COVID-19 UPDATES / GOVERNMENT RELATIONS
Fed Expands Scope of 'Main Street' Program
The Federal Reserve yesterday expanded the scope of its Main Street Lending Program to accommodate more businesses and more loan options for participating banks. The revised term sheets for the program provide for several changes including: permitting the use of the London Interbank Offered Rate; lowering the minimum loan size somewhat; and providing flexibility on the maximum loan size.
Eligible MSLP loans will be originated after April 24 and have a four-year term with a minimum loan size of $500,000 in the Main Street New Loan Facility and Main Street Priority Loan Facility. The minimum size will be $10 million in the Main Street Expanded Loan Facility. In the MSNLF and the MSELF, lenders will retain 5% of the risk on each loan, while retaining 15% in the newly created MSPLF.
The Fed will provide a more flexible calculation method for maximum loan sizes. In the MSNLF, the maximum loan size will be $25 million or four times adjusted 2019 EBITDA, whichever is less; in the MSPLF, it will be the lesser of $25 million or six times adjusted EBITDA. In the MSELF for larger loans, the maximum loan will be $200 million, 35% of outstanding and undrawn available debt or six times adjusted EBITDA, whichever is less. Instead of referencing loans to the Secured Overnight Financing Rate, lenders in all facilities will use Libor plus 300 basis points.
SBA Limits PPP Funds for Corporate Groups to $20 Million
In an interim final rule yesterday, the Small Business Administration indicated it will limit the amount of Paycheck Protection Program loan funds that a corporate group can receive to $20 million. Businesses are considered part of a corporate group if "they are majority owned, directly or indirectly, by a common parent," according to the rule.
The cap was effective yesterday for outstanding loan applications and also applies to loans that have not yet fully been disbursed. Borrowers that are part of a corporate group that has received funds in excess of this amount are required to notify their lenders and withdraw or cancel pending applications. Borrowers who fail to take these actions will not be eligible for loan forgiveness.
"A lender may rely on an applicant’s representation concerning the applicant’s compliance with this limitation," SBA wrote in the rule. "This rule has no effect on lender obligations required to obtain an SBA guarantee for PPP loans."
Fed Expands PPP Liquidity Facility’s Eligible Participants, Collateral
The Federal Reserve late yesterday expanded access to its PPP Liquidity Facility to nonbank lenders and expanded the range of collateral that can be pledged to the PPPLF. Eligible borrowers will now be able to pledge whole PPP loans that they have purchased.
All lenders approved by SBA to make PPP loans are now eligible to pledge collateral to the PPPLF. Eligible non-depository institutions include nonbank community development financial institutions, Farm Credit System lenders, small business lending companies licensed by SBA and some fintech firms, according to the Fed.
Treasury on PPP: No to Private Companies, Yes to Audits
The Treasury Department said businesses owned by private companies with adequate sources of liquidity are unlikely to qualify for the Paycheck Protection Program. In the latest update to its frequently asked questions on the program, Treasury cited a previous entry that said public companies with substantial market value and access to capital markets are unlikely to qualify.
The FAQs indicate these larger companies likely could not certify in good faith that a PPP loan request is necessary to support their ongoing operations. The updates come after the Los Angeles Lakers and restaurant chains such as Ruth's Chris Steakhouse and Shake Shack returned PPP funds following a public backlash.
Additionally, Treasury Secretary Steven Mnuchin said the department will audit all PPP loans over $2 million before the forgiveness phase to ensure they were made in good faith. Mnuchin said Treasury will also conduct random audits of loans under $2 million.
Under an SBA interim final rule, PPP borrowers may repay the money by May 7 without penalty if their original certification was not valid.
Treasury Issues Guidance on Disbursements, Collecting Fees
The Treasury Department issued a new interim final rule that answers questions on Paycheck Protection Program disbursements, including collecting processing fees on disbursed loans.
The interim rule indicates borrowers are not permitted to make multiple draws from a PPP loan and thereby delay the start of the eight-week covered period. Rather, lenders must make a one-time, full disbursement of the PPP loan within 10 calendar days of when the loan is assigned a loan number by SBA. For loans that received an SBA loan number prior to the posting of this interim final rule but have not yet been fully disbursed, the 10-day period begins as of April 28 and the eight-week covered period began on the date of first disbursement.
The rule also indicates lenders are not responsible for delays in disbursement attributable to a borrower’s failure to provide required loan documentation in a timely fashion, including a signed promissory note. Loans for which funds have not been disbursed because a borrower has not submitted required loan documentation within 20 calendar days of loan approval shall be canceled by the lender.
If the 10th calendar day is a Saturday, Sunday or legal holiday, the period continues to run until the end of the next business day, according to the rule. When disbursing loans, lenders must send any amount of loan proceeds designated for the refinance of an Economic Injury Disaster Loan directly to SBA and not to the borrower.
Further, the interim final rule includes information on collecting fees for PPP loans:
• SBA will make available a specific SBA Form 1502 reporting process through which PPP lenders will report on PPP loans and collect the processing fee on fully disbursed loans to which they are entitled.
