CFPB Consent Order Could Upend Bank Garnishment Practices

On May 4, 2022, the Consumer Financial Protection Bureau published a consent order concerning Bank of America’s garnishment practices whereby Bank of America agreed to:

  • Refund at least $592,000 to its customers for garnishment fees that were improperly assessed;
  • Pay a civil penalty of $10 million; and
  • Submit a compliance plan for redressing unfair and deceptive acts in its garnishment processing.

The order has significant implications for the banking industry and the processing of garnishments. Accordingly, it would be prudent for all banks to undertake an immediate review of the following.

To read the full text of this Duane Morris Alert, please visit the firm website.

Best Practices for Fund Document Diligence in Fund Financing Transactions

By Anastasia N. Kaup and Melissa A. Sharp

It is critically important, for both lenders and borrowers, to confirm that the borrower is actually authorized to enter into a financing transaction, borrow money, and pledge assets as security for those obligations (if the financing is secured).  If a borrower (entity) acts without express legal authority or beyond the stated scope of authority in its charter, operating agreement, or offering documents (collectively, the “Fund Documents”), the entity may be sued by its investors, the transaction may be voided by a court, the lender may suffer a loss, and/or other negative consequences may result.  Continue reading “Best Practices for Fund Document Diligence in Fund Financing Transactions”

LIBOR Transition: Feedback from FCA Consultation on Synthetic LIBOR

Further to our recent blog post on synthetic LIBOR, the Financial Conduct Authority (the “FCA”) has published its feedback statement on its consultation regarding the legacy use of 1, 3 and 6 month sterling LIBOR from 1 January 2022. The feedback consisted of 36 responses from market participants, with the majority of respondents agreeing with all aspects of the FCA’s proposals. The FCA has confirmed that it will permit legacy use of synthetic Sterling LIBOR by supervised entities, aside from cleared derivatives.

The FCA confirmed that one, three and six-month synthetic Sterling LIBOR will be calculated as the sum of the applicable one, three or six-month Term SONIA Reference Rates provided by IBA and the fixed spread adjustment applicable as part of the ISDA IBOR fallback for one, three or six-month Sterling LIBOR, which is published for the purposes of the ISDA IBOR Fallbacks Supplement and Protocol. IBA will be required to continue publishing synthetic Sterling LIBOR for all applicable London business days, except London public holidays.

It is of note that some market participants queried the use of forward-looking term RFR as a component for synthetic LIBOR, suggesting the use of RFRs “in-arrears” instead in order to align with ISDA fallbacks. The FCA’s response to this suggestion was that RFRs “in-arrears” are not suitable for contracts which require the interest rate to be identified up-front, and as such contracts are not realistically able to be amended to work using RFRs “in-arrears”, the use of such rates in the calculation of synthetic LIBOR could have the potential to cause market disruption.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. HuskinsPhuong (Michelle) Ngo and Natalie A. Stewart.

LIBOR Transition: Synthetic Sterling LIBOR for limited tough legacy loans

As the cessation of LIBOR panels draws closer, the Financial Conduct Authority (the “FCA”) has been looking at ways to mitigate market disruption in respect of tough legacy loans which link to LIBOR but expire after LIBOR is discontinued. As a result, the FCA will require ICE Benchmark Administration to publish a synthetic Sterling LIBOR for the duration of 2022.

Despite at first instance appearing to be a solution for products which have yet to be amended for the cessation of LIBOR, synthetic LIBOR is only intended to be used for certain tough legacy contracts. To learn more about how synthetic LIBOR will work in practice and the legacy contracts which are likely to be able to utilize synthetic LIBOR, check out our Alert here.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, Phuong (Michelle) Ngo and Natalie A. Stewart.

 

LIBOR Transition: Drama Continues for BSBY

As Bloomberg and banks like Bank of America in the US and DBS Bank in Singapore continue to push forward with BSBY, IOSCO last month rattled its saber with a statement on credit sensitive rates, highlighting the importance of choosing alternative financial benchmarks that are compliant with the IOSCO Principles. The last volley in the continuing back and forth between regulators and proponents of new credit sensitive rates came in July, when Bloomberg tried to address some of the volume and manipulation concerns raised by SEC Chair Gary Gensler and others with BSBY.

The IOSCO statement counters that with a caution that IOSCO compliance is not a one-time test, and even if trading volumes are sufficient for current volumes of loans in such benchmarks, loan volume should not be permitted to grow if it outpaces increases in underlying trading volumes and are unable to be resilient. BSBY is not mentioned by name, but it has been the primary subject of attention.

Two weeks after IOSCO published its cautionary statement, Gensler spoke at the ARRC’s fifth session of The SOFR Symposium: The Final Year, responding to Bloomberg’s July report that it “could not address the main concern that the rate is built off of too thin a market.” Gensler reiterated that that he did not “believe BSBY is, as FSB urged, ‘especially robust,’” adding that, “I don’t believe it meets IOSCO’s 2013 standards.”

