March 26, 2021  

Senate Passes PPP Extension; Bill Goes To President

By a 92-7 vote, the Senate on Thursday passed a bill extending the Paycheck Protection Program. The legislation, which the House already passed, now goes to President Biden for signing. The Paycheck Protection Program Extension Act would allow loan applications to the program, currently set to expire March 31, for two more months and give the Small Business Administration 30 additional days to process loan applications made by the new May 31 deadline.

The American Bankers Association welcomed the bill’s passage in Congress. “This legislation will help ensure that small businesses that have already applied for a PPP loan will be able to get that loan processed, rather than risk seeing this program end before their paperwork can be completed. It will also provide more time for still-struggling small businesses that have not yet applied for a PPP loan to do so,” said ABA President and CEO Rob Nichols. “Providing an additional two months for small business borrowers to access PPP funding and an extra month for SBA to process PPP loans is a common-sense step that will support the economic recovery.” 

ABA Urges Bankers To Oppose NCUA CUSO Proposal By Monday

With the comment period closing soon, the American Bankers Association is calling on bankers to write to the National Credit Union Administration to oppose a proposed rule that would expand the range of permissible lending activity for credit union service organizations. The proposed rule would allow CUSOs to originate any type of loan a federal credit union may originate, including auto and payday loans.

Comments on the proposal are due Monday, March 29. ABA has provided a sample comment letter for bankers to easily complete and send through its grassroots platform, Secure American Opportunity.

State Bankers Associations Raise Concerns About 90-Day PPP Forgiveness Window

MBA was among 51 state bankers associations urging the Small Business Administration to provide clarity about the status of Paycheck Protection Program loans that have surpassed the 90-day period by which SBA is required to provide a decision on whether to forgive the loan, under a January 2021 interim final rule. The groups urged SBA to immediately review all loans that have been in review for more than 90 days.

“We have heard repeatedly from our members across the country that SBA has exceeded this regulatory deadline, sometimes by weeks or months,” the state associations said. “When lenders inquire with SBA, they are often met with silence about when SBA’s review will conclude and whether the loans in question will be forgiven. This lack of information leaves the small business borrowers in a state of uncertainty and without the ability to fully utilize their capital resources while they wait for a decision from SBA.” 

ABA Supports Newly Introduced ECORA Legislation

The American Bankers Association expressed support for the Enhancing Credit Opportunities in Rural America Act, which would end taxation of interest earned from agricultural real estate loans. Reps. Ron Kind, D-Wis., and Randy Feenstra, R-Iowa, reintroduced the bipartisan ECORA Act in the U.S. House. 

“By removing this taxation, the cost to make farm and ranch real estate loans will be reduced and the savings will be passed on to farmer and rancher customers,” ABA said, noting that ECORA could reduce the average interest rate on a farm and ranch real estate loan by 21%.

The ECORA Act also would help to level the playing field between banks and the tax-advantaged Farm Credit System, whose profits from real estate lending are currently exempt from corporate income tax. 

Yellen Touts PPP Changes to Target Small Businesses

Testifying before the House Financial Services Committee on Tuesday, Treasury Secretary Janet Yellen highlighted recent changes to the Small Business Administration's Paycheck Protection Program that will allow more small businesses, especially in rural and low income areas, access to the funds. Yellen noted that earlier rounds of PPP funding “often didn’t reach the smallest sole proprietorships. We’re addressing that now.” 

She added that because of legislation enacted in December, Treasury also has $12 billion to inject into community development financial institutions and minority depository institutions and that “these CDFIs and MDIs can lend that capital out, helping people buy homes and start businesses.” During the hearing, Federal Reserve Chairman Jerome Powell added that the Fed has extended its PPP lending facility for another quarter to continue to support the PPP.

Regarding concerns of inflation, Powell said that when the economy reopens, there could be bottlenecks from a surge in spending creating upward pressure on prices, but he added that “our best view is that the effect on inflation will neither be particularly large nor persistent.”

When asked about a timeline regarding additional modifications to the supplementary leverage ratio, Powell said the Fed will be putting something out for comment “relatively soon” and that it will be a “very transparent, public process.”

Yellen and Powell also testified before the Senate Banking Committee on Wednesday. Yellen expressed her support for extending the PPP because “the economy is not in a place where small businesses that have been affected are able to thrive.” Powell offered his thoughts on the economic outlook overall, noting that “the recovery has progressed more quickly than generally expected and looks to be strengthening. This is due in significant part to the unprecedented fiscal and monetary policy actions.”

