FinReg Round-Up Vol. 1 No. 8

In this month’s FinReg Round-Up, we highlight a significant development in the Paycheck Protection Program (PPP) regarding change in ownership of a PPP borrower, a plan to update anti-money laundering (AML) rules for financial institutions and a proposed rule from five regulatory agencies clarifying the role of supervisory guidance. 

• SBA Notifies PPP Lenders of Rules to Follow When Borrowers’ Ownership Changes
• FinCEN Seeks Input on Proposed AML Program Amendments
• Federal Financial Regulators Seek Comment on Proposed Supervisory Guidance Rule

SBA Notifies PPP Lenders of Rules to Follow When Borrowers’ Ownership Changes

The Small Business Administration (SBA) notified PPP lenders of the procedures they must follow when a PPP borrower seeks to undergo a change of ownership. Under the SBA’s standard Section 7(a) loan procedures, lenders must obtain SBA approval for any change of ownership of a borrower within the first year of the loan. Because the PPP is a type of Section 7(a) loan, there was uncertainty as to whether the SBA’s standard procedures would apply to change in ownership of PPP borrowers, especially since PPP loans are granted with almost none of the typical underwriting process. 

The Procedural Notice clarifies that lenders must seek approval from the SBA for borrower change in ownership. However, the Procedural Notice provides some exemptions, aimed at ensuring that the change in ownership does not impact the borrower’s ability to repay the PPP loan if necessary. 

Borrowers can avoid the need for the SBA to approve ownership changes by having the PPP note fully satisfied either by:

• Repayment in full of the note prior to the transaction closing.
• Completion of the forgiveness process, including the SBA’s remittance of the funds to the PPP lender and, to the extent necessary, the repayment of any outstanding balance by the borrower.
• Submission of a forgiveness application and any required supporting documentation to the lender, and placement of funds equal to the amount of the outstanding balance of the loan in an interest-bearing escrow account controlled by the lender. 

Although many buyers and sellers were using escrow accounts to hold some or all of the amount of a PPP loan in anticipation of forgiveness, the SBA’s requirement that the escrow account be controlled by the lender is a unique requirement. Because the forgiveness process has been slow to start and the SBA just started processing applications in October, the second exemption is not practical in the near term. Therefore, from a practical standpoint, the options open to buyers and sellers of a PPP borrower in order to avoid the lender needing SBA approval are (1) repay the PPP loan before closing; (2) apply for forgiveness before closing, and place PPP funds in a lender-controlled escrow account; or (3) seek SBA approval. A complicating factor is that not all lenders are accepting forgiveness applications at present.

If none of the exemptions applies, SBA approval before the completion of the transaction is required, which may take as long as 60 calendar days to receive. The lender must submit a request for approval to the SBA, along with accompanying documentation, including a list of all owners of 20 % or more of the purchasing entity, and the reason the borrower cannot fully satisfy the PPP note or place the required funds into a lender-controlled escrow account. 

To avoid a possible delay in closing an acquisition or sale, PPP borrowers considering stock/ownership interest or asset sales should communicate with their lenders well in advance to ensure that the lender either agrees that one of the available exemptions applies or is prepared to seek approval from the SBA. 

FinCEN Seeks Input on Proposed AML Program Amendments

As part of its ongoing initiative to update and modernize its AML regulations, the Financial Crimes Enforcement Network (FinCEN) is seeking public comment on proposed regulatory amendments that are intended to (1) upgrade and modernize the national AML regime and (2) facilitate the ability of financial institutions to leverage new technologies and risk-management techniques, share information, discard inefficient and unnecessary practices, and focus resources on fulfilling the Bank Secrecy Act’s (BSA) purpose of providing information with a high degree of usefulness to government authorities. FinCEN’s proposals are based on recommendations made by the Anti-Money-Laundering Effectiveness Working Group of the congressionally mandated Bank Secrecy Act Advisory Group. 

