[Federal Register Volume 86, Number 30 (Wednesday, February 17, 2021)]
[Rules and Regulations]
[Pages 9837-9840]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-02966]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 86, No. 30 / Wednesday, February 17, 2021 /
Rules and Regulations
[[Page 9837]]
FEDERAL RESERVE SYSTEM
12 CFR Part 215
[Regulation O; Docket No. R-1740]
RIN 7100-AG 10
Loans to Executive Officers, Directors, and Principal
Shareholders of Member Banks
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Interim final rule with request for comment.
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SUMMARY: On April 17 and July 15, 2020, the Board issued two interim
final rules to except certain loans made through June 30 and August 8,
2020, respectively, that are guaranteed under the Small Business
Administration's Paycheck Protection Program from the requirements of
section 22(h) of the Federal Reserve Act and the Board's Regulation O.
The Board is issuing this interim final rule to further extend this
relief to PPP loans, including PPP second draw loans, made through
March 31, 2021.
DATES: This interim final rule is effective February 17, 2021. Comments
on the interim final rule must be received no later than April 5, 2021.
ADDRESSES: You may submit comments, identified by Docket No. R-1740 and
RIN 7100 AG 10, by any of the following methods:
Agency Website: http://www.federalreserve.gov. Follow the
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Email: [email protected]. Include docket
and RIN numbers in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551.
All public comments will be made available on the Board's website
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons or to remove
personally identifiable information at the commenter's request.
Accordingly, comments will not be edited to remove any identifying or
contact information. Public comments also may be viewed electronically
or in paper form in Room 146, 1709 New York Avenue NW, Washington, DC
20006, between 9:00 a.m. and 5:00 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Benjamin McDonough, Associate General
Counsel, (202) 452-2036, Alison Thro, Deputy Associate General Counsel,
(202) 452-3236, Dan Hickman, Senior Counsel, (202) 973-7432, Josh
Strazanac, Senior Attorney, (202) 452-2457, Jasmin Keskinen, Attorney,
(202) 475-6650, Legal Division; or Anna Lee Hewko, Associate Director,
(202) 530-6360, Juan Climent, Assistant Director, (202) 872-7526, (202)
452-5239, Kathryn Ballintine, Manager, (202) 452-2555, Rebecca Zak,
Lead Financial Institution Policy Analyst, (202) 912-7995, Eusebius
Luk, Senior Financial Policy Analyst I, (202) 452-2874, Division of
Supervision and Regulation; Board of Governors of the Federal Reserve
System, 20th Street and Constitution Avenue NW, Washington, DC 20551.
Users of Telecommunication Device for Deaf (TDD) only, call (202) 263-
4869.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. The Interim Final Rule
III. Administrative Law Matters
A. Administrative Procedure Act
B. Paperwork Reduction Act
C. Regulatory Flexibility Act
D. Riegle Community Development and Regulatory Improvement Act
of 1994
E. Use of Plain Language
I. Background
On March 27, 2020, the President signed into law the Coronavirus
Aid, Relief, and Economic Security (CARES) Act which, among other
things, created the Paycheck Protection Program (PPP) to facilitate
lending to small businesses affected by the outbreak of COVID-19 and
imposition of associated containment measures (COVID event). Although
the CARES Act specified that the PPP would end on June 30, 2020, it was
later extended to August 8, 2020.\1\ On December 27, 2020, the
President signed into law the Consolidated Appropriations Act, 2021
(Appropriations Act), which further extended the PPP to March 31,
2021.\2\ The Appropriations Act also created ``PPP second draw loans,''
which are substantially similar to the PPP loans that have been made to
date.\3\
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\1\ Prioritized Paycheck Protection Program Act, S. 4116, 116th
Cong. section 1 (2020).
\2\ Consolidated Appropriations Act, 2021, H.R. 133, 116th Cong.
section 323 (2020).
\3\ Consolidated Appropriations Act, 2021, H.R. 133, 116th Cong.
section 311.
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Regulation O sets forth quantitative and qualitative requirements
for loans made by a bank \4\ to its directors, executive officers, and
principal shareholders, as well as to any companies owned by such
persons (collectively, insiders).\5\ Regulation O also sets forth
procedural and recordkeeping requirements for loans by banks to their
insiders. These requirements normally would apply to PPP loans made by
banks to the small businesses owned by their insiders. In some cases,
the restrictions in Regulation O could delay or entirely prohibit a
bank from making a PPP loan to such a business. This could be
particularly challenging in small communities where bank insiders often
own small businesses and there are few alternative lenders.
