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08.27.2020 | Legal Update

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1. Federal Court Dismisses Class Action Claims Against PPP Lenders for Agent Fees
2. Federal Banking Agencies Issue Guidance on Mandatory BSA/AML Enforcement Actions
3. FFIEC Issues Guidance on Additional Loan Accommodations Related to COVID-19
4. FDIC Proposes to Establish a New Office to Hear Supervisory Appeals
5. Other Developments: Accounting Guidance and Qualified Mortgages

1. Federal Court Dismisses Class Action Claims Against PPP Lenders for Agent Fees

A federal court in Florida has dismissed claims made in a class action lawsuit against several banks and other Small Business Administration (“SBA”) qualified lenders for the payment of “agent fees” for loans made under the Paycheck Protection Program (“PPP”) established by the federal Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The August 17 decision by United States District Court for the Northern District of Florida came in a class action case brought on behalf of accounting firms and other consultants that worked as agents for businesses applying for PPP loans. The lawsuit claimed that the PPP lenders owed agent fees under the PPP to the agents for assisting PPP loan applicants even though neither the agents nor the borrowers had agreements with the lenders regarding the payment of agent fees. Specifically, the agents claimed that they were owed a portion of the loan processing fees that the lenders received from the SBA under the PPP. The agents argued that the CARES Act and the SBA’s regulation that implements the PPP require PPP lenders to pay borrowers’ agent fees. The court determined that the agent’s claims found “no support in the plain language of the statute or the regulation.” Similar class action lawsuits for agent fees are pending in several federal courts around the country. Click here for a copy of the court’s decision.

Nutter Notes: The CARES Act requires the SBA to reimburse a lender authorized to make a PPP loan and establishes the fees that a PPP lender must be paid for making the loan. The CARES Act also provides that an agent that assists a PPP borrower to prepare an application for a PPP loan may not collect a fee in excess of limits established by the SBA. The SBA’s PPP implementing regulation provides that agent fees are to be paid by a PPP lender out of the fees the lender receives from the SBA, and prohibits agents from collecting fees from the borrower or that are paid out of the PPP loan proceeds. The regulation also limits the total amount that an agent may collect from a lender for assistance in preparing a PPP application, depending on the amount of the PPP loan. The court determined that the CARES Act does not require PPP lenders to pay an agent’s fees absent an agreement to do so “because the statutory language does not even speak to who pays the agent’s fees; it merely provides that the agent cannot collect a fee from anyone in excess of the amount established by the SBA Administrator.” The court also determined that the SBA’s existing Section 7(a) Loan Program regulations, to which PPP loans are subject, require a loan applicant or agent to execute a compensation agreement and provide it to the SBA on an SBA Form 159 as a prerequisite to a PPP lender’s payment of agent fees.

2. Federal Banking Agencies Issue Guidance on Mandatory BSA/AML Enforcement Actions

The federal banking agencies have issued joint guidance to clarify how they determine what enforcement actions will be taken when banks fail to meet Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) requirements. The guidance, published on August 13, describes the circumstances in which a federal banking agency will issue a mandatory cease and desist order, and those in which an agency may exercise discretion to issue other formal or informal enforcement actions. For example, the guidance clarifies that an agency will issue a cease and desist order based on a violation of the statutory requirement to establish and maintain a reasonably designed BSA/AML compliance program where the bank fails to have a written BSA/AML compliance program, fails to implement a BSA/AML compliance program that adequately covers the required program components, or has defects in its BSA/AML compliance program that indicate that either the written program or its implementation is not effective. According to the guidance, a cease and desist order would be warranted if an agency determines that a bank has deficiencies in the required independent testing component of its BSA/AML compliance program along with evidence of highly suspicious activity that creates a potential for significant money laundering, terrorist financing, or other illegal financial transactions. Click here for a copy of the agencies’ guidance on BSA/AML enforcement actions.

Nutter Notes: The federal banking agencies separately issued joint guidance on August 21 to clarify BSA/AML due diligence requirements for customers who may be considered politically exposed persons (“PEPs”). The guidance explains that, while not defined by the BSA/AML regulations, the term PEP generally refers to foreign individuals who are or have been “entrusted with a prominent public function,” and their immediate family members and close associates, but does not include U.S. public officials. Due to this public position or relationship, PEPs may present a higher BSA/AML risk, according to the agencies’ guidance. However, the guidance clarifies that the level of risk associated with PEPs varies and that classification as a PEP does not automatically mean the individual is a higher risk. According to the guidance, the agencies recognize that the level and type of customer due diligence should be commensurate with the risks presented by each PEP relationship, and that the level of risk depends on facts and circumstances specific to the customer relationship. The guidance also clarifies that there is no supervisory expectation that banks should have separate due diligence steps for customers who are considered PEPs, and that the BSA/AML regulations do not require a bank to screen for PEPs. According to the guidance, a bank may choose to determine whether a customer is a PEP at account opening, and a bank may conduct periodic reviews with respect to PEPs, as part of or in addition to ongoing risk-based monitoring. Click here for a copy of the agencies’ guidance on BSA due diligence requirements for customers who may be considered PEPs.

3. FFIEC Issues Guidance on Additional Loan Accommodations Related to COVID-19

The member agencies of the Federal Financial Institutions Examination Council (“FFIEC”) have issued joint guidance for banks on additional loan accommodations for consumer and commercial borrowers that continue to suffer financial hardships related to the COVID-19 public health crisis. The FFIEC’s guidance published on August 3 recommends risk management and consumer protection principles that banks should consider while working with their borrowers as loans near the end of initial loan accommodation periods related to COVID-19 hardships. According to the guidance, a bank’s risk management practices should include the application of loan risk ratings or grades along with making accrual status decisions on loans subject to COVID-19 accommodations. The federal banking agencies expect banks to reassess risk ratings for a loan following a COVID-19 accommodation based on a borrower’s current debt level, current financial condition, repayment ability, and collateral. The guidance clarifies that a COVID-19 accommodation does not require an adverse risk rating solely because of a decline in the value of underlying collateral if the borrower has the ability to repay the loan according to its modified terms. The guidance also suggests that banks consider additional accommodations for borrowers that continue to experience financial challenges after an initial COVID-19 accommodation. Click here for a copy of the joint guidance.

