CURRENT MONTH (April 2020)

Banking Law

Fed Moves to Shore up Municipal Funding Markets

By Andrew Rohrkemper & Eric Lewin, Davis Polk & Wardwell LLP

The Federal Reserve announced on April 9 the creation of the Municipal Liquidity Facility (MLF), expanded on April 27, which will provide up to $500 billion of direct support to states and local governments to help them manage cash flow stress related to the COVID-19 pandemic.  Indirect support to states and local governments is also being provided through the Federal Reserve’s previously-announced Money Market Mutual Fund Liquidity Facility.  The MLF is one of several facilities established by the Federal Reserve to provide liquidity in response to the COVID-19 pandemic, under its “unusual and exigent circumstances” powers in Section 13(3) of the Federal Reserve Act. 

Under the MLF, the Federal Reserve Bank of New York will lend to a special purpose vehicle (SPV) on a recourse basis, and the loan will be secured by all the assets of the SPV.  The SPV in turn will purchase newly-issued qualifying debt (Eligible Notes) from certain state and municipal issuers (Eligible Issuers), and Eligible Issuers may use the proceeds of these sales for specified pandemic-related purposes (Eligible Uses of Proceeds).  Eligible Issuers include U.S. states (defined to include the District of Columbia), U.S. cities with a population exceeding 250,000 residents, U.S. counties with a population exceeding 500,000 residents, certain multi-state entities and, at the Federal Reserve’s discretion, certain other entities that issue notes on behalf of such state, city or county.  Issuers must have specified ratings from major nationally recognized statistical rating organizations to be eligible.  Only one issuer is eligible for each state, city, county or multi-state entity, and the SPV is subject to limits on the quantity of Eligible Notes it can purchase from a single state, city, county or multi-state entity.  The SPV will receive a $35 billion initial equity investment from the U.S. Department of the Treasury, as authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Additional details can be found in the MLF term sheet released by the Federal Reserve and the FAQs released by the Federal Reserve Bank of New York, which include an appendix listing eligible issuers.

Paycheck Protection Program: Support for Small Businesses

By Jane Faulkner, Davis Polk & Wardwell LLP

Pandemic-related shutdowns and restrictions have had dire effects on many small businesses, which create two-thirds of net new jobs in the United States and account for 44 percent of U.S. economic activity.[1]  In response to the pandemic’s effects on the economy, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which included the Paycheck Protection Program (the PPP) designed to support small businesses.  The PPP builds on the Small Business Administration’s (SBA) existing Section 7(a) loan program and provides forgivable loans of up to 2.5 times monthly payroll to small businesses on favorable terms, backed by a federal government guarantee. 

Restrictions apply to the use of PPP loan proceeds.  Borrowers must use no less than 75% of loan proceeds on payroll costs.  Other permissible uses include rent, utilities, payment of interest (but not principal) on a mortgage, and the refinancing of EIDL loans made between January 31 and April 3.  Borrowers are eligible for forgiveness equal to the sum of the following costs incurred, and payments made, during the eight week period beginning on the loan’s origination date.  Amounts that are not forgiven must be repaid at an interest rate of 1.0% over a two-year term, with principal and interest payments deferred for six months.  Eligible borrowers generally include businesses with less than 500 employees (subject to variation by industry), self-employed individuals, and certain non-profits.

The swift rollout of the program, which was formally launched one week after the CARES Act’s passage, has presented challenges for both lenders and borrowers in tracking, understanding and meeting the PPP’s requirements.  The $349 billion initially appropriated for the PPP was exhausted on April 16; Congress subsequently provided an additional $310 billion to replenish the program.  

[1] Small Businesses Generate 44 Percent of U.S. Economic Activity, SBA, Release No. 10-1 ADV available at https://advocacy.sba.gov/2019/01/30/small-businesses-generate-44-percent-of-u-s-economic-activity/.

Consumer Finance

Bureau Releases Guidance on Transfers of Residential Mortgage Loans

Eric Mogilnicki and Graves Lee, Covington & Burling LLP

On April 24, the CFPB announced the release of a guidance document outlining mortgage servicers’ obligations when transferring mortgage loans.  Regulation X contains servicing transfer provisions requiring, inter alia, that mortgage servicers maintain policies and procedures that: (1) facilitate the timely turnover of mortgage-related information and documents when a mortgage is transferred, and (2) allow servicers to identify documents or information that may not have been transmitted to a transferee.  The guidance described several examples of servicer practices that the Bureau may consider reasonably designed to comply with the servicing transfer requirements.  These examples include:

  • servicing transfer plans that incorporate communications plans, testing plans, timelines, and escalation plans;
  • engaging in quality control to verify that the transferee’s system’s data matches that contained in the transferor’s system;
  • clearly determining servicing responsibilities for legacy accounts;
  • conducting post-transfer analysis to check for possible gaps;
  • monitoring consumer complaints and loss mitigation performance metrics to ensure the integrity of transferred data; and
  • identifying loans in default, foreclosure, bankruptcy, and forbearance status. 

The Bureau indicated that it began developing the guidance before the COVID-19 pandemic, and will consider the disruption caused by the pandemic in evaluating whether servicers have complied with the servicing transfer requirements.