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\4\ Sections 22(g) and 22(h), and Regulation O, apply to all
banks that are members of the Federal Reserve System. Other federal
law subjects federally insured state non-member banks and insured
savings associations to sections 22(g) and 22(h) in the same manner
and to the same extent as if they were member banks. 12 U.S.C.
1828(j) (non-member banks); 12 U.S.C. 1468(b) (savings
associations); 12 CFR 337.3 (state non-member banks and state
savings associations); 12 CFR 31.2 (national banks and federal
savings associations). Accordingly, any reference to ``bank'' in
this notice applies to all member banks and institutions subject to
sections 22(g) and 22(h) in the same manner and to the same extent
as member banks.
\5\ See generally 12 CFR part 215.
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On April 17, 2020, the Board issued an exception to section 22(h)
of the Federal Reserve Act \6\ and the corresponding provisions of
Regulation O for PPP loans made to insiders that would not be
prohibited from receiving a PPP loan under the Small Business
Administration (SBA) lending
[[Page 9838]]
restrictions (original IFR).\7\ The exception was intended to
facilitate lending by banks to a broad range of small businesses within
their communities, consistent with applicable law and safe and sound
banking practices. The exception applied only to PPP loans made by June
30, 2020, the original date on which the PPP was set to expire. The
Board extended the exception after Congress extended the PPP.\8\
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\6\ 12 U.S.C. 375b.
\7\ ``Loans to Executive Officers, Directors, and Principal
Shareholders of Member Banks,'' 85 FR 22345 (Apr. 22, 2020)).
\8\ ``Loans to Executive Officers, Directors, and Principal
Shareholders of Member Banks,'' 85 FR 43119 (July 16, 2020)).
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The Board received a dozen comments in response to the IFRs it
issued in April and July from one trade association, several small
businesses, and several individuals. Most of the comments expressed
support for the Board's relief, indicating that it would bolster the
effectiveness of the PPP in providing support to small businesses.
Several raised issues related to the terms and administration of the
PPP. One commenter asserted that no bank executives should receive
loans from their banks in excess of $15,000 because executives could
take advantage of their banks to the detriment of depositors.
In response to comments about the terms and administration of the
PPP, the Board notes that the SBA is the agency responsible for setting
forth the requirements and administering the program. Any comments
concerning those matters are properly addressed to the SBA. Regarding
one commenter's suggestion that no executive should be able to borrow
more than $15,000 from its banks because executives could exert undue
influence and cause harm to a bank, the Board notes that PPP loans have
standardized terms and are fully guaranteed as to principal and
interest by the U.S. government. Accordingly, a bank may not amend the
terms of a PPP loan to be unduly favorable to an executive and the bank
is unlikely to suffer a loss because of the loan guarantee. The Board
also notes that the relief only extends to insiders who would not be
prohibited from receiving a PPP loan by the SBA's lending restrictions,
which currently prohibit an ``officer'' from receiving a PPP loan from
his or her bank.\9\
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\9\ 13 CFR 120.110 (prohibiting an ``Associate'' of a lender
from receiving a loan made by the lender pursuant to section 7(a) of
the Small Business Act); 13 CFR 120.10 (defining ``Associate of a
Lender'' to include ``an officer'').
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The Board is issuing this interim final rule to extend the
exception to PPP loans made through March 31, 2021, and to PPP second
draw loans.
II. The Interim Final Rule
Section 22(h) authorizes the Board to adopt, by regulation,
exceptions to the definition of ``extension of credit'' in section
22(h) for transactions that ``pose minimal risk.'' \10\ Therefore, the
Board may except PPP loans and PPP second draw loans from the
restrictions in section 22(h) and the corresponding provisions of
Regulation O upon a determination that such loans pose minimal risk.
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\10\ 12 U.S.C. 375b(9)(D)(ii).
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The Board determined in the original IFR that PPP loans pose
minimal risk.\11\ Among other things, this determination relieved
member banks from ensuring that PPP loans made to certain insiders
complied with the qualitative, quantitative, and procedural
requirements set forth in section 22(h) and Regulation O. The
Appropriations Act did not change any of the features of PPP loans on
which the Board relied in the original IFR to determine that PPP loans
pose minimal risk. Moreover, under the Appropriations Act, PPP second
draw loans have the same features as PPP loans, except that fewer
borrowers are eligible for PPP second draw loans as for PPP loans.\12\
Accordingly, for the same reasons cited in the original IFR, the Board
has determined that PPP loans and PPP second draw loans appear to pose
minimal risk to bank safety and soundness.\13\
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\11\ 85 FR 22346.