The proposed amendments would apply to industries with FinCEN AML programs, including banks, credit unions and other depository institutions; casinos; money services businesses; securities brokers or dealers; mutual funds; insurance companies; futures commission merchants; dealers in precious metals and precious stones; credit card system operators; and loan or finance companies. Comments on the advance notice of proposed rulemaking must be submitted by Nov. 16, 2020.

The Advanced Notice of Proposed Rulemaking asks for public input on the following proposals.

First, whether instead of implementing internal controls to “assure ongoing compliance” with the BSA, a financial intuition should be required to ensure that its AML program is “effective and reasonably designed,” meaning a program that:

• Identifies, assesses and reasonably mitigates the risks resulting from illicit financial activity (including terrorist financing and money laundering) consistent with both the institution’s risk profile and the risks identified as national AML priorities.
• Ensures and monitors compliance with the record-keeping and reporting requirements of the BSA.
• Provides information with a high degree of usefulness to government authorities consistent with both the institution’s risk assessment and the risks identified as national AML priorities.

Second, whether FinCEN should issue every two years a list of national AML priorities, to be called FinCEN’s “Strategic Anti-Money Laundering Priorities,” which would be intended to articulate FinCEN’s AML priorities in order to assist financial institutions in better complying with their AML obligations. 

Third, whether an effective and reasonably designed AML program should require that financial institutions reasonably manage and mitigate the risks identified in the risk-assessment process by taking into consideration the Strategic AML Priorities as well as other relevant information.

FinCEN asks for public input on these proposals as well as on a number of related proposals, including, notably, whether there are ways to articulate objective criteria and/or a rubric for examining a financial institution’s risk assessment processes and independent testing. Because AML programs are required to be risk-based and individually tailored to each financial institution, FinCEN has generally avoided issuing rubrics or other detailed criteria for meeting AML compliance expectations. This flexibility in being able to design an AML program is useful to financial institutions, but it can lead to uncertainty as to the effectiveness of a financial institution’s compliance program until a regulator provides feedback during an examination or a problem is identified. Although it is unclear how any objective criteria can be applied to individually tailored, risk-based AML programs, objective criteria or a rubric could be extremely useful to smaller or early-stage financial institutions that are at the initial stages of developing AML programs.  

Federal Financial Regulators Seek Comment on Proposed Supervisory Guidance Rule

Five federal financial regulatory agencies—the Office of the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Bureau of Consumer Financial Protection—are seeking public comment on a proposed rule that would update and codify a statement issued in 2018 regarding the agencies’ use of supervisory guidance. 

Regulatory agencies issue a variety of types of supervisory guidance—including advisories, bulletins, policy statements and FAQ documents—to their supervised institutions. However, this supervisory guidance is not legally binding and does not have the same force and effect as a regulation. In 2018, five financial regulatory agencies issued the Interagency Statement Clarifying the Role of Supervisory Guidance, which confirmed that (1) supervisory guidance does not have the force and effect of law, (2) the agencies do not take enforcement actions based on supervisory guidance and (3) supervisory guidance is intended to outline the agencies’ supervisory expectations or priorities and articulate the agencies’ general views regarding appropriate practices for a given subject area. The 2018 Interagency Statement is consistent with one of the Trump administration’s priorities regarding clarifying the role of supervisory guidance from federal agencies.

The proposed rule would codify the 2018 Interagency Statement, with clarifying changes, as an appendix to a new regulation and would supersede the original 2018 Interagency Statement. The changes include clarifications with respect to supervisory criticisms and confirms that agencies will not base supervisory criticisms (such as matters requiring attention) on a “violation of” or “non-compliance with” supervisory guidance. In addition, the proposed rule reiterates that supervisory criticisms should be specific as to practices, operations, financial conditions or other matters that could have a negative effect on the safety and soundness of the financial institution; could cause consumer harm; or could cause violations of laws, regulations, final agency orders, or other legally enforceable conditions.

Comments will be accepted for 60 days following publication in the Federal Register.