Should US state nonbank mortgage servicers be subject to “safety and soundness” standards of the type imposed by federal law on insured depository institutions, even though the nonbanks do not solicit and hold customer funds in federally insured deposit accounts or pose a direct risk of a government bailout? Well, state mortgage banking regulators think so. On September 29, 2020, the Conference of State Bank Supervisors, an organization made up of state regulators, released proposed prudential standards for state oversight of nonbank mortgage servicers.

This Legal Update provides background and further detail on the proposal.

Read the Legal Update here.

Financial Statement Disclosure of Supply Chain and other Trade Payables Programs

Trade payables programs have in recent years increased greatly in popularity among both large and small companies. While originally the sole domain of the large global banks and firmly based on a fairly straightforward reverse factoring model, these programs are now offered by banks and many non-bank market participants using a variety of structures and funding sources.

As we discussed in our post on April 22, 2020, the “Big Four” accounting firms and the Office of the Investor Advocate of the SEC, among others, have recently been calling for guidance from the Financial Accounting Standards Board (“FASB”) on two distinct issues with respect to the financial reporting of trade payables programs: (i) the financial statement disclosure requirements for public companies utilizing such programs and (ii) whether such programs should be treated as trade payables on a company’s balance sheet or, instead, as short-term debt obligations. According to critics, the increased popularity of these programs, along with the relatively modest disclosures required currently under US GAAP are raising questions as to whether these trade payables programs potentially obscure the financial reality of companies from investors. In particular, critics have expressed a concern that these programs – which sometimes allow for longer terms for a company’s trade payables than the company would be able to negotiate in the absence of such a program – (i) could cause artificial improvements to a company’s cash flow that could evaporate overnight if the financier of its payables program decided to discontinue funding and (ii) could potentially obscure a company’s true leverage. However, proponents of these programs argue, among other things, that these programs serve a vital economic function by providing efficient working capital to a company’s supplier base without in any way distorting the underlying supplier/buyer commercial relationship or the trade payable nature of the company’s obligations.

Last Wednesday, FASB held a board meeting to discuss whether developing guidance with respect to trade payables programs should be added to their agenda. FASB made clear that this proposed agenda item does not include examination of supplier-led factoring, receivables purchase or receivables securitization arrangements. The scope of the proposal only includes buyer-led trade payables programs.

During the meeting, the Board members voted 5-2 in favor of adding the creation of guidance on disclosure requirements with respect to trade payables programs to their agenda. However, FASB declined, for now, to take up the issue of whether trade payables programs should be classified as trade payables or short-term debt on balance sheets, although some Board members acknowledged that this may be necessary at some point. Should this be the case, it is likely that the Board would need to delve into the legal substance of trade payables structures, which varies greatly from program to program.

FASB’s next steps will include the solicitation of feedback from companies and their accounting firms, the development of a draft proposal, a public comment process and the issuance of final guidance. The guidance that will eventually be provided by FASB should speak to the nature and extent of disclosure that will be required in financial statements with respect to these programs. Given the importance of these questions for the supply chain finance industry, we anticipate that, in the coming months, industry participants will be keen to convey to FASB the importance and durability of the payables product.


On Friday, October 9, 2020, the US Internal Revenue Service released Revenue Procedure 2020-44 (the “Revenue Procedure”), providing retroactive but limited relief for amending specific types of legacy contracts to add fallback mechanics for LIBOR or other IBORs. The fallback language included must rather strictly follow select model contract language recommended by the Alternative Reference Rate Committee (the “ARRC”) and the International Swaps and Derivatives Association (“ISDA”).

The only permissible deviations from the prescribed ARRC or ISDA contract language are deviations (a) reasonably necessary to make the terms incorporated into the contract legally enforceable in a relevant jurisdiction or to satisfy legal requirements of that jurisdiction, (b) from the terms of an ISDA fallback that are reasonably necessary to incorporate the ISDA fallback into a contract that is not a “protocol covered document” as defined in the ISDA protocol, (c) to omit terms of an ARRC fallback or an ISDA fallback that cannot under any circumstances affect the operation of the modified contract (for example, for a contract that refers only to USD LIBOR, omission of the portions of an ISDA fallback that relate exclusively to contracts referring to another IBOR), and (d) from the terms of an ARRC fallback or an ISDA fallback to add, to revise, or to remove technical, administrative, or operational terms, provided that the addition, revision, or removal is reasonably necessary to adopt or to implement the ARRC fallback or the ISDA fallback

The Revenue Procedure applies to contracts entered on or after October 9, 2020 and before January 1, 2023. It is also retroactive, as taxpayers are permitted to rely on it for modifications to contracts occurring before October 9, 2020.

