Money Matters: This Week in Washington

This Week in Washington for April 27, 2020

April 27, 2020

Dina Ellis

THE BIG PICTURE

For the latest advice for businesses dealing with the coronavirus, be sure to check out Paul Hastings’ targeted alert series: https://www.paulhastings.com/coronavirus-resource-center

Coronavirus cases in the United States neared the 1 million mark, with the death toll reaching 55,000 over the weekend. Despite these statistics, some states began to relax their social distancing measures, with Georgia leading the way in allowing gyms, nail salons, and other businesses to reopen. Despite the President’s prior enthusiasm to begin lifting restrictions, he said in a briefing that he disagreed with the decision, saying it was “too soon.” As protests against stay-at-home orders popped up in several states, Dr. Anthony Fauci warned that real economic recovery would not be possible until the virus was under control. He cautioned that reopening too early could lead to a second wave of infections, setting back the recovery. The availability of testing continues to hamstring planning efforts, as states warn they will need robust test and trace capacity before moving forward.

Congress passed an interim US$484B relief measure that included provisions to replenish the Paycheck Protection Program, emergency money for hospitals, and funding to increase testing. On Friday, the President signed the measure into law. A growing number of companies have announced that they will return loans they received during the first round of the PPP following public outrage over reports of larger companies and chains receiving loans. While an additional US$310B has been appropriated, no technical changes to the program were made, leaving some concerned that smaller businesses will be shut out again once the program goes back online. The Treasury Department released additional guidance on Thursday, requiring companies to “certify in good faith” the loan is necessary and clarifying that hedge funds and private equity firms do not qualify, but some farmers would. The Small Business Administration will resume accepting applications at 10:30 AM today, but with thousands of applications pending, banks warned the additional funding could quickly be exhausted. In response to the unprecedented demand, the SBA announced on Sunday it would impose a cap of 10% of available funds on each individual lender.

House Democrats are already at work on another relief bill, which will include state and local aid as a cornerstone provision per House Speaker Nancy Pelosi. This position puts the House at odds with Senate Majority Leader Mitch McConnell, who said in an interview that state and local governments should declare bankruptcy, rather than take federal funds.

The price of oil futures tumbled below zero last week on the heels of a Russia-Saudi price war and lowered demand caused by the coronavirus pandemic. The President directed the Energy Department to formulate a plan to make funding available to oil and gas companies in order to protect jobs in the industry.

Other highlights of last week include:

• On Friday, the President signed an executive order temporarily suspending immigration, albeit with some exceptions for farm workers and other essential categories, describing the move as part of an effort to limit competition for jobs.

• An additional 4.4 million jobless claims were filed last week, bringing the total since the outset of the pandemic to 26 million.

• Navy officials have recommended that ousted USS Theodore Roosevelt Captain Brett Crozier be reinstated to his position.

• The CBO projected that the national deficit will soar to US$3.7T by the end of the year, with the unemployment rate hitting double digits.

• The President is reportedly weighing replacing Health and Human Services Secretary Alex Azar and is assembling a list of possible candidates, as frustrations over the coronavirus response effort continue to mount.

LAST WEEK ON THE HILL

Senate Dems Push Administration to Prioritize Workers in CARES Act Funding Allocations: On Monday, Sen. Sherrod Brown (D-OH), Ranking Member of the Senate Banking, led Committee members Jack Reed (D-RI), Elizabeth Warren (D-MA), Brian Schatz (D-HI), and Tina Smith (D-MN) in sending a letter to Treasury Secretary Steven Mnuchin urging the Administration to prioritize workers in CARES Act stimulus lending. Specifically, the lawmakers called for Secretary Mnuchin to use his authority to require all those receiving taxpayer money to enter into binding agreements with the Department of the Treasury that they will commit to meaningful worker protections that support hardworking families during this crisis. The Senators warned, “If trillions in lending is not implemented in a way that helps workers long-term, these investments will fail and further exacerbate economic inequality, just as they did after the 2008 bank bailouts.”

Senate Dems Urge Administration to Protect Food Supply and Workers: A group of 36 Democratic Senators led by Debbie Stabenow (D-MI) wrote to Vice President Mike Pence, urging the administration to take action to ensure the safety and protection of essential workers and the nation’s food supply. The letter followed a series of outbreaks of COVID-19 at meat processing plants around the country and reports of essential workers being encouraged to work despite exhibiting symptoms. “Breakdowns in the food supply chain could have significant economic impacts for both consumers and agricultural producers,” warned the Senators.