Powell: Fed ‘Not Equipped’ To Service Individual Accounts

During testimony before the Senate Banking Committee on Wednesday, Federal Reserve Chairman Jerome Powell said his agency is “not equipped to service individual commercial and retail accounts” and that doing so is currently “not permitted under law.” His comments come amid renewed calls from some lawmakers for legislation that would enable the Fed to offer banking accounts and services directly to consumers, an idea strongly opposed by the American Bankers Association.

“That’s never been our role and it’s really not been the role of other central banks,” he said. “It would be quite a dramatic change in our role in the economy, and one that would require very careful thought.”

Powell: Not Fed Policy To Tell Banks Which Businesses To Lend To

Federal Reserve Chairman Jerome Powell told the House Financial Services Committee on Tuesday that, regarding his agency’s work on mitigating climate change-related risks, it is a “long-held policy of the Fed that we don’t tell banks what legal businesses they can lend to.” 

He noted that that the Federal Reserve is in the “early stages” of understanding the risks climate change poses to financial institutions and considering stress scenarios about climate change.

Powell acknowledged that many large financial institutions are already studying the risks associated with climate change and that the Fed is studying it to learn “how the financial system can be resilient against what may be very significant emerging risks over time.”

Democrats Introduce Bill To Repeal OCC ‘True Lender’ Rule

Sen. Chris Van Hollen, D-Md., Senate Banking Committee Chairman Sherrod Brown, D-Ohio, and Rep. Chuy Garcia, D-Ill., have introduced legislation to repeal the OCC’s “true lender” rule finalized in October. The resolution would employ the Congressional Review Act, which allows Congress to vote by simple majority to overturn rules finalized within the previous 60 days Congress is in session using expedited congressional procedure.

The OCC’s final rule established a clear test to determine when a bank making a loan is considered the “true lender” in the context of a partnership between a bank and a third party. Under the final rule, a bank makes a loan if, as of the date of origination, it is named as the lender in the loan agreement or funds the loan. A loan originated by a bank that satisfies either part of this test would retain its status as a bank-originated loan if the loan is sold, assigned or otherwise transferred to a nonbank entity.

In addition to repealing the final rule, a Congressional Review Act resolution prohibits the agency from reissuing a substantially similar rule.

Agencies Allow Temporary SLR Change To Expire

With the acute phase of the coronavirus crisis past and a return to normal economic activity in sight, the federal banking agencies said they would let a temporary change to the supplementary leverage ratio expire as scheduled March 31. In May 2020, the agencies allowed depository institutions to temporarily exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of the supplementary leverage ratio, which facilitated banks increasing their balance sheets to support consumers and businesses.

While the Treasury market has stabilized, the Federal Reserve noted that as a result of “recent growth in the supply of central bank reserves and the issuance of Treasury securities, the Board may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability.” The Fed said it would “shortly seek comment on measures to adjust the SLR” for an environment with higher reserves and “take appropriate actions to assure that any changes to the SLR do not erode the overall strength of bank capital requirements.”

FinCEN To Issue ANPR On CTA Beneficial Ownership Reporting Requirements

The Financial Crimes Enforcement Network will issue an advanced notice of proposed rulemaking regarding the implementation of the beneficial ownership reporting requirements included in the Corporate Transparency Act, FinCEN Director Kenneth Blanco said at a recent virtual industry event. The CTA was enacted as part of the Anti-Money Laundering Act of 2020, which included several critical Bank Secrecy Act/anti-money laundering compliance reforms.

FinCEN also is taking steps to create a database of the beneficial ownership information it collects and stores under the beneficial ownership rules. Blanco said FinCEN is working to develop the use and confidentiality protocols that will control access to that database. Blanco added that the number-one priority for FinCEN is implementing the AML Act, and urged attendees to provide feedback on FinCEN's proposed rulemaking, asking them to “help us shape the rules of the road that will govern your industry.”

ARRC: USD Libor Exposure Grows As Cessation Deadline Nears

Even with certain U.S. dollar tenors of the London Interbank Offered Rate set to cease publishing as soon as the end of 2021, the volume of financial instruments that reference USD Libor has grown to $223 trillion, up from $199 trillion in 2016, according to the Alternative Reference Rates Committee. “Most of this increase again comes from derivatives exposures, but the estimated amount of business loans referencing USD Libor has also increased,” the ARRC said in its latest transition progress report.

Of the $223 trillion, $90 trillion will mature after June 2023, when the remaining tenors of USD Libor will cease publishing, resulting in legacy contracts that must be revised to deal with the cessation. 

