Our take: financial services regulatory update - April 24, 2020

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Change remains a constant in financial services regulation. Read "our take" on the latest developments and what they mean.

Topics

Agencies continue to offer relief and flexibility for crisis management

This week, the financial services regulatory agencies and Congress have continued to take actions to support the economy and markets in response to heightened volatility and uncertainty. Specifically:

4/24 - Congress passed and the President signed a $484b bill to expand the Paycheck Protection Program (PPP) by $310b with $60b set aside for lending by banks with under $50b in assets. The bill also includes $60b for the Economic Injury Disaster Loan program, $75 billion for hospitals and $25b to fund testing efforts.

4/24 - The SEC established a crisis-related market monitoring group. The group will include representatives from a variety of SEC divisions and will coordinate with other agencies to monitor the impact of the crisis on markets, issuers and investors.

4/24 - The CFTC issued no-action relief to registrants listing new principals or applicants for registration as associated persons from the requirement to submit a fingerprint card.

4/24 - The Fed released a report to Congress describing the amounts of lending and collateral valuations for the Primary Dealer Credit Facility, the Commercial Paper Funding Facility and the Money Market Mutual Fund Liquidity Facility as of April 14.

4/24 - The Fed announced an interim final rule allowing depository institutions to permit their customers to make an unlimited number of convenient transfers and withdrawals from their savings accounts. Customers were previously limited to six transfers per month.

4/23 - The Fed announced temporary actions to increase the availability of intraday credit extended by Federal Reserve Banks. Specifically, it is (1) suspending uncollateralized intraday credit limits (net debit caps) and is waiving overdraft fees for institutions that are eligible for the primary credit program and (2) permitting a streamlined procedure for secondary credit institutions to request collateralized intraday credit (max caps).

4/23 - The Federal Reserve announced that it will report details on its CARES Act lending on a monthly basis including names and details of participants, amounts borrowed and interest rate charged, and overall costs, revenues, and fees for each facility. As of now, the facilities that will have details disclosed are the Main Street Lending Facilities, the Primary and Secondary Corporate Credit Facilities, and the Municipal Liquidity Facility.

4/23 - The Treasury Department and Small Business Administration updated FAQs on the Paycheck Protection Program including a clarification that borrowers should carefully consider the certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The FAQ further says that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith.” Such companies that made the certification before this guidance was updated can repay the loans they received by May 7 and still be considered to have made it in good faith.

4/23 - The CFTC issued additional targeted no-action relief to futures commission merchants and introducing brokers taking advantage of covered loans under the Paycheck Protection Program to use some amounts of those loans to add back to capital.

4/22 - The Federal Housing Finance Agency announced that Fannie Mae and Freddie Mac would purchase certain single-family mortgages in forbearance.

4/21 - The Federal Housing Finance Agency announced that mortgage servicers would not have to advance scheduled payments after four months of missed payments on a loan. The announcement also clarified that mortgages with crisis-related forbearance will remain in the MBS pool even if they have over four months of missed payments. See item 2 below for more information.

4/21 - The Financial Accounting Standards Board proposed an Accounting Standards Update to delay by one year certain lease and revenue recognition guidance for certain companies/stakeholders due to the crisis.

4/20 - The SEC issued two exemptive orders delaying certain Consolidated Audit Trail (CAT) reporting and implementation dates and allowing certain introducing brokers to follow the timeline for small broker-dealers.

Our take

The approval of additional PPP funds has been cheered by many banks and businesses but has also come amidst growing questions about whether the money is going where it is most needed and if this latest expansion will be enough. As the initial $349b in PPP funding was used up in around two weeks even with some banks getting a slow start, there are widespread doubts that the new $310b will last long. A number of lenders still have a backlog of applications that were not able to be processed before initial funding ran out, so it is possible that the program could close again in under a week.

A number of actions by Treasury, the SBA, Congress and the Fed have a common theme of addressing fairness and transparency concerns around the PPP and other lending programs. The latest PPP expansion setting aside $60b for lending by smaller banks reflects concerns around larger banks eating up the lion’s share of initial PPP funding and the smallest of businesses getting left out due to their lack of a relationship with one of the large banks. Banks have defended decisions to only work with existing customers by highlighting anti-money laundering requirements for customer onboarding and a desire to get money out the door as quickly as possible, but they have not been immune to accusations of showing favoritism for the largest loan applications. As banks prepare to process new PPP applications as soon as Monday and Main Street Lending Program (MSLP) applications further down the road, they will have to continue to carefully monitor their lending decisions and make sure they are able to defend them against scrutiny from customers, the media and Congress.

