The Court of Appeal recently handed down judgment in Yieldpoint Stable Value Fund, LP v Kimura Commodity Trade Finance Fund Limited [2024] EWCA Civ 639, on Kimura’s appeal from the High Court’s decision1 that a participation agreement between Yieldpoint and Kimura should be properly construed as a loan. The Court of Appeal allowed the appeal and found that the participation agreement should be construed as a sub-participation and not a loan.

Brief facts:

  • Kimura in its capacity as a lender had provided a loan facility (the “Facility”) to Minera Tre Valles SPA (“MTV”).
  • Kimura and Yieldpoint entered into a master participation agreement (the “MPA”) based on the Bankers Association for Finance and Trade (BAFT)’s standard form of master participation agreement for trade transactions. The MPA was a framework agreement that allowed the parties from time to time to enter into sub-participations in respect of specific trade transactions by exchange of an “Offer” and “Acceptance”. The terms of the MPA stated that the “Participations” concluded between the parties were sub-participations such that the “Participant” (i.e. Yieldpoint in this case) would only receive its share of recoveries and income if such amounts have been received by the “Seller” (i.e. Kimura in this case). The MPA also included an equitable assignment (expressed as a sale and not as a security) by Kimura to Yieldpoint of its rights, title and interests against the “Recourse Parties” (i.e. MTV in this case).
  • Kimura and Yieldpoint entered into a funded sub-participation in respect of the Facility, where Yieldpoint paid to Kimura a participation amount in respect of a portion of the Facility.
  • However the standard form “Offer” was amended to include (i) a “Maturity Date of the Participation”, which was set as 1 year from the start of the sub-participation, and (ii) certain special conditions setting out a process for Yieldpoint to renew the sub-participation prior to the expiry of the maturity date.
  • MTV defaulted on the Facility prior to the maturity date of the sub-participation.
  • Yieldpoint demanded repayment of the participation amount from Kimura, arguing that the arrangement was in fact a fixed term loan from Yieldpoint to Kimura and that Yieldpoint was not intending to accept credit risk in respect of MTV or the Facility, save in respect of the income payments (i.e. interest payments from MTV to Kimura).

Decision of the High Court in the first instance:

The High Court found (although to some extent reluctantly) that the inclusion of the maturity date in the Offer, and the absence of any mechanism in the Offer or the MPA to unwind the sub-participation at such maturity date, were sufficient features for the Court to determine that the parties had intended to depart from the pre-ordained sub-participation structure set out in the MPA and that, rather, the arrangement should be properly construed as a fixed term loan. The Court instructed Kimura to repay the participation amount to Yieldpoint.

Overturned by the Court of Appeal:

The Court of Appeal found that the High Court had made a number of errors in coming to its conclusion, including relying on certain likely inadmissible pre-contract negotiation evidence that did not add anything to the written documentation and by dismissing Kimura’s argument that Yieldpoint’s interpretation was highly uncommercial. The Court of Appeal instead found that it “seem[ed] permissible and appropriate to interpret the inclusion of the [maturity date in the Offer] as entitling Yieldpoint to be repaid on that date at par, absent an [MTV] default in the preceding 12 months“2.

Takeaway points:

  • The inclusion of provisions which result in a sub-participation terminating prior to the relevant participated transaction will not in, and of themselves, result in a sub-participation being recharacterised as a fixed term loan, and an interpretation that would involve “overturn[ing] the entire structure and effect of the umbrella agreement stated to govern” the transaction will not be permitted, absent a clear intention of the parties to such effect3. However, market participants drafting such provisions or other loan-like features and terms should do so with care and with sufficient clarity as to their purpose and how they should be construed.
  • When interpreting contracts that may contain countervailing provisions, you should “seek to read all the contractual provisions together, in order to reach a coherent interpretation of the entire contract which conforms with commercial sense“4.
  • Although not a legal term of art like an “assignment” or a “trust”, the English courts recognise the concept of a sub-participation as being a debtor-creditor relationship between a grantor and a participant, where the participant accepts certain pre-agreed credit risks in respect of a transaction originated by the grantor with a counterparty, and the participant does not obtain any direct rights against the counterparty. However, as is the case in the BAFT master participation agreement for trade transactions, there is no reason why the grantor cannot agree to transfer to the participant certain of its rights against the counterparty so that the participant does have direct rights against the counterparty.
  • The importance of considering a proposed deal not only from the perspective of all going to plan but also expressly addressing how the transaction documentation will respond to any default or non-performance.