Mayer Brown will be releasing a Legal Update summarizing the Revenue Procedure in more detail in the coming days.

The post New Rev Proc 2020-44 Provides Limited Relief for Amending Legacy Contracts to Add IBOR Fallbacks appeared first on Eye on IBOR Transition.

In what we understand to be the first state law to do so, California’s Assembly Bill 913 (AB913), which was enrolled on September 4, 2020, amends Section 850 of the Public Utilities Code to allow electrical corporations to apply for a required financing order from the California Public Utility Commission (CPUC) to use securitization to recover verified incremental undercollections in calendar year 20201 through authorized fixed recovery charges.

AB913 notes that securitization is a “proven method of stabilizing rates by smoothing rate increases over a longer period of time” and finds that, as a result of the COVID-19 pandemic, many customers have been unable to pay their electrical utility bills and, further, that electricity consumption has decreased. Consequently, the amount of revenue the electrical corporations, regulated by the CPUC, will recover is expected to be below authorized forecasts, so—in order to avoid otherwise likely rate increases in a time of economic stress and uncertainty—AB913 notes that the CPUC should be authorized to approve the securitization of these revenue shortfalls.

AB913 requires verification of either or both of the following incremental undercollection amounts for calendar year 2020:

(i) An incremental undercollection amount equal to the difference between the forecasted amount of billed revenues for that year, based on the authorized sales forecast, and the revenues actually billed by an electrical corporation with respect to all revenue balancing accounts if the incremental amount as a percentage of the forecasted amount of billed revenues for that year is at least 5 percent.

(ii) An incremental undercollection amount equal to the residential and small business customer bad debt expense recorded for that year that exceeds the bad debt expense for that year that was adopted by the CPUC in the general rate case if the incremental undercollection amount is otherwise eligible for recovery in rates.

AB913 defines a “revenue balancing account” to mean a balancing account reflecting the balance between the electrical corporation’s authorized revenue requirements relating to the volumetric sale of electricity and billed revenues associated with those sales. A revenue balancing account includes accounts reflecting the balance between the electrical corporation’s authorized distribution base revenue requirements and recorded billed revenues from authorized distribution rates, and accounts reflecting the difference between the amount of the discount provided to consumers enrolled in the California Alternative Rates for Energy (“CARE”) program and the CARE surcharge charged to non-CARE consumers, but shall not include amounts reflecting the balance between costs and expenses relating to fuel and purchased electricity by the electrical corporation.

AB913 also prohibits the recovery through any other cost recovery application, mechanism, or request by the electrical corporation of any incremental undercollection amounts subject to a CPUC-approved financing order and requires that the CPUC ensure that any costs included in incremental undercollections subject to a financing order are just and reasonable, consistent with the requirements of subdivision (a) of Section 850.1.

While, by focusing on revenue undercollections, AB913 may avoid some of the technical and other difficult issues2 in determining COVID-19 “costs,” this law may raise issues regarding the qualification of a related securitization for the preferential treatment provided by the Internal Revenue Service in its related revenue procedure 2005-62.

On 3 September 2020, two regulations were published regarding the detailed disclosure requirements under the Securitisation Regulation (the “Disclosure Technical Standards“). These consist of regulatory technical standards concerning the information and the details of a securitisation to be made available (the “Disclosure RTS“), and implementing technical standards with regard to the standardised templates (the “Disclosure ITS“).  The Disclosure Technical Standards will enter into force 20 days after publication, i.e. on 23 September 2020.

Read the Legal Update here.

