Agencies continue to offer relief and flexibility for crisis management
This week, the Small Business Administration announced that the Paycheck Protection Program (PPP) - which provides forgivable loans to small businesses with 500 or fewer employees to support payroll and other expenses during the crisis - ran out of its $350b in funding after 13 days in operation. Congress has not yet passed additional funding and the Senate has adjourned until Monday.
Meanwhile, the financial services regulatory agencies have continued to take actions to support the economy and markets in response to heightened volatility and uncertainty. Specifically:
- 4/16 - Fed: The Federal Reserve announced that its Paycheck Protection Program (PPP) Liquidity Facility (PPPLF) is fully operational and published a set of FAQs.
- 4/15-4/16 - Treasury & SBA: The Treasury Department and Small Business Administration (SBA) published updated FAQs on the Paycheck Protection Program (PPP) and the SBA published details on loans approved as of April 16. A total of 4,975 lenders approved over 1.6m loans with an average size of $206k. The four sectors receiving the most funding - and nearly half of the total amount allocated - were construction, professional, scientific and technical services, manufacturing, and health care and social assistance.
- 4/15 - Treasury & IRS: The Treasury Department and IRS launched a “Get My Payment” application to allow taxpayers to provide direct deposit information in order to receive their Economic Impact Payments more quickly.
- 4/15 - CFPB & FHFA: The CFPB and FHFA announced a new Borrower Protection Program to allow them to share mortgage servicing information such as complaints, forbearances, modifications and loss mitigation initiatives undertaken by Fannie Mae and Freddie Mac.
- 4/14 - Multiple agencies: The Fed, FDIC, OCC, CFPB and NCUA issued an interim final rule to temporarily defer real estate-related appraisals and evaluations for up to 120 days after closing. The agencies also issued a joint statement outlining other available flexibilities in industry appraisals standards and regulations.
- 4/13 - SBA: The SBA published information on PPP loans approved through April 13.
- 4/13 - Treasury: The Treasury Department announced that eligible taxpayers with direct deposit information on file with the IRS will receive their Economic Impact Payments by April 15.
- 4/13 - CFBP: The CFPB issued an interpretive rule to clarify that Electronic Fund Transfer Act (EFTA) and Regulation E restrictions do not apply to crisis-related payments (such as the Economic Impact Payments) in order to allow more recipients to receive them through direct deposit or prepaid accounts.
Despite the initial rollout of the PPP seeing several banks hold off their participation and others struggle to manage a backlog of applications, its $350b limit was reached quickly - demonstrating just how much need there is for small business assistance. One key question that has been raised is whether the funds are going to the most critical recipients as the SBA’s report shows that other industries received more funding than largely shuttered sectors of the economy such as hotels, restaurants and retailers. In addition, potential borrowers that don’t already have a relationship with an eligible lender - including a number of the smallest businesses - have struggled to take advantage of the program due to Anti-Money Laundering (AML) and Know Your Customer requirements driving banks to focus on existing borrowers. Now that the Fed’s PPP Liquidity Facility is up and running, banks will have additional capacity to make loans, but now they will have to wait until Congress appropriates additional funds.
With the comment period on the Main Street Lending Program closing yesterday, we are likely to receive additional program details soon. Industry stakeholders have already called for various changes including expanding eligible lenders beyond US banks to nonbank lenders and scaling back some of the limitations on distributions. The industry is also seeking clarification on affiliation rules, calculation of debt, and how companies with existing loans or revolvers may use the funds given the program’s limitations on repaying other loan balances. Already leveraged borrowers may be restricted by debt to EBITDA (earnings before interest, tax, depreciation and amortization) restrictions (4x and 6x respectively for New and Expanded programs), as the average newly issued loan from Q1 2020 was near 5x EBITDA.
As the mortgage market continues to experience dislocations, the regulators have issued a deferral for appraisals and evaluations in a coordinated effort to ensure that regulatory requirements do not hold back firms from working with impacted customers. We continue to stay tuned for additional efforts from the Fed to provide funding to those areas that need it most and may have been left out of current programs such as mortgage servicers and segments of the high yield market.
For more on the CARES Act, PPP and Main Street Lending Program, see the replay of our webcast.
