CFPB Issues Proposals to Amend Qualified Mortgage Definition and Extend GSE Patch

 

On June 22, the CFPB issued two notices of proposed rulemaking (NPRMs) regarding the Qualified Mortgage (QM) exemption from the ability-to-repay requirements of Regulation Z. The first proposal would, among other changes, revise the general QM loan definition by replacing the QM borrower debt-to-income ratio limit with a price-based approach to determining loan eligibility. The second proposal would extend the current January 2021 sunset date in the provision granting QM status to mortgages eligible for purchase by Fannie Mae or Freddie Mac (the “GSE Patch”) to the date on which the amendments to the general QM loan definition become effective. Comments on the NPRM to revise the general QM loan definition are due 60 days following publication in the Federal Register. Comments on the NPRM to extend the GSE Patch are due 30 days following publication. Release. NPRM (General QM Loan Definition). NPRM (GSE Patch Extension).

Rating Agency Developments (June 18 – June 30)

 

On June 30, Fitch published its criteria for Covered Bonds RatingCriteria.

On June 30, DBRS Morningstar published its updated methodology for U.S. ABS General RatingsMethodology.

On June 26, Moody’s published its updated methodology for Catastrophe Bonds. Methodology.

On June 26, KBRA published a ­­­­­­­­­­­­­­­release titled KBRA Assigns Ratings to BANK 2020-BNK27. Release.

On June 25, KBRA published a report titled Public Finance: Coronavirus (COVID-19): Unemployment Improves in All but Six States. Report.

On June 24, Moody’s published its revised methodology for rating Credit Card Receivables-Backed Securities. Methodology.

On June 24, Moody’s published its revised methodology for rating Credit Tenant Lease and Comparable Lease Financings. Methodology.

On June 19, Fitch published its revised criteria for rating Future Flow Securitizations. Criteria.

On June 19, Fitch published its revised criteria for rating CMBS Large Loans. Criteria.

On June 19, Moody’s published its revised methodology for rating Floorplan Asset-Backed Securities. Methodology.

On June 19, Moody’s published its revised methodology for rating Repackaged Securities. Methodology.

On June 18, Moody’s published its revised methodology for rating Covered Bonds. Methodology.

Federal Reserve Expands Main Street Lending Program to Small and Medium-Sized Businesses

 

On June 8, the Federal Reserve Board (the “Board”) announced that it was expanding its Main Street Lending Program to allow more small and medium-sized business to qualify for the program. Among the changes, the Board lowered the minimum loan size for certain loans from $500,000 to $250,000, increased the maximum loan size for all facilities, increased the term of each loan option from four years to five years and extended the repayment period for all loans by delaying principal payments for two years rather than one year. Release.

CFTC Approves Final Rule Regarding Registration Requirements for Commodity Pool Operators

 

On June 4, the Commodity Futures Trading Commission (CFTC) finalized a rule to prohibit certain commodity pool operators from relying on the registration exemptions found in Regulation 4.13 in Title 17 of the Code of Federal Regulations (“Regulation 4.13”). The final rule generally prohibits persons who have, or whose principals have, any of the disqualifying factors listed in Section 8a (2) of the Commodity Exchange Act from claiming one of the exemptions to the commodity-pool-operator registration requirements set forth in Regulation 4.13. Release.

Rating Agency Developments (June 4 – June 15)

 

On June 15, KBRA published a Structured Finance CMBS pre-sale report titled Bank 2020-BNK27. Report.

On June 10, DBRS Morningstar published its U.S. ABS General Ratings. Methodology.

On June 9, KBRA published a research report titled Coronavirus (COVID 19): State and Local Revenue Losses Adding Up. Report.

On June 9, Fitch published its Consumer ABS Rating. Criteria.

On June 8, Moody’s published its Approach to Rating TruPS CDOs. Methodology.

On June 8, DBRS Morningstar published its Global Methodology for Rating Banks and Banking Organizations. Methodology.

On June 8, Fitch published its National Scale Rating. Criteria.

On June 4, DBRS Morningstar published its Rating Entities in the Real Estate Industry. Methodology.

On June 4, DBRS Morningstar published its Interest Rate Stresses for U.S. Structured Finance Transactions. Methodology.