Brown, Schumer, and Cardin Call on SBA Inspector General to Investigate Reports that Some PPP Lenders Have Prioritized Larger, Wealthier Clients over Hard-Hit Small Businesses: On Thursday, Senators Sherrod Brown (D-OH), Minority Leader Chuck Schumer (D-NY), and Ben Cardin (D-MD) sent a letter to SBA Inspector General Mike Ware, calling for the immediate investigation of reports that some lenders participating in the SBA’s Paycheck Protection Program have prioritized the applications of their larger and wealthier clients to the detriment of smaller businesses adversely impacted by the coronavirus pandemic. According to the reports, some private and commercial banking customers received special treatment from their banks when applying for assistance through the PPP, while smaller businesses, including those at greater risk because of the pandemic, have struggled to receive timely assistance from their banks, contrary to the SBA’s “first-come, first-served” claims. The Senators called on the SBA IG to review the implementation of the program by SBA-eligible lenders and to also provide recommendations on SBA’s current rules, regulations, policies, and procedures to ensure small businesses get the money they need and are treated fairly.

Brown Urges Financial Regulators to Ensure that Temporary Suspensions of Important Financial Protections Do Not Turn into Permanent Rollbacks: On Thursday, Sen. Sherrod Brown (D-OH), Ranking Member of the Senate Banking Committee, sent a letter to the Federal Reserve, OCC, FDIC, and NCUA urging regulators that temporary changes to financial safeguards that have long-been on industry wish lists should not become permanent. “Temporary regulatory changes intended to help consumers and small businesses weather this crisis should not translate into permanent giveaways for Wall Street at the expense of those same consumers and small businesses,” wrote Sen. Brown.

ON THE FLOOR

House Establishes New Select Committee to Oversee Coronavirus Relief: On Thursday, the House voted 212-182 along party lines to create a new oversight committee. In her remarks on the House floor, Speaker Nancy Pelosi said the committee “will be laser-focused on ensuring that taxpayer money goes to workers paychecks and benefits, and it will ensure that the federal response is based on the best possible science and guided by health experts—and that the money invested is not being exploited by profiteers and price gougers.” Republicans opposed the move, claiming it was unnecessary and redundant.

LEGISLATION INTRODUCED AND PROPOSED

H.R. 6444: Rep. Lance Gooden (R-TX) introduced H.R. 6444, the Stop COVID Act of 2020, which would amend the Foreign Sovereign Immunities Act to establish an exception to jurisdictional immunity for a foreign state that discharges a biological weapon.

H.R. 6576: Rep. David Cicilline (D-RI) introduced H.R. 6576, which would prohibit depository institutions from assessing overdraft and non-sufficient fund fees during the novel coronavirus crisis and other disasters.

H.R. 6581: Rep. Chuy Garcia (D-IL) introduced H.R. 6581, which would ensure international financial institution support for a robust international response to the global COVID 19 pandemic.

H.R. 6598: Rep. Mark Green (R-TN) introduced H.R. 6598, which would preserve national security by providing guarantees to investors for investments in businesses at risk of predatory economic tactics by the Communist Party of the People's Republic of China.

H.Res. 939: Rep. Brendan Boyle (D-PA) introduced H.Res. 939, a resolution supporting the World Bank Group to lead a worldwide COVID-19 economic recovery effort.

THIS WEEK ON THE HILL

Senate remains in recess until May 4th.

THE REGULATORS

Federal Reserve Board Outlines the Public Information It Will Make Available: On Thursday, the Federal Reserve outlined the public information it will make available regarding its programs to support the flow of credit to households and businesses and thereby foster economic recovery. Specifically, the Board will report information on a monthly basis for the liquidity and lending facilities using CARES Act funding, including the: (1) names and details of participants in each facility; (2) amounts borrowed and interest rates charged; and (3) overall costs, revenues, and fees for each facility. Chair Jerome Powell said in a statement, “The Federal Reserve is committed to transparency and accountability by providing the public and Congress detailed information about our actions to support the economy during this difficult time.”

Federal Reserve Board Announces Temporary Actions Aimed at Increasing the Availability of Intraday Credit Extended by Federal Reserve Banks: On Thursday, the Federal Reserve announced temporary actions aimed at increasing the availability of intraday credit extended by Federal Reserve Banks on both a collateralized and uncollateralized basis. In light of disruptions from COVID-19, depository institutions may face unanticipated intraday liquidity constraints and demands on collateral pledged to the Reserve Banks. In response, the Board is adjusting the manner in which the Reserve Banks administer part II of the Federal Reserve Policy on Payment System Risk. Specifically, the Board is (1) suspending uncollateralized intraday credit limits (net debit caps) and is waiving overdraft fees for institutions that are eligible for the primary credit program; and (2) permitting a streamlined procedure for secondary credit institutions to request collateralized intraday credit (max caps). Relatedly, the Board is suspending two collections of information that are used to calculate net debit caps. These temporary actions will be applied immediately and will remain in effect until September 30, 2020.