Unless regulators back up their words with actions, this drama is mostly noise, and lenders are free to continue to make BSBY loans. Whether they will be successful will depend in part on whether borrowers perceive BSBY as a better deal. For legacy LIBOR loans, the spread adjustment added to the interest rate to transition to SOFR has been set by market convention—about 11.5 basis points for a 1 month term, 26bps for 3 months and 43bps for 6 months. This adjustment reflects that LIBOR is an unsecured rate that is sensitive to fluctuations in credit risk while SOFR is a secured, relatively stable “risk free” rate. Since BSBY is also based on unsecured transactions, there should not be a need to add much, if any, spread adjustment to transition from LIBOR to BSBY. This lower spread could be attractive to borrowers if they believe that over time, the variable credit sensitivity of BSBY will not cause the rate to rise, relative to SOFR, more than the fixed SOFR spread adjustment.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

Cryptocurrency Issues for Lenders and Borrowers: How to Proceed In the Absence of Industry Clarity

States are beginning to recognize cryptocurrency as a form of collateral under their Uniform Commercial Codes. As a result, commercial lenders and borrowers are learning more about their legal rights in cryptocurrency. Of particular concern for borrowers and lenders alike is the enforceability of a security interest on cryptocurrency as collateral. Forty-seven U.S. states have not passed legislation on cryptocurrency as an asset category, whereas Texas, Rhode Island and Wyoming have passed cryptocurrency legislation. These three states call cryptocurrency, “Virtual Currency”. The collateral is defined in Texas, for example, as “digital representation of value that functions as a medium of exchange, unit of account, and/or store of value and is often secured using blockchain technology”. To perfect its lien in cryptocurrency, a secured lender can file a financing statement or execute a “control” agreement. That said, it is unclear whether filing a financing statement is sufficient to put prospective secured parties on notice of a then-existing lien. As such, until the industry gains clarity on this matter, lenders need to perfect via “control” to have any certainty in the viability of the priority of their security interest.

Even how a lender goes about “controlling” Virtual Currency, though – which is also a perfection method for asset types such as deposit accounts and investment property – is less than crystal clear at this point. For a user to access cryptocurrency, one needs what is called a private “key.” As such, some prospective lender in this space might require possession of that private key as a condition to funding. However, unless a borrower does not plan to access its cryptocurrency during the course of a loan, from a practical matter, it seems unlikely that a borrower would want to give up its private key. Some industry experts have discussed similar control mechanisms that secured lenders use for deposit account collateral or other receivables, such as deposit account control agreements or source code escrow agreements. Still, until those control mechanisms make their way through the court system, it is impossible to know with any degree of certainty how those methods would work and if they would achieve the requisite “control” under the new law.

For further guidance, please check this space regularly, subscribe to our blog or reach out to Michael Witt or Max Fargotstein.

LIBOR Transition: Derivatives News from CME Group

CME Group, the Term SOFR administrator, recently made a couple of important announcements. First, its Term SOFR data are now available for licensing for use in cash market financial products and OTC derivative products. Until now CME Group previously limited Term SOFR data to making loans. Their terms of use, which did not allow the data to be used for Term SOFR derivatives, have been updated with details on licensing.

Of equal importance, BSBY futures are live. As a complement to BSBY futures and SOFR-based offerings, CME Group also announced that it will launch Cleared BSBY swaps for both outright OIS and basis swaps beginning November 15, subject to regulatory review.

An active derivatives market is crucial to the development of Term SOFR and BSBY. With the availability of Term SOFR swaps, Term SOFR seems poised to replace LIBOR as the dominant rate in the loan market. As we discussed in our prior Alert, regulators, and SEC chair Gary Gensler in particular, have expressed considerable reservations with BSBY. It will be interesting to see how trading and loan volume in both rates develop.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

LIBOR Transition: The first syndicated SOFR loan is here!

We knew it was coming, but it finally happened.

Ford Motor Co. announced in June their intention to refinance $15.4 billion in syndicated facilities — and at least some of them on SOFR. With all eyes on what would be the first syndicated U.S. corporate loan tied to regulators’ preferred LIBOR replacement, Ford formally launched the deal this month. Bloomberg reported that there are three revolver tranches that Ford is refinancing (with JPMorgan Chase & Co. leading the loan process): a $3.35 billion three-year portion, a $2 billion three-year tranche and a $10.05 billion five-year portion. Ford’s loan is using Simple SOFR, and not Term SOFR endorsed by the ARRC earlier this summer.

This first syndicated loan originated on SOFR has marked a milestone in the transition away from LIBOR. And as the transition gains steam, more SOFR loans are expected to come in the last quarter of the year.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

© 2009- Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

Proudly powered by WordPress