UK Government’s COVID-19 Support for Businesses: A First Stocktake Three Months On

 

Since March, governments around the world have implemented unprecedented measures in an attempt to avoid a severe economic downturn as a result of the COVID-19 pandemic. In the United Kingdom, HM Treasury (“Treasury”) has spearheaded these efforts for the government. The UK government’s measures include the Coronavirus Business Interruption Loan Scheme (“CBILS”), the Coronavirus Large Business Interruption Loan Scheme (“CLBILS”), the Bounce Back Loan Scheme (“BBLS”) and the Future Fund Scheme (“Future Fund”, and together the “Schemes”). To date, the UK government has provided £38.36bn worth of support through the Schemes (directly or via guarantees), enabling finance to be provided to 913,265 companies under the Schemes.[1]

Since their inception, the UK government has published data and statistics on the implementation of the Schemes. This enables a first stocktake three months since the launch of the first of the Schemes.

UK Government Schemes

Each Scheme targets businesses of different sizes and, as such, provides differing levels of UK government-backed support. The Treasury launched:

  • CBILS on March 23. CBILS is available to small and medium enterprises (“SMEs”) with an annual turnover of no more than £45 million. Under CBILS, the UK government provides the relevant accredited lender with a partial guarantee (80%) in respect of the outstanding balance of the relevant facility (subject to an overall cap per lender). Any facility provided under CBILS is up to a maximum amount of £5m.
  • CLBILS on April 20. CBILS is available to businesses with annual turnover of more than £45 million. Facilities of up to £25m are available, via accredited lenders, for businesses with an annual turnover between £45m and £250m. Facilities of up to £200m (in respect of term loans and revolving credit facilities) and £50m (in invoice finance and asset finance facilities) are available to businesses with an annual turnover of more than £250m.[2]
  • BBLS on May 4. BBLS provides loans, through accredited lenders, of between £2,000 and up to 25% of the borrower’s turnover, up to a maximum of £50,000. There are no turnover requirements, but BBLS is targeted at SMEs.
  • The Future Fund on May 20. The Future Fund adopts a different approach to the rest of the Schemes. It is targeted at innovative UK companies with good potential that typically rely on equity investment—i.e., it is more in line with start-up and venture capital financing mechanisms. The Future Fund is an investor-lead Scheme, and the UK government will match the third-party investment (with a minimum of £125,000, up to a maximum of £5m). Such UK government matching investment is by way of subscribing for convertible loan notes issued by the relevant company.

Taking Stock

Nearly three months on, the Schemes have received over one million applications and supported hundreds of thousands of business across the UK.

As of June 14, CBILS had supported a total of 49,247 facilities out of a total of 96,492 applications, equaling an application success rate of 51%. The value of the accepted applications amounts to £10.11bn, averaging just over £205,290 per debt facility.

In contrast, the CLBILS aimed at large corporations has backed facilities in the value of £1.77bn for a total of 279 successful applicants. This totals just over £6.3m per applicant on average. The success rate for CLBILS has so far been lower than that for CBILS: only around 42% of applicants have been approved.

BBLS boasts by far the greatest number of successful applicants: 863,584 small businesses have been able to secure funding through the Scheme. This high number also translates into a high success rate: Just short of 82% of applicants have had their applications approved. Dispensing a total of £26.34bn, businesses have on average obtained £30,500 in finance.

Funding obtained under the Future Fund Scheme has so far totaled £146m. The money has gone to 155 successful companies out of a total of 577 applicants, who have received an average of approximately 940,000. This amounts to a success rate of just under 27%.[3]

Comparing two metrics reveals notable differences between the Schemes:

1. Success rate: Successful applications under BBLS are by far the highest proportion with 82%, eclipsing the other Schemes. In comparison, the Future Fund has provided finance to just 27% of applicants. CBILS and CLBILS have application success rates of 51% and 42%, respectively, sitting in between the two other Schemes.

While the UK government has not published further analysis of these discrepancies, the varying success rates no doubt indicate the more stringent application criteria and more thorough scrutiny, cultivating a more selective application processes for the larger debt facilities (as opposed to the lower facility size and shorter maturity of BBLS loans). 

2. Approved amounts: The average amount of £30,500 granted under BBLS is considerably closer to the UK government’s cap of £50,000 than that of other Schemes. In contrast, the other three Schemes’ average facilities come in significantly below the maximum amount available under those Schemes. CBILS applicants’ average funding of £205,290 sits against a cap of £5m, whereas the average CLBILS facility of £6.3m pales against an available maximum of £25m or up to £200m, depending on the size of the business (although noting the £200m cap was only increased to that amount, from £50m, on May 19). The Future Fund’s average disbursement of £940,000 is somewhat closer to the £5m cap.