In response to the significant ambiguities raised by New Hampshire’s recent amendments to its Motor Vehicle Retail Installment Sales Act — not to mention their immediate effectiveness and draconian liability provisions — the state’s Banking Department has issued several nuggets of guidance.

Recently, the Department sought to address the pressing question of whether persons involved in various financing transactions and securitizations involving motor vehicle retail installment contracts must now obtain a license. As of August 26, 2024, the Department’s web site states that securitization trusts that are established for the purpose of pooling retail installment contracts and reconstituting them into securities are not required to obtain a sales finance company license in the state. While the Department stated further that the licensing requirement will typically be fulfilled by the servicer or other entity responsible for servicing the contracts in the securitization trust, it did not expressly address the licensing obligations applicable in other types of financing transactions or to other types of special purpose entities. We expect that a similar licensing exemption would apply to those transactions and entities, because the servicer would need to be licensed or an exempt entity.

As we explained previously, the Department also advised that securitization trusts are not subject to the Act’s requirement to provide notices to motor vehicle buyers of the assignment of their contracts. 

The Department also explained that since the recent amendments removed motor vehicle leases from the Department’s authority, sales finance companies engaged only in taking assignments of closed-end motor vehicle leases may surrender their licenses, although the leases remain subject to the state’s Motor Vehicle Leasing statute. 

Among other information, the Department described a “no-action” process through which the public may seek further specific guidance. In seeking a response to a no-action request, financial institutions will need to identify themselves and provide detailed and particular facts and circumstances, along with the legal basis for their interpretation. Financial institutions may seek confidential treatment of those requests, which the Department may grant in accordance with the state’s Right-to-Know Law and other provisions.

The Department emphasized, though, that any no-action letter or response to a request for such a letter that the Department issues will not constitute legal advice, and its answers to frequently asked questions are intended only as informal guidance.

On August 2, 2024, New Hampshire enacted legislation that significantly revises its Motor Vehicle Retail Installment Sales Act, effective July 1, 2024.

Unfortunately, that effective date is not a typographical error. The New Hampshire Banking Department apparently tried during the legislative process to extend the effective date until January 1, 2025, but that extension did not make it into the enacted bill. While the bill was enacted with an effective date of July 1, 2024, the Department attempts at least to provide assurances that the bill became effective upon signing, and not retroactively. Still, the effective date of the amendments is just one of the topics requiring clarification.

The legislation (House Bill 1243) makes many substantive changes to the Act, particularly to the contractual requirements (including notice that complaints may be filed with the Department), notices of assignment upon transfers, and the scope of its licensing obligation. While the Act, prior to the amendments, required motor vehicle retail installment sellers and sales finance companies in the state to obtain a license, House Bill 1243 amended the definition of “sales finance company” to include any person acting as a lender, holder, assignee, or servicer to consumers under retail installment contracts. Adding to the perplexity of how a person can act as a “holder” or “assignee” to a consumer buying a motor vehicle, the amendments define a “lender” for this purpose to include not just a person that provides the financing for the vehicle, but also any legal successor to the rights of the lender. The amendments even supplemented the definition of “person” to specify that trusts are included, as are any two individuals or entities with a joint or common interest. An express exemption from licensing applies under the amendments only to state or federally chartered banks, savings banks, trust companies, credit unions, cooperative banks, or industrial banks, and to bankruptcy trustees servicing existing contracts. While there is an exemption for pledgees of retail installment sales contracts to secure a bona fide loan, there is no express exemption for special purpose entities used in securitization or other similar financing transactions.

House Bill 1243 also amends the geographical scope of the licensing obligation. While the Act, prior to the amendments, applied the licensing obligation to persons engaging in applicable business in the state, the obligation now applies to any nonexempt person that, in its own name or on behalf of other persons, engages in the applicable business in the state “or with persons located in this state.” Neither the Act nor the amendments expressly address what constitutes engaging in business in the state for this purpose. Without further clarification from the Department, the “transacting business” standard for foreign qualification in the New Hampshire Business Corporations Act could be an appropriate basis for determining whether an entity is “engaging in business” in New Hampshire for purposes of the Act.

