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On December 7, the Office of the Comptroller of the Currency (OCC) published the fall edition of its Semiannual Risk Perspective, which discusses key issues facing banks. From the OCC’s perspective, the overall strength of the banking system remains sound and recessionary pressures appear to be easing. The OCC notes that, while many economists had predicted a decline, gross domestic product increased at an annual rate of 2.1% in the second quarter of 2023, slowing just slightly from the first quarter’s 2.2% pace. However, the OCC also emphasized that inflation remains elevated and a slowing labor market, declining savings, and higher interest rates could cause financial stress to borrowers.

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On October 13, California Governor Gavin Newsom signed into law Senate Bill 666, which amends the California Financing Law to prohibit a covered entity from charging certain fees in connection with a commercial financing transaction with a small business. Under the law, a small business is defined as an independently owned and operated business, with its principal office located in California, its officers domiciled in California, and, together with affiliates, 100 or fewer employees and average annual gross receipts of $15 million or less over the previous three years. “Covered entities” do not include depository institutions.

In a major victory for small business lenders, yesterday the U.S. District Court for the Southern District of Texas granted motions filed by three groups of trade association intervenors to extend the court’s existing injunction against the Consumer Financial Protection Bureau’s (CFPB or Bureau) enforcement of its final rule under § 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Final Rule) to cover all small business lenders nationwide. A discussion of the preliminary injunction issued by that Texas federal court on July 31 can be found here. The injunction in Texas Bankers Association v. CFPB will dissolve if the U.S. Supreme Court reverses the Fifth Circuit in Community Financial Services Association v CFPB (CFSA case), which found the CFPB’s funding structure unconstitutional.

On October 24, the Federal Reserve Board (Fed), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies) finally issued their long-awaited final rule modernizing how they assess lenders’ compliance under the Community Reinvestment Act (CRA). The CRA was enacted in 1977 to address systemic inequities in access to credit and encourages banks to meet the credit needs of the entire community, including low- and moderate-income (LMI) communities, consistent with safety and soundness principles. The last meaningful, comprehensive revision to the CRA regulations occurred in 1995.

Earlier this month, the California Department of Financial Regulation and Innovation (CA DFPI) announced a new rule expanding the definition of unfair, deceptive and abusive acts and practices (UDAAP) to commercial financing. Specifically, the rule makes it unlawful “for a covered provider to engage or have engaged in any unfair, deceptive, or abusive act or practice in connection with the offering or provision of commercial financing or another financial product or service to a covered entity.” The new rule also includes annual reporting requirements (described below) for any covered provider who makes more than one commercial financing transaction to covered entities in a 12-month period or who makes five or more commercial financing transactions to covered entities in a 12-month period that are “incidental” to the business of the covered provider. Importantly, this rule does not apply to banks, credit unions, federal savings and loan associations, current licensees of the CA DFPI or licensees of other California agencies “to the extent that licensee or employee is acting under the authority of” the license.

In its highly anticipated decision, the Second Circuit has answered the question of whether a syndicated term loan qualifies as a “security” with a definitive “no”. On August 24, the Court of Appeals for the Second Circuit issued its ruling, affirming the lower court’s holding in Kirschner[1] that leveraged loans are not securities. After the Securities and Exchange Commission (SEC) declined to submit a brief, the court determined, in its application of the Reves test, that three of the four Reves factors weighed against concluding that the complaint plausibly alleged that the loans in question are securities.

On August 8, the Office of the Comptroller of the Currency (OCC) issued guidance on the applicability of the legal lending limit (LLL) to purchased loans. This guidance applies to community banks’ purchases of loans. In short, unless an exception applies, all loans and extensions of credit made by banks are subject to the LLL.

As discussed here, on April 26, the Texas Bankers Association, the American Bankers Association (ABA), and Rio Bank, McAllen, Texas (Rio Bank) filed a complaint in the U.S. District Court for the Southern District of Texas challenging the Consumer Financial Protection Bureau’s (CFPB or Bureau) final rule under § 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Final Rule). As discussed here, § 1071 amended the Equal Credit Opportunity Act (ECOA) to impose significant data collection and reporting requirements on small business creditors. The plaintiffs’ complaint relied heavily on the Fifth Circuit’s decision in Community Financial Services Association (CFSA) v CFPB, finding the CFPB’s funding structure unconstitutional and, therefore, rules promulgated by the Bureau invalid. The CFPB’s appeal of the Fifth Circuit’s decision is currently pending before the U.S. Supreme Court (discussed here).

On June 29, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and the National Credit Union Administration (collectively, the agencies) issued a joint policy statement on commercial real estate loan workouts building on existing guidance calling for financial institutions to work “prudently and constructively” with distressed borrowers. The joint policy statement supersedes the agencies’ 2009 guidance.