“Some of these contracts should already have workable fallback language, but many still have no effective means to replace Libor upon its cessation,” Federal Reserve Vice Chairman for Supervision Randal Quarles noted in a recent speech

The ARRC added that 55% of the $2 trillion in outstanding Libor-benchmarked syndicated loans will mature after June 2023, as will 31% of the $1.3 trillion in nonsyndicated business loans, 53% of the $1.5 trillion in nonsyndicated commercial mortgages and 61% of the $1.3 trillion in retail mortgages referencing Libor, based on historic prepayment rates.

The ARRC raised concerns about a lack of progress in transitioning business loans, noting that borrowers need to be prepared to accommodate new rates and that they may wish to transition more gradually, “which cannot occur if lenders do not offer alternatives soon.” Borrowers also wish to be “offered a range of [Secured Overnight Financing Rate] alternatives,” the ARRC said, adding that “delay in offering alternatives to Libor in the business loans market slows overall market development in the derivatives markets that may be required to hedge these loans.”

Meanwhile, Quarles outlined what supervised institutions should expect as examiners review their post-Libor transition plans, financial exposures, risk assessments, operational preparedness, contract readiness, customer and counterparty communication and oversight by boards and management. “Market participants have had many years to prepare for the end of Libor, yet over the last few years they have actually increased use of Libor,” he said. “The firms we supervise should be aware of the intense supervisory focus we are placing on their transition, and especially on their plans to end issuance of new contracts by year-end.”

ARRC: No Guarantee On Forward-Looking SOFR Term Rate In 2021

The Alternative Reference Rates Committee said it “will not be in a position” to recommend a forward-looking term rate using the Secured Overnight Financing Rate by mid-2021. The committee added that it “cannot guarantee” that it will be able to recommend an administrator that can produce a robust forward-looking SOFR term rate by the end of 2021, when certain U.S. dollar tenors of the London Interbank Offered Rate will cease to publish.

“While trading activity in SOFR derivatives is growing, at this time, the ARRC believes that it is not yet in a position to recommend a term rate with confidence based on the current level of liquidity in SOFR derivatives markets,” the committee said. SOFR is the ARRC’s recommended replacement for Libor. However, with Libor’s cessation date approaching soon and over $90 trillion in USD Libor exposures set to mature after Libor cessation, the ARRC “encourage[d] market participants to continue to transition from Libor using the tools available now,” including SOFR averages and index data that can be applied in advance or in arrears.

The ARRC said it will continue to review submissions in its RFP for an administrator to develop a forward-looking SOFR term rate contingent on liquidity and other conditions being met. The committee will also hold a series of workshops to help banks and borrowers understand how to use existing SOFR tools for business loans.

ARRC Provides Suggested Fallback Formula For USD Libor ICE Swap Rate

With the Intercontinental Exchange, which administers the London Interbank Offered Rate, set to cease publication of all Libor settings after June 30, 2023, the Alternative Reference Rates Committee recommended a suggested fallback formula for contracts that are linked to U.S. dollar Libor in an indirect manner through reference to the USD ICE Swap Rate. These contracts are not covered by existing fallback provisions.

The formula, outlined in new white paper, enables banks and other entities to calculate a fallback from the USD Libor ICE Swap Rate to a spread-adjusted Secured Overnight Financing Rate swap rate. The ICE swap rates represent the mid-market fixed rate for the fixed/float interest rate swaps for a set of tenors at a specified time of day. The ARRC noted that “it is expected that once SOFR swap liquidity increases on electronic trading venues, the [ICE Benchmark Administration] or other vendors will start publishing a SOFR version of these swap rates.”

“The ARRC has repeatedly stressed the importance of adequate fallbacks in Libor-linked contracts,” said ARRC Chairman Tom Wipf. “This paper aims to aid market participants as they consider how to address the impact that the end of representative USD Libor will have for contracts referencing the USD Libor ICE Swap Rates.”

ARRC Supplements Its Recommended Libor Fallback Language For Business Loans

As part of its ongoing effort to support the transition away from the London Interbank Offered Rate, the Alternative Reference Rates Committee supplemented its recommended hardwired fallback language for syndicated and bilateral business loans that reference U.S. dollar Libor.

Based on recent announcements about Libor’s scheduled cessation in 2023, the supplemental recommendation provides “simplified versions of the more elaborate fallback language offered in the 2020 recommendations,” the ARRC said. “Market participants may now use either the original 2020 or simplified 2021 language as they see fit and can be confident in the fact both versions lead to the same outcome at transition.” 

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