\12\ For example, only borrowers who already have received a PPP
loan may obtain a PPP second draw loan. PPP Second draw loans also
are only available to employers with 300 or fewer employees.
Consolidated Appropriations Act, 2021, H.R. 133, 116th Cong. section
311.
\13\ 85 FR 22345, 22346 (Apr. 22, 2020); 85 FR 43119, 43119-20
(July 16, 2020).
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SBA lending restrictions continue to apply to certain PPP loans and
PPP second draw loans that also would be subject to section 22(h) and
the corresponding provisions of Regulation O.\14\ Excepting loans that
would be prohibited by the SBA lending restrictions from the
requirements of section 22(h) and the corresponding provisions in
Regulation O would not achieve any meaningful regulatory purpose.
Excepting these loans from one regime and not the other also may create
confusion because some lenders may mistakenly interpret an exception
under one regime to extend to both regimes. Accordingly, the exception
continues to apply only for insiders that would not be prohibited from
receiving a PPP loan or PPP second draw loan by the SBA lending
restrictions.
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\14\ Business Loan Program Temporary Changes; Paycheck
Protection Program as Amended by the Economic Aid Act, 86 FR 3712
(Jan. 6, 2021).
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This interim final rule does not except a PPP loan or PPP second
draw loan from other restrictions that may apply to the loan, including
section 22(g) of the Federal Reserve Act or section 215.5 of Regulation
O.\15\ This determination also does not affect application of SBA
lending restrictions to a PPP loan or PPP second draw loan. The SBA has
stated that ``[f]avoritism by [a PPP] [l]ender in processing time or
prioritization of [a] director's or equity holder's PPP application is
prohibited.'' \16\ The Board will administer the interim final rule
accordingly.
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\15\ 12 U.S.C. 375a; 12 CFR 215.5.
\16\ Id. at 14-15.
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Question 1: Are there any additional terms or conditions that
should apply to the exception? Why?
Question 2: Based on the experience with the PPP program, what, if
any, terms or conditions for PPP second draw loans would make it
unreasonable for such loans to be exempted from the requirements of
section 22(h)?
III. Administrative Law Matters
A. Administrative Procedure Act
The Board is issuing the interim final rule without prior notice
and the opportunity for public comment and the delayed effective date
ordinarily prescribed by the Administrative Procedure Act (APA).\17\
Pursuant to section 553(b)(B) of the APA, general notice and the
opportunity for public comment are not required with respect to a
rulemaking when an ``agency for good cause finds (and incorporates the
finding and a brief statement of reasons therefor in the rules issued)
that notice and public procedure thereon are impracticable,
unnecessary, or contrary to the public interest.'' \18\
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\17\ 5 U.S.C. 553.
\18\ 5 U.S.C. 553(b)(B).
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The Board believes that the public interest is best served by
implementing the interim final rule immediately in light of the short
timeframe for execution of the renewed PPP mandated by the
Appropriations Act. Accordingly, the Board finds that there is good
cause consistent with the public interest to issue the rule without
advance notice and comment.\19\
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\19\ 5 U.S.C. 553(b)(B); 553(d)(3).
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The APA also requires a 30-day delayed effective date, except for
(1) substantive rules which grant or recognize an exemption or relieve
a restriction; (2) interpretative rules and statements of policy; or
(3) as otherwise provided by the agency for good
[[Page 9839]]
cause.\20\ Because the rules relieve a restriction by providing an
exception to the definition of ``extension of credit'' in section 22(h)
and Regulation O, the interim final rule is exempt from the APA's
delayed effective date requirement.\21\
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\20\ 5 U.S.C. 553(d).
\21\ 5 U.S.C. 553(d)(1).
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While the Board believes that there is good cause to issue the rule
without advance notice and comment and with an immediate effective
date, the Board is interested in the views of the public and requests
comment on all aspects of the interim final rule.
B. Paperwork Reduction Act
The Paperwork Reduction Act (44 U.S.C. 3501-3521) (PRA) states that
no agency may conduct or sponsor, nor is the respondent required to
respond to, an information collection unless it displays a currently
valid OMB control number. On June 15, 1984, OMB delegated to the Board
authority under the PRA to approve and assign OMB control numbers to
collections of information conducted or sponsored by the Board, as well
as the authority to temporarily approve a new collection of information
without providing opportunity for public comment if the Board
determines that a change in an existing collection must be instituted
quickly and that public participation in the approval process would
defeat the purpose of the collection or substantially interfere with
the Board's ability to perform its statutory obligation.
