Weekly Fintech Focus
- The CARES Act rollout provides numerous avenues of financial relief through injections of liquidity and new lending opportunities.
- The CFPB Taskforce on Federal Consumer Financial Law seeks comments on many aspects of consumer financial law and protection, including a focus on fintech solutions.
- The BIS issues a publication outlining the challenges of cash payments in the age of coronavirus.
- Microsoft and Plaid announce a new personal finance function through Excel that leverages Plaid’s integration with financial accounts.
- FinCEN provides financial institutions with more information in response to COVID‑19.
Brief Summary of the CARES Act with respect to Fintechs and other Financial Institutions
The Coronavirus Aid, Relief, and Economic Security Act, known as the “CARES Act,” became law on March 27, 2020. The CARES Act implements wide-ranging changes to law and funding designed to ameliorate the coronavirus pandemic’s impact on the American economy and its workers. We have briefly summarized select portions of the CARES Act with respect to fintech and financial services companies.
- $454+ billion made available to provide liquidity to the financial system. Subject to certain restrictions and conditions, the new law enables $454 billion (plus any unused portion of the other $46 billion authorized by the Coronavirus Economic Stabilization Act of 2020) to be used to make loans and loan guarantees to, and other investments in, programs and facilities established by the Federal Reserve for purposes of providing liquidity to the financial system that supports lending, by purchasing obligations or other interests directly from issuers and secondary markets in addition to making loans or other secured loans or advances. Notably, issuances from this $454 billion fund are not subject to the government financial protection aspects that require warrants or a senior debt instrument.
Among other requirements, eligible borrowers applying for a direct loan must certify in good faith the following:
- The loan is necessary due to the uncertainty of economic conditions to support ongoing operations;
- The funds received will be used to retain at least 90% of the recipient’s workforce at full compensation and benefits through September 30, 2020;
- The recipient intends to restore at least 90% of the workforce that existed as of February 1, 2020 and to restore all compensation and benefits to their workers within 4 months after the termination date of the COVID‑19 public health emergency declared on January 31, 2020;
- The recipient is domiciled and created (or organized) in the United States, with significant operations and a majority of employees located in the United States;
- The recipient is not a debtor in a bankruptcy proceeding;
- The recipient will not pay dividends to common stock or repurchase its or its parent entity’s publicly traded equities, unless contractually required (prior to the enactment of this Act);
- The recipient will not outsource or offshore jobs for the term of the loan and 2 years after complete repayment;
- The recipient will not abrogate existing collective bargaining agreements for the term of the loan and 2 years after complete repayment of the loan; and
- The recipient will remain neutral in any union organizing effort for the term of the loan.
- Secretary can designate financial institutions as agents of the United States. Financial institutions can perform all reasonable duties that the Secretary determines necessary to respond to the coronavirus and can be paid for such duties using available appropriations.
- New Dodd-Frank amendments allow deposits to be treated as a debt guarantee program. Section 1105(f) of the Dodd-Frank Act has been amended to allow the guarantee of deposits held by insured depository institutions to be treated as a debt guarantee program (previously prohibited). Additionally, a new Section 1105(h) has been added that approves the FDIC to establish a program that guarantees obligations of solvent insured depository institutions (and holding companies and affiliates thereof), provided that the program and any associated guarantee terminates no later than December 31, 2020.
- Temporary lending limit waiver to nonbank financial institutions. National banking associations can temporarily exceed the statutory caps on outstanding loans and extensions of credit to a nonbank financial company (not previously allowed under 12 U.S.C. § 84(a)). This temporary waiver will remain in effect until the earlier of the termination date of the national emergency declaration of COVID‑19, or December 31, 2020.
- Temporary relief for community banks. Federal banking agencies are directed to issue an interim final rule that provides for (1) the Community Bank Leverage Ratio to be 8%; and (2) that community banks have a reasonable grace period to satisfy the Community Bank Leverage Ratio should they fall below 8%. If a community bank triggers the grace period, they shall continue to be treated as a qualifying community bank and shall be presumed to satisfy the capital and leverage requirements set forth in Section 201(c) of the Economic Growth, Regulatory Relief, and Consumer Protection Act during such grace period.
This temporary relief is effective from the day that the federal banking agencies issue the rule to the sooner of the termination date of the national emergency declaration of COVID‑19, or December 31, 2020.