As the UK government has not released detailed application statistics, it remains speculative whether lower levels of support to a larger number of businesses has been prioritized, or whether companies are applying for lower amounts of finance than anticipated. Equally, the UK government-imposed caps may have also been designed to meet all eventualities, acting as a ceiling with substantial buffer, rather than suggesting an expectation that most companies would apply for funding close to the respective caps. That said, the low average size of a CLBILS facility of £6.3m is very surprising given that the maximum facility size was increased to £200m cap (from £50m) on May 19 following discussions between the UK government, lenders and business groups.

Another reason why the CLBILS facility size and/or acceptance rates may be low is that, notwithstanding the Chancellor clarifying that CLBILS could be accessed by private equity-owned companies, it has been reported[4] that private equity-owned companies are still prevented from accessing CLBILS (for example, Hawksmoor, of which the majority is owned by Graphite). The rationale for these refusals is that such private equity-owned companies do not meet the CLBILS criteria, and particularly that they were an “undertaking in difficulty” as of December 31, 2019 (this requirement effectively comes from EU state-aid rules). Private Equity firms often fail this test, even if they are operating successfully and are in no financial difficulty, because they tend to be highly leveraged.[5]

Alternative Lenders

In line with the unprecedented scale of economic support, the UK government has also adopted innovative approaches to lending by approving alternative lenders as part of its COVID-19 Schemes. Alternative lending used in this context (i.e., not including true direct lending/alternative credit funds) tends to mean peer-to-peer lending, but it can also include finance from challenger banks, using technology to connect loan investors and borrowers on online platforms. Borrowers turning to these types of alternative lending providers often struggle to secure funding from traditional lending institutions, such as banks. Such loans typically have higher interest rates, a lower duration and are often unsecured.[6] Emerging in the UK in 2005, the practice gained traction in the aftermath of the financial crisis as a lifeline for SMEs and has since increased its market share consistently.

Amid the COVID-19 pandemic in May, the British Business Bank approved four fintechs as part of CBILS to lend money: Assetz Capital, Atom Bank, Ebury and Fleximise.[7] Other approved alternative lenders include Funding Circle, a dedicated SME peer-to-peer lending platform, and Starling Bank, a leading challenger bank.[8] BBLS has accredited a more limited number of alternative lenders, including Starling Bank and Tide, a challenger bank focused on offering banking services to SMEs.[9] The lenders accredited to provide finance to large corporations under the CLBILS remain, to date, traditional lenders, such as Barclays, NatWest or Santander.[10]

The UK government’s move to approve such alternative lenders and fintech companies may illustrate a broader readiness to engage with a budding group of innovative businesses within the lending sector. Such alternative lenders have long constituted a lifeline to SMEs, which may be unable to access funding through traditional avenues.[11] In the current COVID-19 environment, such lenders may become increasingly important to keep SMEs afloat, inside and outside of the UK government-guaranteed Schemes.

We noted in “COVID-19 UK: Finance – Large Business Loan Scheme launched and available to PE owned and large companies – Insight” that it will be interesting to see whether direct lending/alternative credit funds will look to become accredited lenders under CLBILS to take advantage of the UK government guarantee, given that these types of lenders are used to, and are well positioned to, structure and provide bespoke financing solutions. However, as outlined above, to date direct lending/alternative credit funds have not seemed to want to be become accredited lenders.

Concluding Thoughts

Unprecedented challenges often call for unprecedented responses. The UK government’s readiness to pour significant amounts of money into Schemes supporting various segments of the economy has been critical to the survival of many businesses. As updated figures are published over the next months, it will become increasingly evident whether the UK economy’s need for UK government-supported debt facilities will grow, subside or remain steady; how much finance businesses continue to require; and how successful their applications are. The ultimate stocktake of these Schemes, however, is likely still some time away, once the medium- to long-term economic effects of the pandemic crystalize.


