’s third-party risk management guidance to bank partnership relationships.
3. FinCEN Issues BSA/AML Compliance Guidance for Hemp-Related Business Customers
The Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury has issued new guidance to financial institutions, including banks, addressing Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance issues related to providing financial services to hemp-related business customers. The guidance issued on June 29 describes how financial institutions can conduct due diligence for hemp-related business customers, and identifies the types of information that financial institutions should collect from hemp-related business customers to comply with BSA/AML requirements. For example, a financial institution may confirm a hemp grower’s compliance with applicable licensing requirements by either obtaining a written attestation by the hemp grower that it is validly licensed or a copy of the license, according to the guidance. According to the guidance, the extent to which a financial institution may need to seek additional information beyond what is minimally required under the BSA/AML rules depends on the financial institution’s assessment of the level of risk posed by each customer. The guidance advises that such additional information in the case of a hemp-related business customer may include crop inspection or testing reports, license renewals, updated attestations from the business, or correspondence with the governmental licensing authority. Click here for a copy of FinCEN’s guidance.
Nutter Notes: The federal Agriculture Improvement Act of 2018 (the “2018 Farm Bill”) removed hemp from the definition of marijuana in the federal Controlled Substances Act and directed the U.S. Department of Agriculture (the “USDA”) to establish a regulatory framework for the legal production of hemp. The USDA issued an interim final rule in 2019 that established the domestic hemp production regulatory program to facilitate the legal production of hemp in accordance with the 2018 Farm Bill. Under the interim final rule, state and tribal governments may submit plans to the USDA for approval to monitor and regulate the domestic production of hemp. As such, the licensed production of hemp is not subject to the federal criminal prohibitions against the cultivation, possession or distribution of marijuana, or state laws regulating marijuana. Under FinCEN’s BSA/AML rules, financial institutions must conduct customer due diligence for all customers, including hemp-related businesses. The BSA/AML rules also require that financial institutions establish appropriate risk-based procedures for conducting ongoing customer due diligence, the requirements of which will generally vary depending on the customer’s risk profile and other factors.
4. OCC: National Banks and Federal Thrifts May Provide Cryptocurrency Custody Services
The OCC has issued an interpretive letter explaining the OCC’s determination that national banks and federal savings associations have the authority to provide cryptocurrency custody services for customers. The activities discussed in the OCC’s July 22 interpretive letter include holding unique cryptographic keys associated with cryptocurrencies on behalf of a bank’s customers and providing related custody services. According to the interpretive letter, such customers may include investment advisers who wish to manage cryptocurrencies on behalf of their customers and who prefer to use national banks as custodians for the managed assets. The interpretive letter notes that providing safekeeping and custody services for a wide variety of assets, including both physical objects and electronic assets, are well established as permissible activities for national banks. According to the interpretive letter, a national bank has authority to provide such services in both a non-fiduciary capacity and, if authorized to exercise trust powers, in a fiduciary capacity. The letter concludes that the authority to provide cryptocurrency custody services for customers applies equally to federal savings associations, either in a fiduciary or a non-fiduciary capacity. Click here for a copy of the interpretive letter.
Nutter Notes: The OCC’s determination provides indirect authority for any Massachusetts-chartered bank to provide cryptocurrency custody services for customers under the Massachusetts parity law, Chapter 167F, Section 2, Paragraph 31 of the General Laws of Massachusetts. The Massachusetts parity law permits a Massachusetts bank to “exercise any power and engage in any activity that is permissible for” a national bank or federal savings association headquartered in Massachusetts, provided that the activity is not otherwise prohibited by Massachusetts law. There is no Massachusetts law prohibiting banks from providing cryptocurrency custody services. The Massachusetts parity law provides that the activity will be subject to the same limitations and restrictions that are applicable to a national bank or federal savings association. The parity law also provides that the activity must be one that has been permitted by the FDIC under Section 24 of the Federal Deposit Insurance Act and the FDIC’s implementing rules at 12 C.F.R. Part 362. Section 24 and the FDIC’s rules at Part 362 generally do not restrict activities conducted as agent for a customer, including custodial services. A Massachusetts bank that wishes to exercise authority under the parity law must provide 30 days written notice in advance to the Division of Banks.
5. Other Developments: Foreclosure Moratorium and CFPB Leadership
- Massachusetts Moratorium on Evictions and Foreclosures Extended
Governor Baker announced on July 21 that he has extended the current moratorium on evictions and foreclosures in Massachusetts for 60 days, until October 17, 2020, under the authority granted to him by the emergency COVID-19 law, Chapter 65 of the Acts of 2020. According to the governor’s statement, during the extension the administration will “consult with the court administrators and other stakeholders regarding programs and policies to help tenants avoid eviction when proceedings resume.”
Nutter Notes: Chapter 65 of the Acts of 2020 temporarily suspends most residential and small business commercial evictions, and residential foreclosures. The law does not relieve tenants or home mortgage loan borrowers of their obligations to pay rent or make mortgage payments. Click here to access the governor’s announcement.
- U.S. Supreme Court Strikes Down CFPB’s Single-Director Leadership Structure
The U.S. Supreme Court ruled on June 29 that the CFPB’s leadership by a single Director removable by the President “only for ‘inefficiency, neglect of duty, or malfeasance in office’” is unconstitutional. The Court also ruled that the statutory protections for the removal of the Director of the CFPB are severable from the rest of the federal law that established the CFPB and grants the agency its authority. According to the ruling, the agency may continue to operate, but its Director may be removed by the President at will.
Nutter Notes: In its opinion, the Court explained that there are only two exceptions to the President’s constitutional power to supervise, and the unrestricted power to remove, federal officials who exercise executive power: Congress may create expert agencies led by a group of officials removable by the President only for good cause, and Congress may provide protections to certain subordinate officials who have narrowly defined duties. Click here for a copy of the Court’s decision.
Nutter Bank Report
Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. Visit the U.S. rankings at Chambers.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Thomas J. Curry and Heather F. Merton. The information in this publication is not legal advice. For further information, contact:
Thomas J. Curry
Tel: (617) 439-2087
Kenneth F. Ehrlich
Tel: (617) 439-2989
Michael K. Krebs
Tel: (617) 439-2288
This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.
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