On Tuesday, September 1, 2020, the US Centers for Disease Control and Prevention (the “CDC”) filed a notice of an agency order in the Federal Register titled Temporary Halt in Residential Evictions to Prevent the Further Spread of COVID-19 (the “Order”), which the CDC published on Friday, September 4, 2020. The Order prohibits landlords, residential property owners, or other persons or entities with the legal right to pursue an eviction from exercising such right with respect to any covered person for the period from publication through December 31, 2020.

The Order defines a “covered person” as any tenant, lessee, or resident of a residential property—including any property leased for residential purposes, such as a house, building, mobile home or land in a mobile home park, or similar dwelling leased for residential purposes but excluding hotels, motels, and other temporary or seasonal guest housing—who provides a declaration, under penalty of perjury, to the person holding a legal right to pursue eviction indicating that the individual:

  1. Has used best efforts to obtain all available government rental or housing assistance;
  2. (i) Expects to earn less than $99,000 per year ($198,000 for joint returns), (ii) was not required to report any income in 2019, or (iii) received an economic impact payment pursuant to the CARES Act;
  3. Is unable to pay full rent or housing payments due to substantial loss of household income, loss of work hours or wages, a layoff, or extraordinary out-of-pocket medical expenses;
  4. Is using best efforts to make timely partial payments as close to the full payment as the individual’s circumstances permit, taking into account other nondiscretionary expenses; and
  5. Would likely be rendered homeless or forced to move into and live in close quarters in a new shared living situation if evicted.

A declaration must be prepared by each adult listed on the lease, rental agreement, or housing contract. There is no requirement for the tenant, lessee, or resident to provide documentation to evidence the statements made in the declaration. Nor is there any express right of the person holding the legal right to pursue eviction to challenge the underlying statements made in the declaration.

The Order does not prohibit foreclosure on home mortgages nor does the Order relieve any tenant or resident of any contractual obligations to pay rent or housing payments; however, any eviction or other proceeding to remove a covered person from a residential property for failure to pay rent is prohibited under the Order. Notably, the Order does not prohibit evictions for other reasons, such as evictions for (i) engaging in criminal activity; (ii) threatening the health and safety of other residents; (iii) damaging, or posing a significant risk of damaging, property; (iv) violating applicable building codes or similar regulations related to health and safety; or (v) violating any other contractual obligation other than the timely payment of rent or housing payments (defined to include late fees, penalties, and interest). Nor does the Order apply in states or localities with greater eviction protections or in American Samoa (where there have been no reported cases of COVID-19).

Violations of the Order may be enforced by federal authorities as well as state and local authorities cooperating pursuant to the CDC’s statutory authority to accept state and local cooperation. Violations carry potential criminal penalties for individuals of up to one year in jail and a fine of up to $100,000, which increases to up to $250,000 if a death occurs as a result of the violation. For organizations, violations can carry a penalty of up to $200,000, which increases to up to $500,000 if a death occurs as a result of the violation.

Background and Authority

The CARES Act already provides a stay on eviction but only in connection with residential properties securing “federally-backed mortgage loans,” consisting of loans sold to Fannie Mae or Freddie Mac or insured or guaranteed by the Federal Housing Administration, US Department of Veterans Affairs or Rural Housing Service. While the statutory stay has expired, each of the federal entities has extended the stay through the end of the year. Some states and localities also have imposed stays on residential evictions. Accordingly, the Order is designed to fill the gap.

The CDC issued the Order pursuant to its authority to “take such measures to prevent such spread of the diseases as [the Director] deems reasonably necessary” when interventions by state and local health officials are, in the Director’s determination, insufficient to prevent the spread of communicable diseases.1 The Order highlights the potential for a large number of Americans to be evicted as a result of economic hardships caused by the COVID-19 pandemic and notes that a number of such evictions would result in interstate moves, moves that result in close-quarters living with friends or family, moves to homeless shelters or other congregate living situations, or unsheltered homelessness. In these scenarios, the Order notes, the rate of the spread of COVID-19 may be increased and the severity of resulting illness may be exacerbated.

As a result, the Director has determined that “[b]ased on the convergence of COVID-19, seasonal influenza, and the increased risk of individuals sheltering in close quarters in congregate settings such as homeless shelters, which may be unable to provide adequate social distancing as populations increase, all of which may be exacerbated as fall and winter approach,” a temporary halt in evictions is appropriate. Likewise, the Director has determined that any state or locality that does not implement this minimum level of eviction protection is taking insufficient measures to prevent the spread of communicable disease. Interestingly and surprisingly, the Order is not signed by the Director but instead by the Acting Chief of Staff.