This interim final rule does not contain any collections of
information subject to the PRA.
C. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) \22\ requires an agency to
consider whether the rules it proposes will have a significant economic
impact on a substantial number of small entities.\23\ The RFA applies
only to rules for which an agency publishes a general notice of
proposed rulemaking pursuant to 5 U.S.C. 553(b). As discussed
previously, consistent with section 553(b)(B) of the APA, the Board has
determined for good cause that general notice and opportunity for
public comment are unnecessary, and therefore the Board is not issuing
a notice of proposed rulemaking. Accordingly, the Board has concluded
that the RFA's requirements relating to initial and final regulatory
flexibility analysis do not apply.
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\22\ 5 U.S.C. 601 et seq.
\23\ Under regulations issued by the SBA, a small entity
includes a depository institution, bank holding company, or savings
and loan holding company with total assets of $600 million or less
and trust companies with total assets of $41.5 million or less. See
13 CFR 121.201.
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Nevertheless, the Board seeks comment on whether, and the extent to
which, the interim final rule would affect a significant number of
small entities.
D. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\24\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
insured depository institutions (IDIs), the federal banking agencies
must consider, consistent with the principle of safety and soundness
and the public interest, any administrative burdens that such
regulations would place on depository institutions, including small
depository institutions, and customers of depository institutions, as
well as the benefits of such regulations. In addition, section 302(b)
of RCDRIA requires new regulations and amendments to regulations that
impose additional reporting, disclosures, or other new requirements on
IDIs generally to take effect on the first day of a calendar quarter
that begins on or after the date on which the regulations are published
in final form, with certain exceptions, including for good cause.\25\
The Board believes that the public interest is best served by
implementing the interim final rule immediately. As discussed in the
original IFR, the COVID event has disrupted economic activity in the
United States and other countries. The magnitude and persistence of the
COVID event on the economy remain uncertain. In light of the
substantial disruptions in the economy, and the likelihood that this
interim final rule would help ameliorate those disruptions by promoting
lending to small businesses, the Board finds good cause exists under
section 302 of RCDRIA to publish this interim final rule with an
immediate effective date.
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\24\ 12 U.S.C. 4802(a).
\25\ 12 U.S.C. 4802.
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As such, the interim final rule will be effective immediately on
publication. Nevertheless, the Board seeks comment on RCDRIA.
E. Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act \26\ requires the federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The Board has sought to present the
interim final rule in a simple and straightforward manner. The Board
invites comments on whether there are additional steps it could take to
make the rule easier to understand. For example:
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\26\ 12 U.S.C. 4809.
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Have we organized the material to suit your needs? If not,
how could this material be better organized?
Are the requirements in the regulation clearly stated? If
not, how could the regulation be more clearly stated?
Does the regulation contain language or jargon that is not
clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes to the format would make the regulation
easier to understand?
What else could we do to make the regulation easier to
understand?
List of Subjects in 12 CFR Part 215
Credit, Penalties, Reporting and Recordkeeping requirements.
Authority and Issuance
For the reasons stated in the preamble, the Board of Governors of
the Federal Reserve System amends 12 CFR chapter II as follows:
PART 215--LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL
SHAREHOLDERS OF MEMBER BANKS (REGULATION O)
0
1. The authority citation for part 215 is revised to read as follows:
Authority: 12 U.S.C. 248(a), 375a(10), 375b(9) and (10), 1468,
1817(k), 5412; and Pub. L. 102-242, 105 Stat. 2236 (1991) (12 U.S.C.
1811 note).
0
2. In Sec. 215.3, revise paragraphs (b)(8)(i) through (iii) to read as
follows:
Sec. 215.3 Extension of credit.
* * * * *
(b) * * *
(8) * * *
(i) Made pursuant to the ``Paycheck Protection Program'' in which
the participation by the Small Business Administration on a deferred
basis is 100 percent pursuant to section 1102 of Public Law 116-136 or
section 311 of Public Law 116-260;
(ii) That is made during the period beginning on February 15, 2020,
and ending on March 31, 2021; and
(iii) That would not be prohibited by 13 CFR 120.110(o) or rules or
[[Page 9840]]
interpretations thereof issued by the Small Business Administration.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, February 9, 2021.
Ann Misback,
Secretary of the Board.
[FR Doc. 2021-02966 Filed 2-16-21; 8:45 am]
BILLING CODE 6210-01-P