- Temporary relief from troubled debt restructurings. Financial institutions may suspend the GAAP requirements for loan modifications related to COVID‑19 and suspend any determination of a loan modified as a result of COVID‑19 as being a troubled debt restructuring (including impairment for accounting purposes). Such suspensions are applicable for the term of the loan modification, but solely with respect to any modification that occurs during the Applicable Period (defined below).
This temporary relief may occur from March 1, 2020 through the earlier of December 31, 2020 or 60 days following the termination of the declaration of a national emergency concerning COVID‑19 (the “Applicable Period”).
- Temporary relief from current expected credit losses. No insured depository institution, bank holding company, or any affiliate thereof is required to comply with the FASB account standards update No. 2016-13 (Measurement of Credit Losses on Financial Instruments), including the current expected credit losses methodology for estimating allowances for credit losses, until the earlier of the termination date of the national emergency declaration of COVID‑19 or December 31, 2020.
- Temporary Credit Union Provisions. The definitions of “liquidity needs” has been temporarily broadened to the needs of credit unions generally (not just those primarily serving natural persons). The prohibition on the National Credit Union Administration Board from approving an application for credit to expand credit union portfolios has been removed and replaced with a requirement that the credit union must first obtain evidence that the applicant made reasonable efforts to use primary sources of liquidity available to the applicant, including its balance sheet and market funding. Notably, the total face value of obligations cannot exceed 16 times the subscribed capital stock and surplus of the Facility.
These temporary credit union provisions will revert back to their pre-COVID‑19 language on December 31, 2020.
- Temporary credit protections for consumers. If a furnisher makes an accommodation to defer one or more payments, make a partial payment, forbear any delinquent amounts, modify a loan or contract, or any other assistance to a consumer affected by COVID‑19, the furnisher must (1) report the credit obligation or account as current; or (2) if it was delinquent before the accommodation, maintain the delinquent status during the period of the accommodation (if the obligation is brought current during this report, the furnisher must report the obligation as current). This does not apply to a credit obligation or account of a consumer that has been charged-off.
These temporary credit protections for consumers terminate 120 days after the termination date of the national emergency declaration of COVID‑19.
These provisions may be augmented by future congressional action. Please contact the authors of the posting if you have any questions or would like to discuss how the CARES Act may impact your business.
CFPB Seeks Comments to Assist Taskforce on Federal Consumer Financial Law
This week, the Consumer Financial Protection Bureau (CFPB) published a request for information (RFI) seeking comments about its Taskforce on Consumer Financial Law (the Taskforce), which it created in October 2019. The CFPB created the Taskforce to evaluate the bevy of federal consumer financial laws for purposes of harmonizing and updating these laws and their implementing regulations. The Taskforce will also make recommendations about ways to improve federal consumer financial laws.
The questions in the RFI touch on numerous consumer financial products and services, and focus on expanding access to consumer financial services, collection and use of consumer’s personal financial information, regulatory ambiguity, coordination between the state and federal government, and improvements to consumer protections. Below, we provide a summary of some of the issues to which the Taskforce is seeking comment:
- The Taskforce appears to be interested in providing financial services outside of the traditional banking context. It asks for comment on how to promote greater access to banking services, including alternatives to deposit accounts through prepaid cards or P2P electronic payments.
- The Taskforce is interested in expanding access to short-term, small-dollar credit, including ways to educate consumers on understanding this type of loan product.
- The Taskforce asks for information about using alternative data to conduct underwriting, including using payment histories for rent or utilities.
- Following a long period of uncertainty, the Taskforce is seeking comment on whether the CFPB should clarify its position on disparate impact theory under the Equal Credit Opportunity Act, and specifically, what that position should be.
- The Taskforce asks numerous questions about consumer data sharing and security under the Fair Credit Reporting Act and the Gramm-Leach-Bliley Act. These questions touch on granular issues such as procedures for ensuring accuracy in credit reporting to the broader issuers surrounding a federal data breach standard and facilitating the development of fintech solutions to privacy and security.
- The Taskforce is interested in evaluating the costs and benefits of current regulations and potential changes to help financial regulation keep up with developments in technology.
- The Taskforce seeks information about cooperation between state and federal regulators regarding consumer financial protection laws, and would like to hear about ways to improve communication between the states and the federal government to streamline oversight.
- The Taskforce is also seeking information how to generally achieve the CFPB’s consumer financial protection goals, and is interested in what combination of regulation, enforcement, supervision, and consumer financial education is the best approach.