The Order stems from President Trump’s August 8, 2020, Executive Order on Fighting the Spread of COVID-19 by Providing Assistance to Renters and Homeowners, which, among other things, directed the Secretary of Health and Human Services and the Director of the CDC to consider whether measures halting residential evictions of any tenants for failure to pay rent were reasonably necessary to prevent the further interstate spread of COVID-19. Consistent with other components of that executive order, the CDC Order notes that both the Department of Housing and Urban Development and the Department of the Treasury have informed the CDC of availability for funding and additional housing aid to assist with eviction-prevention programs.

The Order appears to be a novel application of the CDC’s authority. We are unaware of any past efforts by the CDC to implement such broad, nationwide restrictions on activities with seemingly attenuated connection to preventing the spread of communicable diseases. While section 361 of the Public Health Service Act grants broad authority to the CDC to regulate the entry and spread of communicable diseases, it is unclear whether a nationwide eviction moratorium falls into the types of regulations contemplated by the Act or its implementing regulations, which describe measures such as “inspection, fumigation, disinfection, sanitation, pest extermination, and destruction of animals or articles believed to be sources of infection.”2

A moratorium on evictions certainly is not of the same kind or with the same characteristics or common attributes of the listed health measures and thus may lack the necessary nexus with the underlying purpose of the law. Moreover, the public health risks on which the Order is based arguably are present in many other types of daily activities that the CDC has not sought to prohibit or limit through an order, thus raising questions about the potential unevenness of the use of the CDC’s broad authority. Time will tell if the Order is challenged in court. Regardless of whether the Order is challenged in court, many industry groups publicly have stated that federal legislation to fund direct rental assistance or other economic benefits to tenants suffering economic distress is necessary.


If you wish to receive regular updates on the range of the complex issues confronting businesses in the face of the novel coronavirus, please subscribe to our COVID-19 “Special Interest” mailing list.

And for any legal questions related to this pandemic, please contact the authors of this Legal Update or Mayer Brown’s COVID-19 Core Response Team at

1 42 C.F.R. § 70.2; 42 U.S.C. § 264.

2 42 C.F.R. § 70.2.

Almost 12 years after the commencement of the Lehman Brothers bankruptcy case, we now know the answer to one of that case’s most interesting questions—namely, whether so-called “flip clauses” are protected settlement payments or void as ipso facto bankruptcy provisions.

On August 11, 2020, the US Court of Appeals for the Second Circuit (Court) issued a decision in the closely followed case of Lehman Brothers Special Financing Inc. v. Bank of America N.A., 18-1079, which raised this question in the context of synthetic collateralized debt obligations (SCDOs).

Continue Reading Second Circuit: Lehman Brothers “Flip Clause” Payments Are Protected Settlement Payments and Not Void as Ipso Facto Bankruptcy Provisions

Ginnie Mae’s newly imposed restriction on repooling of reperforming forborne loans yet again penalizes servicers acting as essential service providers in the continuing efforts to protect mortgagors facing financial hardship due to COVID-19. In issuing APM-20-07 on June 29, 2020, Ginnie Mae decided to further protect investors from the potential enhanced prepayment risk resulting from early pool buyouts of forborne loans. This protection, however, comes at the expense of servicers. By restricting servicers from relying on long-standing, legitimate business activity—early pool buyouts coupled with the repooling of reperforming loans—Ginnie Mae has elected to deem a routine activity as inappropriate because it is unnecessary and, gosh, may produce a profit.

This Of Special Interest provides more context on the new APM, possible reasoning behind Ginnie Mae’s change in position and what it means for issuers.

This article was first published in and is reproduced with the kind permission of HousingWire.

A recent report, entitled “A New Vision for Europe’s Capital Markets” (the “Report”), sets out some key recommendations for how the EU securitisation market can be scaled up. The Report has been published by the High Level Forum on the Capital Markets Union (the “HLF”) which was established by the European Commission (the “Commission”). The recommendations cover some key areas of interest for market participants.

