Today, July 7, 2020, the Consumer Financial Protection Bureau (“CFPB”) released final amendments to its small-dollar lending rule published in November 2017 (the “2017 Rule”), specifically repealing the mandatory underwriting provisions of the rule. The CFPB did not rescind or alter the payments provisions of the 2017 Rule, and instead ratified those provisions and will move forward to implement those provisions. We address each aspect of the final amendments below.
On June 23, 2020, the Federal Reserve, FDIC, OCC, NCUA, and state financial regulators (“the agencies”) issued guidance outlining the supervisory principles for assessing the safety and soundness of institutions amidst the COVID-19 pandemic. The guidance highlights that while examiners will consider the unique stresses caused by COVID-19 on financial institutions, the agencies will continue to assess institutions in accordance with existing policies and procedures and may provide supervisory feedback, or downgrade institutions’ composite or component ratings under the applicable rating system when conditions have deteriorated. Although an assessment may result in a lower rating, in determining the appropriate supervisory response, examiners will consider whether weaknesses were caused by external economic problems related to the pandemic or by intrinsic risk management and governance issues. Overall, the guidance suggests that while examiners will take into account the unique impact of the pandemic on financial institutions, ratings will depend on each individual institution’s ability to assess and manage risk appropriately, including taking appropriate action in response to stresses caused by the COVID-19 pandemic.
Yesterday, July 1, the Federal Financial Institutions Examination Council released a Joint Statement on Managing the LIBOR Transition (the “Joint Statement”). The Joint Statement discusses the LIBOR replacement issues at a high level and “does not establish new guidance or regulation.” The Joint Statement does not mandate SOFR or any other rate as the replacement for LIBOR.
What the Joint Statement does do is lay out supervisory expectations for an insured depository institution’s plans for the LIBOR transition. These plans will be reviewed at the institution’s next safety and soundness examination – which may occur well before LIBOR is discontinued.
For many institutions, the critical supervisory issue is likely to be how an institution plans to implement the fallback language in existing contracts. Fallback or replacement language is typically not uniform in these contracts and may not address the permanent cessation of LIBOR. Further, according to the Joint Statement, LIBOR transition plans should include the identification of LIBOR-related exposures, efforts to include fallback language or use alternative reference rates in new contracts, operational preparedness, and consumer protection considerations.
The New York State Department of Financial Services (DFS) launched a series of virtual currency initiatives last week meant to expand access to and clarify rules regarding the use of virtual currencies in the state. First, DFS has proposed a conditional licensing framework for virtual currency providers. In connection with this framework, DFS has signed an MOU with the State University of New York (“SUNY”) to launch a new virtual currency program. Second, DFS has issued final guidance regarding self-certification of new coins and the process by which DFS “Greenlists” coins. Third, DFS has issued new online virtual currency-related resources for the benefit of market participants.
Earlier today, the U.S. Supreme Court released its long-awaited decision in the case of Seila Law LLC v. Consumer Financial Protection Bureau, a constitutional challenge to the structure of the CFPB. The Court held that (i) the provision of the Dodd-Frank Act that protects the CFPB Director from removal by the President except for cause violates the constitutional separation of powers, and (ii) this provision is severable from the rest of the statute. As a consequence of the decision, the CFPB Director is now removable by the President; the agency retains its full authority. Continue Reading
On May 20th the U.S. Commodities Futures Trading Commission (the “CFTC”) Division of Enforcement (the “Division”) announced new guidance for Division staff to consider when recommending civil monetary penalties in an enforcement action (the “CMP Guidance” or the “Guidance”). As a former CFTC regulator who brought dozens of cases over a 13 year career in the Division of Enforcement, Anne Termine provides an explanation of both the art and science involved in the CFTC’s decision-making process for assessing penalties in enforcement actions. Utilizing her perspective and experience as a former CFTC regulator, the alert explains the background and reason for the CMP Guidance; deciphers the Guidance factors and how they can be used when negotiating a settlement or reviewing internal systems and controls; and examines the missing piece of the equation – the quantitative component in the Division’s penalty decision-making process and how this piece can be filled in by understanding how to interpret and distinguish precedent CFTC enforcement cases.
Click here to read our Covington Alert summarizing the key features of the final rule.
On May 28, 2020, the Commodity Futures Trading Commission (CFTC) unanimously approved an interim final rule in order to grant an extension of the compliance schedule for uncleared swaps in response to the many operational challenges entities are facing in the wake of the COVID-19 (coronavirus) pandemic. It also approved a proposed rule exempting certain foreign persons from registration as a commodity pool operator (CPO). Recently, the CFTC extended previous waves of no-action relief in response to the coronavirus.
