Update on COVID-19 in the financial services sector

We continue to monitor the key COVID-19 related developments in financial services regulation and litigation.

Our summary of the week’s key developments follows, grouped into four topic areas:

Oversight & Enforcement
Relief Programs
Assessing Market Impact
Regulatory Changes

COVID-19: Weekly update for financial services clients

Must Read Developments through May 28

Oversight & Enforcement

The US Department of Justice (DOJ) filed new prosecutions related to PPP relief fraud, including charges against a New York defendant in relation to a fraudulent scheme to obtain over $20 million in SBA funds and against a Texas man who tried to procure more than $5 million.
The DOJ has also filed a complaint against a New Jersey defendant for an alleged scheme to deceive and price gauge New York City into paying $45 million for personal protective equipment that the defendant did not actually have.
DOJ has announced that it has dropped its investigation into stock trades made by Senators Dianne Feinstein, Kelly Loeffler and James Inhofe following a private briefing early in the coronavirus crisis. However, Senator Richard Burr remains the subject of a related investigation.
US regulators continue to actively surveil the markets; they have stated that they are observing a dramatic uptick in potentially manipulative activity that they anticipate will provide “years” of enforcement cases to come:

DOJ’s Criminal Division Fraud Section has announced the formation of a special sub-unit of prosecutors specializing in commodities fraud, who will work closely with the CFTC. Robert Zink, the Chief of the Fraud Section, commented that market volatility related to the coronavirus has offered “a wealth of information … which is going to give us years and years of cases to come.”
During a webcast hosted by the Securities Industry and Financial Markets Association, FINRA’s executive vice president of market regulation and transparency services commented that the pandemic has triggered a spike in market manipulation alerts, with up to 200% increases in alerts for best execution and pricing issues as well as manipulative trading tactics like wash sales, spoofing, and layering. FINRA’s head of enforcement noted that the majority of COVID-related fraud to date has been linked to alleged vaccines, cures and testing.

The FTC and SBA sent warning letters to two companies “whose marketing could lead consumers to believe they are affiliated with the SBA, or that consumers can apply on [the companies’] site for loans” through the PPP or CARES Act (one of the companies even operated the domain “SBA.com”). This action emphasizes the need for accurate marketing when advertising COVID-19-related lending services.

Relief Programs

The SBA has published a number of Interim Final Rules in the Federal Register related to the Paycheck Protection Program. The rules cover:
- increasing PPP loans;
- the eligibility of certain electric cooperatives for PPP relief;
- extending the safe harbor for the repayment of certain loans, due to certification issues; and
- confirming that employees of foreign affiliates are included “for purposes of determining whether a PPP borrower has more than 500 employees” (and thus, whether it can qualify for PPP relief).
The Fed announced that June 17, 2020 will be the first loan subscription date for its revived Term Asset-Backed Securities Loan Facility (TALF); the first loan closing date will be June 25, 2020. The NY Fed has also released an expanded set of FAQs in relation to the TALF and a Master Loan and Security Agreement, which provides further details on the terms that will apply to TALF loans.
The Fed released a sample application and form documents and certifications for its Municipal Liquidity Facility, so that potential participants can understand the program in more detail.
- The Fed also released operational documentation for depository institutions to fill out and submit so they can pledge PPP loans as collateral for Paycheck Protection Program Liquidity Facility advances.
- More generally, the Fed has published its periodic report updating Congress on its pandemic facilities.
The Fed has also updated its FAQs on its Primary Market and Secondary Market Corporate Credit Facilities, Commercial Paper Funding Facility and Term Asset-Backed Securities Loan Facility.

Regulatory Changes

The US Senate unanimously passed the Holding Foreign Companies Accountable Act, which requires foreign companies listed on US exchanges to adhere to US accounting standards and disclose any ties to the Chinese government. The bill was sponsored by Senator John Kennedy, who cited to the economic fallout and volatility caused by the COVID-19 pandemic for the need to protect investors and create a uniform standard for all publicly listed companies in the US.
The Fed, FDIC, NCUA, and OCC jointly issued a set of “Interagency Lending Principles for Offering Responsible Small-Dollar Loans” to encourage regulated entities to offer responsible small-dollar loans to customers for consumer and small business purposes who may need funds or credit in light of the pandemic. The agencies provided additional detail in the Fed’s Supervision and Regulation Letter, the FDIC’s Fact Sheet and the OCC’s Dear CEO Letter.
- The CFPB also issued a No-Action Letter Template that lays out a path to no-action relief for small-dollar lending products issued by regulated depository institutions. This issue is especially salient in light of various pandemic relief initiatives. The Template includes a set of “guardrails” – product characteristics like eligibility, dollar amount, repayment structure, and collateral requirements. The CFPB “intends to grant applications” for no-action letters concerning products that are within the “guardrails,” although the agency reserves the right to make decisions on a case-by-case basis.
The FDIC published a notice of proposed rulemaking designed to mitigate the deposit insurance assessment effects of participating in the PPP, the Paycheck Protection Program Liquidity Facility and the Market Mutual Fund Liquidity Facility. Comments on the proposed rule were due May 27, 2020.
The CFPB extended the comment period for its Fair Debt Collection Practices Act-related Supplemental Notice of Proposed Rule Making, which requires debt collectors to make certain disclosures when collecting time-barred debts. The comment period will now close on August 4, 2020.
The FASB voted to give certain regulated entities an extra year to comply with new rules regarding the calculation of liabilities from renting storefronts, heavy equipment and vehicles. Private companies can now adopt the new lease accounting standard (ASC 842) in 2022, rather than 2021. The FASB proposal allows private companies and nonprofits its major new revenue recognition accounting methodology for one year.
The FHFA has announced that Fannie Mae and Freddie Mac have issued temporary guidance regarding the eligibility of borrowers who are in forbearance, or have recently ended their forbearance, looking to refinance or buy a new home. The agency has further extended Fannie Mae and Freddie Mac’s ability to purchase single-family mortgages in forbearance with note dates on or before June 30, 2020, as long as only one mortgage payment has been missed and they are delivered to the enterprises by August 31, 2020 (the previous policy was set to expire on May 31, 2020).

Assessing Market Impacts

The CFPB issued a report analyzing the complaints the agency has received during the COVID-19 pandemic. The CFPB received 4,500 complaints mentioning coronavirus-related key words in April and May 2020; 22% of the complaints related to mortgages and 19% related to credit cards.
The Federal Open Market Committee released the minutes of its April 28-29 meeting, during which it discussed the financial markets, open market operations, and the current economic situation more generally.