 The Main Street Lending Program contains two facilities. The Main Street New Loan Facility purchases 95% of loans from eligible lenders to businesses with either a) 10,000 or fewer employees or b) $2.5b or less in annual revenues, while the Main Street Expanded Loan Facility does the same for the expansion of existing lines of credit.
FFIEC publishes first AML update in six years
On Wednesday, the Federal Financial Institutions Examination Council (FFIEC) - a regulatory council composed of the Fed, OCC, FDIC, CFPB, and NCUA - released an updated Bank Secrecy Act/Anti-Money Laundering (BSA/AML) examination manual. Last updated in 2014, the manual provides instructions to examiners for assessing the adequacy of a bank’s BSA/AML compliance program and risk assessment. The updates do not establish any new requirements and are intended to offer further transparency into the examination process, making a concerted effort to distinguish between mandatory regulatory requirements and supervisory expectations. They also incorporate regulatory changes since the last update, including the Customer Due Diligence Rule. The manual reminds examiners that banks have flexibility in the design of their BSA/AML compliance programs and that minor weaknesses alone are not indicative of an inadequate program.
The financial services industry has long awaited updates to the FFIEC manual - and the BSA/AML regime in general, which has not seen significant updates or changes to reporting thresholds since 1970 despite rapid evolution in technology. While the new updates do not offer much in the way of change, they do provide helpful clarification of regulatory expectations to assist firms in evaluating whether their programs adequately address their AML risks. As larger financial institutions were mostly already aware of these expectations because of extensive regulatory scrutiny, the updated manual will be of most help to small and medium sized institutions that have not had such communications with regulators. For those institutions, it will be important to assess whether the various program components, such as their risk assessment, are adequately tailored to the size, complexity and risk appetite of their business.
With no significant changes to BSA/AML requirements, the potential for any major revisions rests with Congress. Last October, the House had passed a bill that contained several meaningful updates to beneficial ownership disclosure, information sharing and reporting threshold requirements. Although the bill received support from the White House, the current crisis and upcoming election season has us not expecting any modifications to the AML regime until next year.
In the markets
The current crisis is affecting the markets in several ways:
Markets showing interest in TALF but asking for more: Following the Fed’s addition of certain collateralized loan obligations (CLOs) as eligible collateral under the Term Asset-Backed Securities Loan Facility (TALF) last week, the capital markets are actively signalling interest in using the program. High yield corporate loan spreads tightened approximately 10% in the past week though they remain elevated from the beginning of the year. Unlike other facilities announced by the Fed, there is no recent precedent for addressing this segment of the market. However, there are still some potential gaps as most CLOs are actively managed portfolios, whereas TALF only allows for static CLOS. In addition, only new CLOs with “newly issued” loans are eligible under the program. Market participants are seeking clarity on what “newly issued” means and if issuers can refinance debt to take advantage of the program. The market is also seeking to clarify if typical CLO structures would be TALF-eligible as many CLOs utilize an offshore vehicle to facilitate the securitization.
On our radar
These notable developments hit our radar this week:
- CFTC proposes and finalizes several rules. On Tuesday, the CFTC unanimously proposed three rules and finalized two. Among the proposals were amendments to regulations that govern bankruptcy proceedings of commodity brokers, certain reporting requirements for commodity pool operators, and regulations on clearing requirements for swaps entered into by central banks, sovereign entities, international financial institutions, bank holding companies and community development financial institutions. The finalized rules (1) codify a previous no-action letter with regard to registered swap dealers that do not follow uncleared margin rules for swaps entered into with the European Stability Mechanism and (2) restore requirements for safeguarding customer records and information that were previously inadvertently deleted.
- LIBOR Transition: ISDA obtains market consensus to include pre-cessation fallbacks. On Wednesday, ISDA announced the preliminary results of its final consultation on pre-cessation fallbacks for derivative contracts referencing LIBOR. A majority of respondents supported the inclusion of pre-cessation fallbacks as part of the standard language in ISDA’s upcoming protocol to facilitate the transition of legacy trades from LIBOR to alternative reference rates. For further details on this and other topics, subscribe to PwC’s biweekly LIBOR Transition update here.
- EONIA to €STR Transition: Eurex announces delay of discounting switch. Late today Eurex announced in a circular that the discounting switch from EONIA to €STR for cleared OTC derivatives in Euro will now take place on or around July 27, representing a delay of five weeks from its original date of June 22.