Capital Markets Union has been an important part of the European regulatory agenda for some time, and was the subject of an Action Plan adopted by the Commission in September 2015. The HLF is composed of experts in the European capital markets, alongside a number of observers from European supervisory bodies and institutions. The views expressed in the Report are those of its members and not the Commission. Nonetheless, the views expressed in the Report are expected to inform the future work of the Commission.

The Report makes seventeen sets of recommendations in relation to different aspects of the EU markets. In this Legal Update, we have focused solely on the recommendations relating to the EU regulatory framework which applies to securitisation.

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For more information about the topics raised in this Legal Update, please contact Merryn Craske on +44 20 3130 3029, Neil Macleod on +44 20 3130 3252, Robyn Llewellyn on +44 20 3130 3990 or Jaime Lad on +44 20 3130 3927.

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On June 25, 2020, five federal financial regulatory agencies published the long awaited Final Revisions to the Volcker Rule (the “Final Revisions”) which revise certain aspects of the Volcker Rule (Section 13 of the Bank Holding Company Act) with respect to the identification and treatment of covered funds.  The Final Revisions follow three years of the agencies’ consideration of changes to the Volcker Rule, originally prompted by the June 2017 Treasury Report that solicited changes to ease the compliance burden on banks.  The Final Revisions are largely consistent with the notice of proposed rulemaking (the “NPR”) published 6 months ago, but with some important, and welcome, clarifications and other adjustments.  Many of the changes from the NPR contained in the Final Revisions are in response to industry requests designed to clarify and ease the compliance burden of banking entities subject to the Volcker Rule.


For those entities relying on the loan securitization exclusion under the Volcker Rule (the “LSE”), the Final Revisions added to the LSE an allowance to own up to 5% of non-loan debt instruments (such as corporate bonds).   This 5% bucket is calculated based on the par value of assets at the time of each acquisition. In a shift from the NPR, the Final Revisions limit the 5% non-complying assets bucket to debt securities (other than ABS or convertible securities). Although this change from the NPR technically narrows the non-complying assets bucket, the agencies helpfully clarified in the adopting release for the Final Revisions that all leases and leased property are permissible assets under the LSE. This clarification alleviates the need for further broadening of the non-complying assets bucket for typical ABS transactions while closing any gap in the NPR that would have permitted funds relying on the LSE to acquire equity securities.


The Final Revisions include a safe-harbor carve-out to the definition of “ownership interest” under the Volcker Rule in substantially the same manner as proposed in the NPR. The safe harbor applies to certain senior loan or other senior debt interests that satisfy three tests. The safe harbor provides greater clarity around certain debt interests that structured finance industry participants ordinarily would not consider to be an ownership interest.  Unfortunately, the agencies declined to provide further clarity around the meaning of “senior”.


The need for further clarification with respect to this safe harbor, however, is largely mitigated by the helpful change and clarifications to the definition of “ownership interest” in the Final Revisions and accompanying adopting release.  Importantly, and as requested by industry participants, the Final Revisions provide that the right to remove a collateral manager or similar entity for cause generally does not convert a debt instrument into an “ownership interest”, regardless of the existence of an event of default or acceleration event.  Although the Final Revisions include a list of specific “cause” events on the basis of which holders of debt instruments may remove a manager without their instruments being rendered “ownership interests”, we believe these are generally consistent with industry standards – and moreover the list includes a catch-all for other similar “cause” events that are not solely related to the performance of the covered fund or the investment manager’s exercise of investment discretion under the covered fund’s transaction agreements.  The adopting release also helpfully clarifies that the existence of a typical cash waterfall for the allocation of collections to an interest in an issuer is not a “right to share in income, gains or profits” that would result in the interest constituting an ownership interest in a covered fund.   We anticipate that these adjustments to the definition of “ownership interest” will enable banking entities to invest in CLOs and other ABS loans and debt instruments without the need to rely on a specific covered fund exclusion.  This should ease the compliance burden for banking entities that finance the securitization of loans.


The Final Revisions are effective as of October 1, just three months away.   The agencies considered a longer transition period but believe the nature of the changes permit an accelerated effective date.  We agree.  We will provide a full Legal Update on the Final Revisions in the coming days.