[1] UK government, ‘HM Treasury coronavirus (COVID-19) business loan scheme statistics’, June 16, 2002, <https://www.gov.uk/government/collections/hm-treasury-coronavirus-covid-19-business-loan-scheme-statistics#history>.
[2] Companies that borrow more than £50 million through CLBILS are subject to certain restrictions. These restrictions include: (i) no dividend payments to be made other than those that have already been declared; (ii) no share buybacks; and (iii) no cash bonuses, or pay raises, to senior management and/or directors except in certain limited and specific cases.
[3] All figures from UK government, ‘HM Treasury coronavirus (COVID-19) business loan scheme statistics’, June 16, 2002, <https://www.gov.uk/government/collections/hm-treasury-coronavirus-covid-19-business-loan-scheme-statistics#history>.
[4] “Private equity-owned companies miss out on bailout loans”, Financial Times, May 19, 2020.
[5] Please see a future “Insight” to be published on https://covid19.orrick.com/UK/ for further discussion on this topic.
[6] Kenneth Michlitsch, ‘An introduction to alternative lending’, Morgan Stanley Insights, May 20, 2020, <https://www.morganstanley.com/im/en-us/financial-advisor/insights/investment-insights/an-introduction-to-alternative-lending.html>; Funding Circle, ‘What is alternative lending’, February 26, 2019, <https://www.fundingcircle.com/us/resources/alternative-lending/>.
[7] Victor Chatenay, ‘Four new alt lenders have been accredited under the Coronavirus Business Interruption Loan Scheme’, Business Insider, May 11, 2020, <https://www.businessinsider.com/four-alt-lenders-approved-for-cbils-2020-5?r=DE&IR=T>.
[8] British Business Bank, ‘CBILS – current accredited lenders and partners’, <https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils-2/current-accredited-lenders-and-partners/>, accessed June 20, 2020.
[9] British Business Bank, ‘CLBILS – current accredited lenders and partners’, <https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/bounce-back-loans/current-accredited-lenders-and-partners/>, accessed June 20, 2020.
[10] British Business Bank, ‘CLBILS – current accredited lenders and partners’, <https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/clbils/current-accredited-lenders-and-partners-2/>, accessed June 20, 2020.
[11] SME Finance Forum, ‘MSME finance gap’, <https://www.smefinanceforum.org/data-sites/msme-finance-gap>, accessed June 20, 2020. 

Rating Agency Developments (May 22 – June 3)

 

On June 3, KBRA published a Structured Finance research report titled CMBS: Coronavirus (COVID-19): CMBS Loan Performance Trend Update. Report

On June 3, KBRA published a report titled Public Finance: Coronavirus (COVID-19): States Brace for Unprecedented Medicaid Expansion. Report.

On June 2, KBRA published a report titled ABS: Coronavirus (COVID-19): Modifying Auto and Consumer Loan Delinquency Expectations. Report

On May 29, KRBA published a Structured Finance – CMBS surveillance report titled CMBS: BANK 2019-BNK18. Report.

On May 27, Fitch published an updated rating methodology titled APAC Residential Mortgage Rating Criteria. Methodology.

On May 27, DBRS Morningstar published its updated methodology titled U.S. ABS Surveillance. Methodology.

On May 22, Moody’s published an updated rating methodology titled Moody’s Approach to Rating Large Loan and Single Asset/Single Borrower CMBS. Methodology.

On May 22, Moody’s published an updated rating methodology titled Moody’s Approach to Rating Derivative Product Companies. Methodology.

FHFA Publishes Final Rule on the FHLBanks’ Housing Goals

 

On June 3, the Federal Housing Finance Agency (FHFA) sent for publication a final rule on the Federal Home Loan Banks’ Housing Goals, which eliminates the retrospective evaluation using HMDA data and set a single prospective mortgage purchase housing goal as a share of each FHLBank’s total Acquired Member Asset purchases. The rule also sets a new small member participation housing goal for participation by small institutions, eliminates the volume threshold and simplifies the eligibility criteria to enable federally backed loans sold by small institutions eligible to count for goals purposes. Release.

Federal Reserve Board Announces Expansion in the Number and Type of Entities Eligible to Directly Use Its Municipal Liquidity Facility

 

On June 3, the Federal Reserve Board announced an expansion in the number and type of entities eligible to directly use its Municipal Liquidity Facility (MLF). Under the new terms, all U.S. states will be able to have at least two cities or counties eligible to directly issue notes to the MLF, regardless of population. Governors of each state will also be able to designate two issuers in their jurisdictions whose revenues are generally derived from operating government activities to be eligible to directly use the facility. Release.

CFTC: Interim Final Rule – Uncleared Swaps Margin – Proposed Rule: CPO Registration Exemption

 

On May 28, the Commodity Futures Trading Commission (CFTC) approved an interim rule to grant an extension of the compliance schedule for initial margin requirements for uncleared swaps in response to operational challenges certain entities are facing due to the COVID-19 pandemic. The CFTC also approved a proposed rule that amends regulation 3.10(c)(3), which provides an exemption from registration as a CPO for certain persons located outside the U.S. who are operating offshore commodity pools that are neither offered nor sold to U.S. participants. Release.