Federal Reserve Announces It Is Working to Expand Access to Its Paycheck Protection Program Liquidity Facility: On Thursday, the Federal Reserve announced that it is working to expand access to its Paycheck Protection Program Liquidity Facility (PPPLF) for additional SBA-qualified lenders as soon as possible. SBA-qualified PPP lenders include depository institutions, such as banks and credit unions, as well as non-depository institution lenders, such as some Community Development Financial Institutions. Currently, only depository institutions are eligible to participate in the PPPLF, and over 1000 have already been approved to access the program. The PPPLF supports the PPP by extending credit to financial institutions that make PPP loans, using the loans as collateral. The additional liquidity from the PPPLF increases the capacity of financial institutions to make additional PPP loans.

Federal Reserve Board Announces Interim Final Rule to Amend Regulation D: On Friday, the Federal Reserve Board announced an interim final rule to amend Regulation D (Reserve Requirements of Depository Institutions) to delete the six-per-month limit on convenient transfers from the “savings deposit” definition. The interim final rule allows depository institutions immediately to suspend enforcement of the six transfer limit and to allow their customers to make an unlimited number of convenient transfers and withdrawals from their savings deposits at a time when financial events associated with the coronavirus pandemic have made such access more urgent.

SEC Provides for Phased CAT Broker-Dealer Reporting Timelines with Conditional Exemption for Impacts of COVID-19: On Monday, the SEC announced it has voted to issue two exemptive orders in order to move Consolidated Audit Trail (CAT) implementation forward: (1) establishing a phased CAT reporting timeline for broker-dealers; and (2) permitting introducing brokers that meet certain requirements to follow the small broker-dealer reporting timeline. Following Monday’s actions, select milestones for broker-dealer reporting to the CAT are: June 22, 2020: Initial equities reporting for large broker-dealers and small broker-dealers that currently report to FINRA's Order Audit Trail System (OATS); July 20, 2020: Initial options reporting for large broker-dealers; Dec. 13, 2021: Full equities and options reporting for large and small broker-dealers; and July 11, 2022: Full customer and account reporting for large and small broker-dealers.

SEC Proposes to Modernize Framework for Fund Valuation Practices: On Tuesday, the SEC announced that it has voted to propose a new rule that would establish a framework for fund valuation practices. The rule is designed to clarify how fund boards can satisfy their valuation obligations in light of market developments, including an increase in the variety of asset classes held by funds and an increase in both the volume and type of data used in valuation determinations. “The way a fund values its investments is critical to our Main Street investors,” said SEC Chairman Jay Clayton. He continued, “It affects the fees they pay, the returns they receive, and the value of the fund shares they hold. [The] proposal would improve valuation practices, including oversight, thereby protecting investors and improving market efficiency, integrity and fairness.”

SEC Forms Cross-Divisional COVID-19 Market Monitoring Group: On Friday, the SEC announced the formation of an internal, cross-divisional COVID-19 Market Monitoring Group. This temporary, senior-level group will assist the Commission and its various divisions and offices in (1) commission and staff actions and analysis related to the effects of COVID-19 on markets, issuers, and investors; and (2) responding to requests for information, analysis and assistance from fellow regulators and other public sector partners. The COVID-19 Market Monitoring Group will be chaired by S.P. Kothari, the SEC’s Chief Economist and Director of the Division of Economic and Risk Analysis DERA.

Treasury Finalizes Agreements with Major Airlines, Disburses Initial Payroll Support Program Payments: On Monday, the Treasury Department concluded Payroll Support Program agreements with several major airlines. The agreements will support airline workers and help safeguard the strategically important aviation industry, while ensuring that taxpayers are appropriately compensated. Treasury also made the first Payroll Support Program payments to passenger air carriers, disbursing a total of US$2.9B in initial payments to approved applicants, including two major airlines and 54 smaller passenger air carriers. On Friday, Treasury announced that it had disbursed an additional US$9.5B in initial payments to approved applicants, including an additional 8 major airlines and 29 smaller passenger air carriers.

Treasury Secretary Says There Are No Plans for Mortgage Servicer Facility: On Thursday, Treasury Secretary Steven Mnuchin said in an interview that the Federal Reserve has no plans to establish a facility to support non-bank mortgage services. He indicated that recent actions taken by Ginnie Mae and the FHFA “are more than sufficient to create liquidity.”

Treasury, IRS Announce 88 million Economic Impact Payments Have Gone Out: On Friday, the Treasury Department and the Internal Revenue Service released state-by-state figures for Economic Impact Payments, with 88 million individuals receiving payments worth nearly US$158B in the program's first three weeks.

