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Senate passes PPP Flexibility Act; acting OCC chief finalizes 'Madden fix'

The Washington Wrap is a weekly recap of financial regulation, news and chatter from around the capital. Send tips and ideas to polo.rocha@spglobal.com, alison.bennett@spglobal.com, declan.harty@spglobal.com and maria.rafi@spglobal.com

On Capitol Hill

During the week, the Senate passed the Paycheck Protection Program Flexibility Act on June 3, earlier approved by the House on May 28. The bill provides small businesses with greater flexibility on how and when they use their loans under the U.S. Small Business Administration's Paycheck Protection Program. If signed into law by President Donald Trump, the bill will give businesses 24 weeks to utilize the funds and have them forgiven, an increase of 16 weeks from the original law.

The legislation also extends the covered period to Dec. 31 from June 30, allows employers to delay payment of payroll taxes, lets lenders and borrowers negotiate on modifying terms of a covered loan and gives leeway to employers who are unable to meet the payroll requirement under certain circumstances.

Should the bill become law, the extended forgiveness period could impact banks’ revenue recognition for months, well into 2021, according to Craig Mancinotti, managing director at ProBank Austin. He added that the bill would not impact the expected level of fees.

Rick Giovannelli, corporate practice area leader for K&L Gates said that banks may have to wait longer to get their fees recognized, but they will rake in interest over the time period. Ultimately, he said he does not "know that extending the loan forgiveness period will change bank profits."

At the OCC

The new acting Comptroller of the Currency got off to a quick start in his first week, finalizing a rule expected to give more clarity to nonbank financial technology lenders.

Brian Brooks, who became the OCC's leader on May 29, finalized the proposed "Madden fix" to clarify that a loan's interest rate can stay unchanged when transferred to another lender. Brooks also sent letters to mayors and governors this week, saying that "essentially indefinite" business closures due to the pandemic may put banks at risk by potentially amplifying the economic downturn and damaging commercial real estate portfolios.

On June 4, he also sought feedback from banks on whether there are any hurdles preventing lenders from boosting their digital banking offerings, their current involvement with the cryptocurrency space and any new payment technologies and processes the OCC should be aware of.

Rep. Maxine Waters, D-Calif., slammed Brooks for his moves, indicating that ongoing tensions between the OCC and Waters' House Financial Services Committee will continue during Brooks' tenure. Waters said in a statement that the OCC's Madden fix rule will allow "predatory lenders to engage in rent-a-bank schemes" and charge interest rates above individual states' caps.

She also criticized Brooks for what she said was an "inappropriate letter" to local officials, saying he should "listen to public health experts" on how long local officials' public safety measures should continue.

At the SEC

A Securities and Exchange Commission advisory panel is recommending some tweaks to the credit ratings industry but avoided calling for a major overhaul of its current structure.

The SEC's Fixed Income Market Structure Advisory Committee, which has studied ways to reduce perceived conflicts of interest in the industry, suggested the agency require more disclosures on the models that ratings agencies use to grade securities. Securities issuers should also disclose more information on their process for picking a ratings agency, and the SEC should explore whether bondholders should vote periodically on agencies that issuers choose to confirm their confidence in them, the panel recommended.

The committee opted against recommending drastic changes to the industry, which currently relies on issuers choosing which ratings agency they work with and paying them for their work. The panel had asked for feedback in February on whether a system that randomly assigns ratings agencies to issuers would be a better alternative.

A group of lawmakers has raised concerns over the industry's current structure, saying it appears to still offer incentives for "rate shopping," or issuers looking to hire ratings agencies that can give them the highest credit rating.

The "Big Three" ratings agencies, S&P Global Inc. unit S&P Global Ratings, Moody's Corp. and Fitch Ratings, account for the vast majority of the market share in the industry. Smaller ratings agencies include Kroll Bond Rating Agency Inc. and Morningstar Inc.'s rating units.

The panel acknowledged its recommendations are not a panacea, saying "issues remain" even if the SEC adopts its recommendations. Investor guidelines that reference specific agencies "contribute to the persistence" of market concentration among the major firms, it said. Some investors are also holding bonds currently deemed investment grade but which market participants "know should be high yield," exposing them to more risk than their internal guidelines suggest, the panel said.

The committee approved the preliminary recommendations in a 16-1 vote.

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This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.