Treasury and SBA’s guidance around public companies that can raise capital elsewhere requesting PPP loans came after several larger chains and businesses were broadly criticized for taking loans even though no previous guidance prevented them from doing so. As the Fed preemptively announced that it will disclose all recipients of MSLP loans, potential applicants will have to think carefully about not only whether they are legally eligible for the program but also whether they are willing to publicly defend their receipt of funds. That said, it is likely that larger MSLP recipients will not see the same scale of criticism as larger PPP recipients as the program is meant for larger businesses and the loans are not forgivable. Going forward, we expect to see further details regarding the MSLP soon - perhaps as early as next week - as the comment period closed last Thursday. Industry comments have called for lowering the $1 million minimum loan amount, removing the requirement that banks retain 5% of loans on their balance sheets, allowing for flexibility to use benchmarks other than SOFR, expanding eligible lenders beyond US banks to nonbank lenders and scaling back some of the limitations on distributions.

Other regulatory agency actions provided helpful flexibility for both financial institutions and consumers to manage their crisis responses, such as the SEC’s delay of CAT reporting dates, the CFTC’s temporary lenience on certain fingerprint requirements and the Fed’s steps to increase the availability of intraday credit. The Fed’s additional flexibility for transfers and withdrawals from savings accounts will be helpful for consumers that need to access their accounts, but the rule does not prohibit banks from charging fees for exceeding the six transaction limit. Depending on what the bank chooses to do regarding fees, they may need to adjust their systems to prevent flagging unnecessary transaction limit exceptions.

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Mortgage servicers get some relief

On Tuesday, the Federal Housing Finance Agency (FHFA) announced that mortgage servicer obligations to advance scheduled monthly principal and interest (P&I) payments for single family mortgage loans will be limited to four months. Prior to this announcement, Fannie Mae servicers were responsible for advancing all scheduled P&I payments regardless of actual borrower payments, creating a significant liquidity burden on non-bank servicers. This announcement aligns Fannie Mae’s policies with Freddie Mac’s, which already had a four month limit on servicer advances. In addition, FHFA instructed Fannie Mae and Freddie Mac to maintain loans in forbearance due to the crisis in mortgage-backed security (MBS) pools for the duration of the forbearance plan, clarifying these loans will be treated like those affected by natural disasters. Previously, loans delinquent for over four months were purchased out of the MBS pools, requiring significant liquidity at Fannie Mae and Freddie Mac. According to the Mortgage Bankers Association, loans in forbearance increased from 2.44% on April 6 to 4.64% on April 12.

FHFA also announced on Wednesday that Fannie Mae and Freddie Mac will purchase single-family mortgages in forbearance plans that meet eligibility criteria for a limited period of time, lifting their prior restriction on purchasing such loans. The announcement also notes that the loans will be priced to mitigate their heightened credit risk.

Our take

This is a positive step in addressing concerns from mortgage servicers about the level and variability of liquidity requirements while borrowers seek forbearance of six (with an extension up to twelve) months under the CARES Act. However, these announcements did not address two important liquidity-related challenges. First, servicers are still required to advance funds for borrowers’ tax and insurance payments during the entire forbearance period. Second, despite intense mortgage industry and bipartisan congressional lobbying, no funding for mortgage servicer advances (primarily for non-bank servicers) has been announced. We expect more lobbying on behalf of mortgage servicers as Congress and the agencies consider further relief measures, particularly as the mortgage market is likely to continue to experience significant dislocations.

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On our radar

These notable developments hit our radar this week:

  1. SEC proposes fund valuation practices rule. On Tuesday, the SEC proposed a rule that would establish a framework for fund valuation practices. The proposal is intended to address the role of the Board with respect to the fair value of investments, specifically providing requirements around determining fair value, risk management and delegation to investment advisors.
  2. LIBOR Transition - ARRC publishes objectives for 2020. Last Friday the Alternative Reference Rates Committee (ARRC) published a set of key objectives for 2020, outlining target dates for the publication of additional guidance and recommendations to facilitate the transition from LIBOR to alternative reference rates. In the coming weeks, the ARRC is also expecting to release recommended best practices, which we expect to include additional industry milestones and target dates, such as the recommended timing for cessation of new issuances tied to USD LIBOR for different products. 

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Contact us

Julien Courbe

Financial Services Leader, PwC US

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