Nutter Notes: The joint guidance encourages banks to provide consumers with options for repaying any missed payments at the end of a COVID-19 accommodation to avoid delinquencies or other adverse consequences, and to provide consumers with options for making “prudent changes” to loan terms to support sustainable and affordable payments, where appropriate. According to the guidance, the federal banking agencies expect banks to provide clear, conspicuous, and accurate communications and disclosures to consumers about the options available as COVID-19 accommodations, and that such communications and disclosures will be delivered before the end of the accommodation period to allow adequate time for the borrower to consider next steps. The agencies also expect banks to base eligibility and payment terms for COVID-19 accommodations on consistent analyses of borrowers’ financial condition and reasonable capacity to repay, and to implement policies and procedures to ensure that loan accommodations are consistent with applicable laws and regulations, including fair lending laws. The guidance also reminds banks to follow applicable accounting and regulatory reporting requirements for all loan modifications, including any additional modifications granted to consumer or commercial borrowers who are continuing to experience COVID-19 related financial hardship at the end of an initial accommodation period.

4. FDIC Proposes to Establish a New Office to Hear Supervisory Appeals

The FDIC is soliciting public comments on proposed amendments to its appeals process for material supervisory determinations. The proposed amendments released on August 21 would establish a new, independent office within the FDIC whose only function would be to review and consider supervisory appeals, which would replace the FDIC’s Supervision Appeals Review Committee (“SARC”), a standing committee of the FDIC’s Board of Directors. This new office would report directly to the FDIC Chairperson’s Office and would have delegated authority to independently consider and resolve FDIC supervisory appeals. According to the proposal, the new office would be independent of the divisions within the FDIC that have authority to issue material supervisory determinations (the Division of Risk Management Supervision, the Division of Depositor and Consumer Protection, and the Division of Complex Institution Supervision and Resolution). The FDIC proposes that banks would continue to be encouraged to make good-faith efforts to resolve disagreements over supervisory determinations with examiners or the appropriate FDIC regional office and, if necessary, submit a request for review with the appropriate division director. Under the proposal, the division director would then have the option of issuing a written decision or sending the appeal directly to the new supervisory appeals office. A bank that disagrees with a decision made by a division director could submit an appeal directly to the new office. Click here for a copy of the proposed amendment.

Nutter Notes: According to the FDIC’s proposal, a three-member panel of the new supervisory appeals office would consider appeals and would issue a written decision. The bank and the applicable division director would continue to be permitted to submit their respective views on the appeal to the new office during the office’s review process, under the proposal. In addition, the FDIC Ombudsman also would be authorized to submit views to the review panel. Under the proposal, oral presentations to the review panel would be permitted if a request is made by either the bank or by FDIC staff. The FDIC noted that the SARC currently has discretion to allow or deny oral presentations, and that requests for oral presentations are generally allowed. The FDIC’s proposal also includes amendments that are meant to improve the procedures and timeline for the consideration of certain decisions related to formal enforcement actions through the supervisory appeals process. The FDIC’s current Guidelines for Appeals of Material Supervisory Determinations provide that if the FDIC does not commence a formal enforcement action within 120 days after giving written notice to a bank of a recommended or proposed formal enforcement action, the bank may appeal to the SARC, unless the SARC Chairperson agrees to extend the 120-day period. The proposal would require that, if the FDIC provides written notice to a bank that the FDIC is determining whether a formal enforcement action is merited, the FDIC must provide the bank with a draft consent order within 120 days of that notice.

5. Other Developments: Accounting Guidance and Qualified Mortgages

• OCC Updates Accounting Guidance on Troubled Debt Restructurings and Credit Losses

The OCC on August 17 issued updated accounting guidance for national banks and federal savings associations on FASB accounting standards issued through March 31, 2020, including troubled debt restructurings and credit losses. The update to the Bank Accounting Advisory Series (“BAAS”) also includes recent answers to frequently asked questions from the industry and examiners, and an appendix describing newly issued accounting standards applicable to the first call report for which calendar year-end institutions must adopt each accounting standard.

Nutter Notes: The updated accounting guidance notably does not address questions related to the impact of the COVID-19 public health crisis and does not reflect new policy statements and rules issued in response to COVID-19. Click here for a copy of the updated BAAS.

• CFPB Proposes to Add a New Category of Qualified Mortgages to Regulation Z

The CFPB on August 18 released proposed amendments to its Truth in Lending rule, Regulation Z, that would establish a new category of qualified mortgages to be known as “seasoned qualified mortgages” or “Seasoned QMs.” Under the proposal, a Seasoned QM would receive a safe harbor from ability-to-repay liability at the end of a 36-month period if the Seasoned QM satisfies certain product restrictions, points-and-fees limits, and underwriting requirements, and if it meets performance and portfolio requirements during the 36-month period.

Nutter Notes: Under the CFPB’s proposal, qualification as a Seasoned QM would be available for home mortgage loans that have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of a 36-month period beginning on the date on which the first periodic loan payment is due after closing. Click here for a copy of the proposed amendments to Regulation Z.

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 Heather F. Merton. The information in this publication is not legal advice. For further information, contact:

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Kenneth F. Ehrlich kehrlich@nutter.com Tel: (617) 439-2989

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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.