Bureau Issues Interpretive Rule on Pandemic Relief Payments

Eric Mogilnicki and Lucy Bartholomew, Covington & Burling LLP

On April 13, the CFPB issued an interpretive rule intended to help pandemic relief payments reach consumers for whom direct deposit is unavailable.  Government agencies are prohibited by the Electronic Fund Transfer Act (“EFTA”) and its implementing regulation, Regulation E, from requiring consumers to establish accounts with a particular financial institution as a condition of receipt of a government benefit.  This prohibition is known as the compulsory use prohibition.  To ensure that consumers receive pandemic relief payments in a fast and secure manner, the Bureau has concluded that if certain conditions are met, pandemic relief payments are not  government benefits for the purposes of Regulation E and are thus not subject to the compulsory use prohibition in the EFTA and Regulation E.  The rule allows government agencies to distribute funds to those consumers for whom direct deposit information is unavailable via prepaid accounts.

Under the new interpretive rule, government benefits do not include payments from federal, state, or local governments if those payments: (1) are made to provide assistance to consumers in response to the COVID-19 pandemic or its economic impacts; (2) are not part of an already-established government benefit program; (3) are made on a one-time or otherwise limited basis; and (4) are distributed without a general requirement that consumers apply to the agency to receive funds.  The CFPB has also published a blog post entitled “A guide to COVID-19 economic stimulus relief” with information for consumers about COVID-19 economic stimulus relief payments from the IRS.

CFPB and FHFA Announce Borrower Protection Program

Eric Mogilnicki and Lucy Bartholomew, Covington & Burling LLP

On April 15, the CFPB and the Federal Housing Finance Agency (FHFA) announced the Borrower Protection Program (the Program), a new joint initiative that enables the CFPB and FHFA to share servicing information during the COVID-19 national emergency.  Under the program, the CFPB will make complaint information and analytical tools available to FHFA via a secure electronic interface; and FHFA will make available to the Bureau information about forbearances, modifications and other loss mitigation initiatives undertaken by Fannie Mae and Freddie Mac (the Enterprises).

CFPB Issues Policy Statement on Remittance Transfers During Pandemic

Eric Mogilnicki and Cody Gaffney, Covington & Burling LLP

On April 10, the CFPB issued a policy statement outlining the Bureau’s supervisory approach to Regulation E’s Remittance Rule in light of the COVID-19 pandemic.  The policy statement is intended to ensure consumers will be able to continue to send remittance transfers without disruption during the pandemic.

Specifically, the Bureau announced that it will not cite supervisory violations nor initiate enforcement actions against remittance transfer providers who fail to disclose the exact cost of remittance transfers, rather than estimated costs, as required under the Remittance Rule.  The true-cost requirement of the Remittance Rule is currently subject to a temporary statutory exception that expires on July 20, 2020.  As such, the policy statement will apply to remittances that occur on or after July 21, 2020 and before January 1, 2021.  The policy statement further notes that the Bureau intends to issue a final rule in Mary 2020 regarding its December 2019 proposal that would adopt two permanent exceptions to this part of the Remittance Rule.

Duran v. La Boom Disco, Inc.: The Second Circuit Weighs in on the TCPA’s Definition of an ATDS

By Alan Ritchie, Pilgrim Christakis LLP

On April 7, 2020, the Second Circuit decided Duran v. La Boom Disco, Inc., holding that the Telephone Consumer Protection Act’s (“TCPA”) definition of an automatic telephone dialing system (“ATDS”) includes equipment that can automatically dial telephone numbers from a stored list. This decision expands an existing circuit split, with the Second Circuit adopting the Ninth Circuit’s broad interpretation of an ATDS in Marks v. Crunch San Diego, LLC, and rejecting the narrower ATDS definition recently adopted by the Third, Seventh, and Eleventh Circuits.

Duran claimed that La Boom Disco, a New York nightclub, violated the TCPA by sending her and others unsolicited text messages. La Boom acknowledged sending text messages but argued that the online texting platforms that it used to send the messages were not ATDSs because they required too much human intervention—specifically, the platforms sent text messages to stored lists of telephone numbers that were uploaded by humans (rather than by a random or sequential number generator), and the text campaigns were initiated when a human clicked a “send” button. La Boom prevailed on summary judgment in the district court, and Duran appealed.

The Second Circuit reversed, finding that the platforms used by La Boom to send text messages to stored lists of numbers qualified as ATDSs under the TCPA. Section 227(a)(1) of the TCPA defines an ATDS as “equipment which has the capacity—(A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers.” In examining the first part of the statutory definition, the Second Circuit questioned whether, to qualify as an ATDS, (a) the numbers must be stored “using a random or sequential number generator”, or (b) the numbers may be produced using such a number generator, but stored in any way. Echoing the Ninth Circuit’s analysis in Marks, the Second Circuit reasoned that the clause “using a random or sequential number generator” in the statutory definition modifies the verb “produce”, but not the verb “store”; and thus, a dialing system can be an ATDS if it can either (a) store numbers or (b) produce numbers using a random or sequential number generator. Because the texting platforms used by La Boom sent messages to stored lists of numbers, the Court concluded that they had the first capacity—i.e., the capacity to “store” numbers—required under the statutory definition of an ATDS.

Turning to the second part of the statutory definition (i.e., the “capacity . . . to dial such numbers”), the Second Circuit noted that the FCC has interpreted this capacity to exist when a system can “dial numbers without human intervention.” The Court reasoned that “merely clicking ‘send’ or some similar button—much like flipping an ‘on’ switch—is not the same thing as dialing, since it is not the actual or constructive inputting of numbers to make a telephone call or to send an individual text message.” Accordingly, the Court held that clicking “send” did not require enough human intervention to exclude the texting platforms used by La Boom from the statutory definition of ATDS.

With five circuits having now weighed in, and the split widening, it appears that the definition of ATDS will remain in flux pending action by the Congress, the FCC, or the Supreme Court.

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