While the new scope of the licensing obligation is not fully clear, the legislation certainly raises the consequences for guessing incorrectly. The Act previously imposed criminal penalties for failure to obtain a license as required (and continues to do so after the amendments, if done “knowingly”). As if that weren’t sufficient deterrence, House Bill 1243 provides that any person that engages in the business of a sales finance company (or retail seller) in the state or with consumers located in the state without first obtaining a license “shall have no right to collect, receive, or retain any principal, interest, or charges whatsoever on any purported retail nonexempt installment contract and any such contract shall be null and void.” The amendments also provide that no person shall assist or aid and abet any person in the conduct of business under the Act without a license as required by the Act. With a retroactive effective date of July 1, 2024, the licensing provision and the other substantive changes have understandably sent the New Hampshire automobile financing industry scrambling for answers.

The Department announced that it spear-headed the legislation (but was unable to fix the effective date), and “intends to engage in outreach and education” on the amendments until January 1, 2025. The agency did not, in that announcement, commit to engaging “only” in outreach and education, nor did it describe any efforts to amend the legislation’s effective date. However, the Department promises to provide further guidance on an ad hoc basis to any business that reaches out with “compliance challenges.” In addition, the Department issued some answers to frequently asked questions. Although the answers clarified that securitization trusts are not “holders” for purposes of servicing requirements in N.H. Rev. Stat. 361-A:20, none of the remaining answers addressed the scope of the licensing requirements  for special purpose entities used in securitization or other similar financing transactions. If and when the Department issues additional guidance, we will provide updates.

On May 10, the United States District Court for the Northern District of Texas granted the credit card industry at least a temporary reprieve from a CFPB rulemaking that would have restricted late fees on consumer credit cards significantly (as described in more detail in our prior Legal Update).

The rule, otherwise slated to become effective May 14, has been stayed after the court granted the industry groups plaintiffs motion for a preliminary injunction. In evaluating key factors relevant to the injunction, however, the court based its determination of plaintiffs’ likelihood of success on the merits entirely on the Fifth Circuit’s prior opinion that the CFPB’s funding structure is unconstitutional. That matter is currently under consideration by the United States Supreme Court in CFPB v. CFSA, with an opinion anticipated before the Court’s summer recess. Accordingly, the stay may need to be revisited in the short-run—with greater consideration of the strength of plaintiffs’ rule-specific challenges based on the APA and CARD Act—if the Supreme Court rules the CFPB to be constitutionally funded.

The District Court’s ruling comes as part of a process-heavy start to litigation challenging the validity of the rule. Before reaching any substantive issues, the suit has included proceedings regarding change of venue (with the District Court initially shifting the matter to DC before the Fifth Circuit reversed), calls for one of the Fifth Circuit judges to recuse himself based on personal investments in financial institutions, and criticism levied by the Fifth Circuit on the pace at which the District Court considered early motions. The limited nature of the stay issued on Friday leaves open the door for more procedural maneuvering before the core of the challenge is addressed.

On March 5, the CFPB issued a final rule that would significantly reduce late fees that may be charged on consumer credit card accounts from $30 or more to $8 in most cases. A proposed rule on this subject matter was issued February 1, 2023, and the credit card industry has paid close attention to the rulemaking process since.

The final rule amends provisions of Regulation Z, implementing the Truth in Lending Act, related to permissible penalty fees—including late fees, NSF fees, returned payment fees, etc.— that a card issuer may impose on consumers who violate the terms of a credit card account subject to the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”).

Under current law, card issuers may impose penalty fees not exceeding safe harbor values of $30 for an initial violation and $41 for a subsequent violation of the same account requirement within six billing cycles (each dollar amount subject to adjustment annually for inflation). Alternatively, a card issuer may impose fees representing a “reasonable proportion of the total costs incurred by the card issuer” as a result of the violation. In each case, penalty fees may not exceed the dollar value of the violation resulting in the penalty. Establishing penalty fees in excess of the safe harbor values requires substantial analysis and documentation of the relevant costs, such that essentially all card issuers in market today impose fees at or below the safe harbor values.

The final rule resets the safe harbor value for late fees to $8 for card issuers other than “small card issuers” (those with fewer than 1 million accounts subject to the CARD Act that have an open credit line or an outstanding, non-charged-off balance). It also eliminates automatic inflation adjustments for the new safe harbor, and eliminates the distinction between first and subsequent late payments that exists under current law.

New restrictions would apply only to late fees and affect only the safe harbor value for such fees. The rulemaking would not impose new restrictions on other penalty fees (e.g., NSF or returned payment fees), nor would it eliminate the ability for a card issuer to justify a higher late fee based on analysis and documentation of hard costs incurred as a result of late payments.

