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Fed issues enforcement action for flood insurance violations
On June 9, the Federal Reserve Board announced an enforcement action against a California-based bank for alleged violations of the National Flood Insurance Act (NFIA) and Regulation H, which implements the NFIA. The consent order assesses a $129,108 penalty against the bank for an alleged pattern or practice of violations of Regulation H, but does not specify the number or the precise nature of the alleged violations. The maximum civil money penalty under the NFIA for a pattern or practice of violations is $2,000 per violation.
Fed expands Main Street Lending Program
On June 8, the Federal Reserve Board (Fed) announced an expansion to its Main Street Lending Program in order to assist more small and medium-sized businesses. The Fed notes that small and medium-sized businesses’ needs “vary widely,” and after seeking feedback, revised the program to, among other things, (i) lower the minimum loan size for certain loans to $250,000 from $500,000; (ii) increase the maximum loan size for all facilities; (iii) increase the term option to five years, from four years; (iv) delay principal payments for two years, rather than one; and (v) raise the purchase rate to 95 percent of each eligible loan. The announcement notes that the Fed expects the program to be open for lender registration “soon” and will be “actively buying loans shortly afterwards.” The program will continue to accept loans that were originated under previous terms if the loans are funded before June 10 (see InfoBytes here on the program’s previous terms).
The Fed’s announcement also contains a chart covering the detailed changes and term sheets for the program’s New Loan Facility, Priority Loan Facility, and Expanded Loan Facility.
Office of the Inspector General issues statement on Coronavirus oversight challenges
The Office of the Inspector General of the Federal Reserve Board, which provides independent oversight of both the Consumer Financial Protection Bureau and the Federal Reserve Board, issued a statement on Coronavirus pandemic oversight challenges. The statement identifies areas of focus for the OIG, including coordination between the Reserve Banks, data aggregation, and monitoring and tracing the unique features associated with specific programs (e.g., the Paycheck Protection Program). The OIG is also actively monitoring, among other things, measures taken to encourage financial institutions to lend consistent with specific lending programs and the extent to which pandemic response lending efforts reach intended recipients and communities. The OIG has also expanded testing of critical information technology systems and has broadened the scope of security reviews.
Federal agencies release host state loan-to-deposit ratios
On June 2, the FDIC, the Federal Reserve Board, and the OCC released the current host state loan-to-deposit ratios for each state or U.S. territory, which the agencies use to determine compliance with Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the Act, banks are prohibited from establishing or acquiring branches outside of their home state for the primary purpose of deposit production. Branches of banks controlled by out-of-state bank holding companies are also subject to the same restriction. Determining compliance with Section 109 requires a comparison of a bank’s estimated statewide loan-to-deposit ratio to the yearly host state loan-to-deposit ratios. If a bank’s statewide ratio is less than one-half of the yearly published host state ratio, an additional review is required by the appropriate agency, which involves a determination of whether a bank is reasonably helping to meet the credit needs of the communities served by the bank’s interstate branches.
Federal Reserve Board announces revised terms for Municipal Liquidity Funds
On June 3, the Federal Reserve Board announced an expansion in the number and type of entities that are eligible to directly use its Municipal Liquidity Facility (MLF). Under the revised terms, at least two cities or counties in each U.S. state will be eligible to directly issue notes to the MLF regardless of population. Additionally, each state governor will be able to designate two issuers in their jurisdictions whose revenues are generally derived from operating government activities to be eligible to directly use the facility. The FRB also issued an Appendix with limits per state and responses to frequently asked questions regarding the MLF.
Federal agencies issue FAQs covering CRA and Covid-19
On May 27, the Federal Reserve Board, the OCC, and the FDIC posted Community Reinvestment Act (CRA) FAQs related to Covid-19. The FAQs acknowledge that while Covid-19 affected states are categorized by the Federal Emergency Management Agency (FEMA) as Category B, which would normally not be considered designated disasters under the CRA, the agencies will grant consideration for activities that revitalize or stabilize affected areas by protecting public health and safety. The FAQs frequently cite to the joint statement on CRA consideration for activities in response to Covid-19, issued by the agencies in March (covered by InfoBytes here). Among other things, the FAQs discuss how Paycheck Protection Program and Main Street Lending Program loans may be eligible for CRA consideration and how bank examiners will consider affordable housing measures under the CRA.
Boston Fed releases Main Street Lending Program forms and agreements
On May 27, the Federal Reserve Bank of Boston posted the necessary legal forms and agreements for eligible borrowers and eligible lenders to participate in the Main Street Lending Program on their website. The documents include, among other things, lender registration certifications and covenants, lender wire instructions, loan participation agreements, and servicing agreements. The Boston Fed has also updated the Main Street Lending Program’s FAQs.
