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.

The regulatory and judicial developments of the last few days relating to the loan markets and to loan funds have been significant.

On Tuesday, lenders and borrowers were concerned about a world in which syndicated and other loans would be treated as securities. And managers of collateralized loan obligation vehicles (“CLOs”) were concerned about being subject to extensive new Federal regulations. Both of these concerns were addressed this week.

On Wednesday afternoon, the SEC announced a final Private Fund Adviser Rule that has a broad exception for “securitized asset funds,” a category that includes CLOs. The SEC’s Release with the final Rule is here. An Update that we issued regarding the final Rule is here.

 Then, on Thursday morning, the Second Circuit issued a decision in the closely watched Kirschner v. JPMorgan case rejecting the plaintiff’s argument that the subject notes associated with syndicated term loans should be treated as securities.

What does all of this mean for the loan markets?

  • Managers of, and investors in, CLOs are relieved after potentially facing demanding new Federal regulations.
  • Sponsors of, and investors in, other loan funds also will benefit from the SEC’s significant paring back of its Private Fund Adviser Rule. Beyond the possibility of satisfying the securitized asset fund definition, many of these market participants will also be able to avail themselves of rule exceptions that should, among other things, limit new obstacles to certain agreed side-letter arrangements tailored for certain investors.
  • The loan markets, and the loan fund universe, won’t have to deal with the substantial complications for origination and trading that would have accompanied a Second Circuit decision that certain syndicated loans are securities. These complications could have also impacted other markets that utilize loan-based funding, such as asset based lending and non-ABS structured finance markets.

No doubt there will be future twists and turns in regulation and in the courts that will pose challenges for the loan markets. But the developments of Wednesday and Thursday might be remembered for a while as the August 2023 Doubleheader.

Following closely on the heels of a Georgia law enacted in May, Connecticut and Florida have become the latest states to enact laws requiring providers of small business financing to provide disclosures to recipients—and in Connecticut’s case, to require certain commercial finance providers to register with the state. We examine the unique and interesting provisions in these laws, and what the new laws might signal for the regulatory landscape in coming years, in Mayer Brown’s Legal Update.

On 20 July 2023 the long awaited Electronic Trade Documents Act 2023 (the Act) received Royal Assent, and will come into effect in the UK on 20 September 2023.

The Act, which is largely based on the UK Law Commission’s draft Bill published in March 2022, sets out the basis upon which trade documents can exist and be dealt with in electronic form under English law, such that an electronic trade document has the same effect as an equivalent paper trade document.

Read more in Mayer Brown’s Legal Update.