CFTC Provides Further Relief to Market Participants in Response to COVID-19: On Thursday, the CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) announced that it had issued additional targeted no-action relief to futures commission merchants (FCMs) and introducing brokers (IBs) in response to the COVID-19 pandemic. DSIO granted targeted no-action relief to permit eligible FCMs and IBs taking advantage of covered loans under the Paycheck Protection Program administered pursuant to the CARES Act to add back to capital certain amounts under covered loans that are forgivable in accordance with Regulation 1.17. In order to further align the targeted relief provided in the letter that was issued by FINRA, DSIO has also granted targeted no-action relief to IBs and FCMs who are permitted by FINRA to add back for capital purposes accrued FINRA annual assessment fees.

CFTC Provides Additional Relief to Market Participants in Response to COVID-19: On Friday, the CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) announced that, in response to the COVID-19 pandemic, it had issued additional targeted no-action relief to registrants listing new principals and to applicants for registration as associated persons (APs) from the requirement to submit a fingerprint card for any such principal or AP registration applicant. Subject to other conditions, DSIO will grant no-action relief with respect to a registrant listing new principals or an applicant for AP registration until July 23, 2020, or until the National Futures Association notifies the public that it has resumed processing fingerprints, whichever is earlier, provided that certain criteria are met. Principals and APs of registrants and applicants for registration relying upon this relief must submit fingerprints to NFA within 30 days of NFA’s public announcement that it has resumed fingerprint processing.

CFPB Advisory Committees to Meet on May 1: On Monday, the CFPB announced that the Consumer Advisory Board, Community Bank Advisory Council, the Credit Union Advisory Council, and the Academic Research Council will meet jointly on May 1st from 2:00 to 4:15 pm ET via conference call. The call will be open to the public. The meeting will focus on the COVID-19 pandemic, including a snap shot of consumer complaints as a result of the pandemic, and the impact of the pandemic on consumers, including service members, students, older Americans, and the underserved.

CFPB Outlines Mortgage Loan Transfer Process to Prevent Consumer Harm: On Friday, the CFPB outlined practices to provide mortgage servicers clarity, facilitate compliance, and prevent harm to consumers during the transfer of residential mortgages. Bureau Director Kathy Kraninger said in a statement, “The guidance provides insights the CFPB has gained through years of supervisory and enforcement work to oversee compliance with regulations updated after the financial crisis.”

FHFA Addresses Servicer Liquidity Concerns, Announces Four Month Advance Obligation Limit for Loans in Forbearance: On Tuesday, the Federal Housing Finance Agency announced the alignment of Fannie Mae's and Freddie Mac's (the Enterprises) policies regarding servicer obligations to advance scheduled monthly principal and interest payments for single-family mortgage loans. Once a servicer has advanced four months of missed payments on a loan, it will have no further obligation to advance scheduled payments. This will apply to all Enterprise servicers regardless of type or size. “The four-month servicer advance obligation limit for loans in forbearance provides stability and clarity to the $5 trillion Enterprise-backed housing finance market,” said FHFA Director Mark Calabria. “Mortgage servicers can now plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payment.”

Education Department Calls on Wealthy Institutions to Reject Taxpayer Emergency Funds and Calls on Congress to Change Eligibility: On Wednesday, Education Secretary Betsy DeVos issued a statement explaining that while “Congress required by law that taxpayer Emergency Relief funds be given to all colleges and universities, no matter their wealth . . . wealthy institutions that do not primarily serve low-income students do not need or deserve additional taxpayer funds.” She advised institutions with large endowments not to apply for funding and urged Congress to “make sure no more taxpayer funds go to elite, wealthy institutions.”

THE COURTS

Supreme Court Finds Non-Unanimous Jury Verdicts are Unconstitutional: The Supreme Court ruled in on Monday that defendants can only be convicted by a unanimous jury. Oregon was the last state in the nation still allowing a defendant to be convicted if up to two jurors dissented, after Louisiana abandoned the practice.

Supreme Court Declines to Hear Challenge to FINRA Immunity: On Monday, the Supreme Court declined to hear a challenge brought by a stockbroker to FINRA’s immunity from lawsuits over its conduct.

OTHER NOTEWORTHY ITEMS

World Bank Predicts Sharpest Decline of Remittances in Recent History: In a report published on Wednesday, the World Bank projected that global remittances will decline sharply by about 20 percent in 2020 due to the economic crisis induced by the COVID-19 pandemic and shutdown. The projected fall, which would be the sharpest decline in recent history, is largely due to a fall in the wages and employment of migrant workers, who tend to be more vulnerable to loss of employment and wages during an economic crisis in a host country. “Remittances are a vital source of income for developing countries. The ongoing economic recession caused by COVID-19 is taking a severe toll on the ability to send money home and makes it all the more vital that we shorten the time to recovery for advanced economies,” said World Bank Group President David Malpass.

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