Additional details about the Main Street Lending Program can be found in a previous InfoBytes post here, and a Buckley Special Alert here.
Prudential regulators outline principles on small-dollar lending
On May 20, the FDIC, Federal Reserve Board, OCC, and NCUA issued joint principles for offering responsible small-dollar loans. The agencies note the “important role” that small-dollar lending can play during times of economic stress, such as the Covid-19 pandemic, and issued the guidance to encourage supervised banks, savings associations, and credit unions to offer responsible small-dollar loans to consumers and small businesses. The principles cover various loan structures, including open-end lines of credit with minimum payments, closed-end loans with short single payment terms, and longer-term installment payments. The guidance indicates that reasonable loan policies and risk management practices would generally address the following:
- Loan structures. Loan amounts and repayment terms should align with eligibility and underwriting criteria that support successful repayment of the loan, including interest and fees, rather than re-borrowing, rollovers, or immediate collectability in the event of default.
- Loan pricing. Pricing, including for loans offered through managed third-party relationships, should reflect “overall returns reasonably related to the financial institution’s product risks and costs” and comply with applicable state and federal laws.
- Loan underwriting. Underwriting should use internal and/or external data sources to assess a customer’s creditworthiness. Underwriting may use new technologies and automation to lower the cost of providing the small-dollar loans.
- Loan marketing and disclosures. Disclosures should comply with applicable consumer protection laws and regulations and provide information in “a clear, conspicuous, accurate, and customer-friendly manner.”
- Loan servicing and safeguards. Timely and reasonable workout strategies, such as payment term restructuring, should be provided for customers who experience financial distress.
As previously covered by InfoBytes, the federal financial regulators issued a joint statement in March, encouraging institutions to offer reasonable, small-dollar loans to consumers and small businesses to help mitigate the effects of the Covid-19 pandemic.
Treasury and Fed testify on CARES Act relief
On May 19, the Senate Committee on Banking, Housing, and Urban Affairs conducted a hearing with Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven T. Mnuchin to discuss the agencies’ efforts to implement the CARES Act relief provisions to support consumers and help stabilize the infrastructure of the economic system. Topics discussed included emergency lending facilities, such as the Main Street Lending Program and the Municipal Liquidity Facility, as well as the Paycheck Protection Program (PPP) and the Payroll Support Program.
Mnuchin testified that Treasury has “worked closely with the Small Business Administration on the [PPP] to ensure the processing of more than 4.2 million loans for over $530 billion[.]” He issued praise for the nearly 400 Community Development Financial Institutions and Minority Depository Institutions, as well as the many small and non-bank lenders that are participating in the program. Mnuchin noted that, while Treasury has already committed up to $195 billion of the $500 billion provided by Congress, the agency plans to use the remainder to create or expand programs as necessary after determining how best to deploy the money to help losses associated with the Covid-19 pandemic. “The only reason I have not allocated it fully is we are just starting to get these facilities up and running,” Mnuchin emphasized during the hearing. “We want to have a better idea as to which one of the facilities needs more capital as well as the potential for adding additional facilities.” Mnuchin also stated that Treasury is “fully prepared to take losses in certain scenarios on that capital.”
Powell discussed lending programs and monetary policy efforts taken by the Fed under section 13(3) of the Federal Reserve Act since the pandemic started, including measures to help stabilize short-term funding markets. These include lengthening the term and lowering the rate on discount window loans to depository institutions, and—together with Treasury—establishing the Commercial Paper Funding Facility and the Money Market Mutual Fund Liquidity Facility. Powell also discussed the Term Asset-Backed Securities Loan Facility, which will lend against asset-backed securities “backed by newly issued auto loans, credit card loans, and other consumer and small business loans.” Powell stressed that “public input has been crucial” in the agency’s development of these facilities and that additional adjustments may occur “as we learn more” about the needs of potential borrowers.
SEC issues exemption for broker-dealer TALF Agents
On May 15, the SEC granted an exemption to broker-dealers designated by the Federal Reserve Bank of New York (NY Fed) as Term Asset-Backed Securities Loan Facility (TALF) Agents from certain requirements of Section 11(d)(1) of the Exchange Act. As previously covered by InfoBytes, under the TALF, the NY Fed will provide loans to U.S. companies that are secured by certain eligible consumer and small business asset-backed securities, such as student loans, auto and credit card loans, loans guaranteed by the SBA and certain other assets. The exemption for broker-dealers was requested by the NY Fed on May 12, because Section11(d)(1) would prevent TALF Agents from arranging nonrecourse loans in which the broker-dealer participated as a member of a selling syndicate or group.
The SEC granted the exemption with respect to asset-backed securities that are or may be designated as “eligible collateral,” declaring that any broker-dealer designated as a TALF Agent and participating in TALF 2020 is exempted from the requirements of Section 11(d)(1).