Cash in the Time of Coronavirus – A New Kind of Money Laundering
On April 3, 2020, the Bank for International Settlements (BIS) issued a bulletin about the effect of COVID‑19 on cash and the future of payments in response to global concerns about the transmission of coronavirus through the handling of cash.
According to the BIS Bulletin, the scientific evidence shows a low probability of transmission of the coronavirus via cash, especially when compared to credit card terminals or PIN pads that come in frequent direct contact with people’s hands. The BIS Bulletin references numerous studies that show that certain viruses, like the common flu, can survive on cash for hours or days, but that non-porous surfaces transmit virus far more efficiently. Still, the BIS notes that washing hands after touching cash or other objects for payments may help reduce the risk of transmission.
Different countries are taking very different approaches to cash during this time, with a combination of approaches to disinfect through various laundering processes while still communicating to the public that cash poses a low risk. For example, early on in the crisis, the People’s Bank of China began destroying all banknotes collected from hospitals, wet markets, and public transportation, and ordered banks to collect banknotes to disinfect them. The Bank of Korea also instituted cash handling protocol and is superheating banknotes to 150° Celsius and removing the cash from circulation for two weeks. The U.S. Federal Reserve has also begun quarantining cash that come to the U.S. from Asia for 7 to 10 days. However, the BIS Bulletin notes that the Bank of England and the Bundesbank have advised the public that the risk of transmission of the coronavirus through cash is low or no greater than touching other common surfaces. The Bank of Canada has asked retailers to stop refusing payments in cash.
The BIS Bulletin notes that concerns about cash in the time of coronavirus have not led to uniform behaviors by the public. For example, in the U.S., cash circulation has increased, whereas, in the United Kingdom, ATM withdrawals have fallen. It is likely too early to tell, but a significant move from cash payments to digital payments, is not yet clear. The BIS warns that a move away from cash could result in distributional consequences or a “payments divide” based on access to digital payments.
Another potential outcome of this crisis, the BIS points out, is a focus on resiliency and accessibility of central bank operated payment infrastructures, including the adoption of central bank digital currencies. Such payment infrastructures would need to be able to meet diverse payments needs and stand up to threats such as those posed by global pandemics.
Microsoft Launching Personal Finance Solution with Plaid
A recent fintech announcement comes from Microsoft and Plaid. On April 21, when Microsoft relaunches its Office 365 suite as Microsoft 365, it will include in its Excel program a personal finance tool with assistance from Plaid.
Plaid, a premier data aggregator, recently acquired by Visa in a roughly $5 billion acquisition, provides streamlined access to a consumer’s bank accounts, credit cards, and other financial accounts, and provides and updates that information in money management software, such as Excel.
The ubiquitous use of Microsoft’s suite of programs, including Excel, coupled with Microsoft’s advanced security and cloud and artificial intelligence technology could turn Excel into a powerful fintech app.
FinCEN Provides More Information to Financial Institutions in Response to COVID‑19.
The Financial Crimes Enforcement Network (FinCEN) provided additional information to financial institutions that are coping with the effects of COVID‑19. Specifically, FinCEN detailed 5 key developments.
- BSA Compliance. FinCEN highlighted the criticality of continuing compliance with the Bank Secrecy Act (BSA) but acknowledged that many financial institutions are taking action to protect employees and families.
- Beneficial Ownership Information Requirements. For Paycheck Protection Program loans under the CARES Act, financial institutions will not be required to re-verify existing customers, unless the risk-based approach the institution takes necessitates such.
- BSA Reporting Obligations & CTR Filings. FinCEN acknowledged certain difficulties with meeting certain filing obligations and noted that there may be reasonable delays within compliance. FinCEN also suspended the implementation of FIN-2020-R001 pertaining to currency transaction report (CTR) filings involving sole proprietorships and entities operating under a “doing business as” name. Until further notice, financial institutions should continue reporting transactions involving those entity structures under their prior practices.
- New COVID‑19 Online Contact Mechanism. FinCEN has created a new COVID‑19-specific online contact mechanism to communicate COVID‑19 concerns to FinCEN.
- Encouragement of Innovative Efforts. FinCEN encourages financial institutions to continue to develop innovative approaches to meeting BSA and anti-money laundering compliance obligations to further strengthen the financial system against illicit financial activity.