On June 11, the European Commission (the “EC”) opened for feedback a trio of draft delegated acts that, if adopted, would constitute a major step toward cohesive global regulation of international securities and derivatives markets. Specifically, the delegated acts (see here, here, and here) would allow certain central counterparties in non-EU Member States (“third-country CCPs”) to submit a request to the European Securities and Markets Authority (“ESMA”) to grant a recognition of comparable compliance. If granted, the third country’s regulatory framework would be deemed to satisfy compliance with EU regulatory requirements, which would enable the third-country CCP to serve EU market participants. The draft delegated acts also specify the criteria to be applied by ESMA when considering such requests, and the fees to be paid by third-country CCPs.
As we have written previously, cross-border swaps reform has been an important – and contentious – area of focus for securities and derivatives regulators in recent years. The adoption of comparable compliance frameworks by regulators would significantly reduce administrative and regulatory burdens on market participants and promote global regulatory cohesion. For this reason, U.S. CFTC Chairman Heath P. Tarbet praised the EC for the draft delegated acts. In his remarks, Chairman Tarbert signaled that the CFTC would explore ways to defer to EU and other regulators as appropriate, stating that deference “is a two-way street.”
Chairman Tarbert’s comments come on the heels of the recent announcement by the International Organization of Securities Commissions (“IOSCO”) that Chairman Tarbert will serve as a Vice Chair of the IOSCO Board for the 2020–2022 term. Through this new leadership role, Chairman Tarbert will have the opportunity to significantly advance international cooperation among securities and derivatives regulators.
On June 8, 2020, the Federal Reserve Bank of New York (“FRBNY”) published revised FAQs and three updated transaction documents for the Term Asset-Backed Securities Loan Facility (“TALF”). The three documents are the (i) Form of Issuer and Sponsor Certification as to TALF Eligibility for ABS, the Form of Indemnity Undertaking for ABS; (ii) the Form of Auditor Attestation, the Form of Management Report on Compliance; and (iii) Guidance for Accounting Firms in Determining TALF Collateral Eligibility for ABS. The term sheets have not changed. The additional documentation, guidance, and clarifications include the following:
- Redemption options. The rules on redemption options are more lenient for collateralized loan obligations (“CLOs”). The FAQs previously allowed a redemption option in a newly issued ABS only if the option could be exercised no earlier than three years after the disbursement date of the loan secured by the ABS (other than a customary clean-up call) or at any time when the ABS is owned by the FRBNY or TALF II LLC (the “SPV”). The revised FAQs carve out collateralized loan obligations; a redemption option for a CLO that can be exercised no earlier than one year after the issuance date does not affect the CLO’s eligibility, provided that the exercise is subject to a condition that the eligible CLOs and any pari passu class(es) of the securitization are redeemed at their full outstanding principal amount plus any accrued interest outstanding. The lender may exercise the option even if the CLOs are owned by the FRBNY or the SPV.
- Maturity dates. The documents clarify that most classes of existing ABS are eligible only if they mature before the TALF termination debt (presently, Sept. 30, 2020) and after January 1, 2020.
- Junior AAA-rated ABS tranches. Generally, junior AAA-rated ABS tranches are not eligible collateral. The revised FAQs provide that, for the purpose of this restriction, money market eligible tranches for auto loan and equipment loan securitizations are not considered senior to other AAA-rated securities in those transactions.
- Auto loan ABS. Auto loan ABS with any revolving feature must have all of the features of a revolving master trust in order to qualify as eligible collateral.
- Timing. The FAQs also cover various timing issues. For the June 17 subscription date, ABS may be priced no earlier than June 15. ABS priced earlier would be eligible for later subscriptions.
- Issuer and Sponsor Certification. A borrower must provide an Issuer and Sponsor Certification as to TALF Eligibility for ABS. For newly issued ABS, the certification must be included in prospectus or offering document.
- Material investor. A borrower is required to identify all “material investors” for the purpose of Federal Reserve disclosures. The FAQs explain that a borrower may rely on the beneficial ownership analysis conducted in connection with reporting obligations under the securities laws. Indirect ownership through another investor is the product of an investor’s percentage ownership in that investor multiplied by the holding company’s percentage ownership in the borrower.
- Sovereign wealth funds. A sovereign wealth fund is considered a foreign government under the TALF and therefore ineligible as a borrower.
On June 8, 2020, the Federal Reserve Board (“Board”) announced changes to its Main Street Lending Program (“MSLP”) intended to allow more small and medium-sized businesses to participate in the MSLP. The Board also published updated term sheets for each of the MSLP facilities reflecting these changes; to illustrate how these changes affect the term sheets, we have prepared a blackline of the updated Main Street New Loan Facility (“MSNLF”) term sheet against the most recent prior version released on April 30, 2020. The Board notes that these changes are based on extensive feedback received from potential participants in the MSLP. The announcement does not provide further specifics on the timing of the MSLP launch, but does state that the MSLP will be open for lender registration “soon” and that it will be actively buying loans “shortly afterwards.”