While the rule as a whole presents material challenges for the credit card industry, there are some positive takeaways. First, as noted above, the final rule contains an exemption for “small card issuers” that was not present in the original proposal. Second, the final rule does not contain a separate restriction included in the original proposal that would have limited late fees to 25% of the required minimum payment that was late, notwithstanding the safe harbor values. Finally, while delayed over a year from their typical cadence and unlikely to offset the pain imposed by late fee reductions, the final rule makes the inflation adjustments for other penalty fee types for the first time since January 1, 2022, increasing the safe harbors to $32/$43 for a first or subsequent violation.

The final rule will become effective 60 days following publication in the Federal Register. Litigation brought by a coalition of trade groups challenging the rule was filed March 7, however, and it is possible that the effective date will be stayed, as has been the case for certain other challenged CFPB rulemakings.

Further analysis will follow, in the form of a Mayer Brown Legal Update, in the near future.

On November 27, 2023, the US Securities Exchange Commission (“SEC”) adopted final Securities Act Rule 192 (“Final Rule 192”) prohibiting certain conflicts of interest in securitization transactions. In general, Final Rule 192 prohibits a “securitization participant” with respect to an “asset-backed security” (“ABS”) from directly or indirectly engaging in any “conflicted transaction” during the applicable prohibition period.

Compliance with Final Rule 192 is required with respect to any ABS the first closing of the sale of which occurs 18 months after Final Rule 192’s date of publication in the Federal Register (which publication is forthcoming).

In general, Final Rule 192 is a significant improvement over the proposed rule in both clarity and scope. But some ambiguities and compliance challenges remain. For securitization participants now working to reach consensus on reasonable interpretations of the final rule and to design and implement compliance programs, Mayer Brown’s white paper provides background and further detail on Final Rule 192 (including a markup of the changes to the proposed rule).

The Securities and Exchange Commission (the “Commission”) published proposed Rule 192 (Conflicts of Interest Relating to Certain Securitizations) on January 25, 2023 and closed the public comment period on March 27, 2023. After several months of review and discussions with industry trade groups, the Commission appears ready to publish a final rule in the near future, concluding a process that began in September of 2011. The Commission’s final rule could have a significant impact on asset-backed securitization markets and participants are keenly waiting to examine the final rule.

Mayer Brown’s recent article in The Review of Securities and Commodities Regulation highlights the provisions, definitions and exceptions of the Commission’s proposed rule and examines critical questions for participants in securitization markets.

Mere days before Halloween, California enacted California Senate Bill 666, imposing a set of restrictions on the fees that commercial financers may charge their small business customers. SB 666 closely follows an August 2023 rulemaking by the California Department of Financial Protection and Innovation targeting unfair, deceptive, or abusive acts or practices (“UDAAPs”) in commercial financing and requiring commercial financers to submit annual reports of their activities to the state. Given California’s history as a bellwether, these developments are an indication that states are not done regulating small business financing.

Mayer Brown’s Legal Update provides further detail for companies that offer commercial financing in California.

While residential mortgage lenders are facing tough headwinds driven by rising interest rates and low housing volume, the current market presents opportunities for savvy investors looking at mortgage servicing rights (“MSRs”). The current mortgage market is supported by non-bank mortgage originators and servicers who lack the same access to capital and liquidity as traditional banks. To continue growing, non-bank entities have had to be creative with respect to capital sources.

Non-bank owners of MSRs are seeking asset-specific alternative private capital vehicles to fund MSR portfolios. However, unlike whole mortgage loans, MSRs cannot be easily created and sold to investors. Fortunately, through creative thinking and structuring, investors are able to use non-bank, non-servicer, alternative capital sources to participate in the economics of MSRs. Mayer Brown’s Legal Update provides an overview of the phases and areas of consideration related to private capital vehicles that offer investment opportunities in MSRs.

On July 27, 2023, the US banking regulators issued a proposal to significantly revise the risk-based capital requirements applicable to large banks and to banks with significant trading activity. The proposal, which is colloquially referred to as “Basel III Endgame” or “Basel IV,” includes important changes to the calculation of credit risk weights for securitization exposures, as well as a new operational risk capital charge on certain fees and commissions. Mayer Brown’s white paper provides a detailed review of those changes, discusses their possible impacts, and highlights specific provisions that market participants will likely focus on in their comment letters. Please read more here.