• Lenders must electronically upload SBA Form 1502 information within 20 calendar days after a PPP loan is approved or, for loans approved before availability of the updated SBA Form 1502 reporting process, by May 18.
• Lenders will not receive a processing fee: (1) prior to full disbursement; (2) if the PPP loan is canceled before disbursement; or (3) if the PPP loan is cancelled or voluntarily terminated and repaid after disbursement.
• Lenders will be required to provide ACH credit information to direct payment of the requested processing fee and to confirm that all PPP loans for which the lender is requesting a processing fee have been fully disbursed on the disbursement dates and in the loan amounts reported.
Treasury Releases PPP Framework for Seasonal Businesses
The Treasury Department released an interim final rule confirming that seasonal employers are eligible for Paycheck Protection Program loans under an alternative base period. The interim rule allows seasonal employers to use their monthly average payroll payments for any consecutive 12-week period between May 1, 2019, and Sept. 15, 2019, to determine their maximum loan amount.
Treasury said the base period laid out in the CARES Act would leave many summer seasonal businesses unable to obtain funding on terms commensurate with those available to winter and spring seasonal businesses.
FHFA Reiterates: No Lump Sum Required at the End of Forbearance
The Federal Housing Finance Agency reiterated that borrowers in forbearance with a Fannie Mae or Freddie Mac-backed mortgage are not required to repay the missed payments in one lump sum.
The FHFA clarified that borrowers who opt for forbearance will hear from their mortgage servicers roughly 30 days before the end of the forbearance plan to see if the temporary hardship has been resolved and discuss repayment options.
If the hardship has not been resolved, the forbearance plan can be extended, according to the FHFA. If it has been resolved, servicers will work with borrowers to set up a repayment plan, modify the loan, or set up a modification.
Fed Expands Scope, Duration of Municipal Liquidity Facility
The Federal Reserve Board expanded the scope and duration of the Municipal Liquidity Facility. The facility, which was announced on April 9, will offer up to $500 billion in lending to states and municipalities.
The revised facility will purchase up to $500 billion in short-term notes issued by U.S. states and the District of Columbia, U.S. counties with populations of at least 500,000 residents, and U.S. cities with a population of at least 250,000 residents. To be eligible for the facility, notes must mature no later than 36 months from the date of issuance – an increase from the previously announced 24-month maximum term.
The Fed said the updates will allow substantially more entities to borrow directly from the MLF than the initial plan announced on April 9.
Fed, FDIC Extend Comment Period on Updates to Resolution Plan Guidance for FBOs
The Federal Reserve and the FDIC have announced a 30-day extension for comments on proposed guidance for the resolution plans submitted by certain large foreign banks starting with the 2021 round of "living wills." Comments will now be due on June 4.
The guidance, which was originally issued in March, would apply to foreign banking organizations required to file living wills on a triennial basis and whose U.S. intermediate holding companies have a method 2 G-SIB score of 250 or more. At present, three FBOs would be subject to the guidance.
SBA Ends Bot Access to E-Tran System
The Small Business Administration has restricted the use of robotic processing automation (RPA) to enter Paycheck Protection Program loan applications amid lenders’ significant difficulties accessing the E-Tran system.
"RPAs burden the processing system and diminish its capabilities," SBA indicated in a message to lenders. "Without RPAs, the loan processing system will be more reliable, accessible, and equitable for all small businesses."
SBA is still permitting lenders to submit PPP applications through application programming interfaces (APIs). For assistance converting an RPA process to an API, SBA advised lenders to contact agency official Sheri McConville at sheri.mcconville@sba.gov.
Fed Vice Chairman Quarles Asks Congress for Capital Flexibility for Banks
According to an article from Politico, Federal Reserve Vice Chairman of Supervision Randal Quarles asked Congress in a letter on April 22 to ease a legal requirement that limits the amount of debt banks are allowed to take on. Quarles said Congress "should consider modifying" the Collins amendment from the 2010 Dodd-Frank Act, which set a floor for capital requirements that determine how much a financial company must fund itself through equity in order to limit a firm’s reliance on debt. Dictating a minimum for Tier 1 capital requirements, the Collins amendment is a narrower version of the same concept, but doesn’t allow the Fed any room to make a similar change.
"In the current environment, it poses an additional challenge: complicating the regulatory agencies’ ability to address a severe economic stress period," Quarles expressed in the letter regarding the Collins amendment. "Banking organizations are receiving significant inflows of customer deposits and the ability of these banking organizations to continue accepting significant deposits may become constrained due to Tier 1 leverage requirements."
It is important to note that earlier in April the Federal Reserve moved to ease the supplementary leverage ratio to exclude Treasury securities and deposits at the Fed from the calculation of that backup capital requirement. In previous years, the Federal Reserve has also asked for flexibility on the Collins amendment for insurers.
IBA COVID-19 Updates
The IBA has several COVID-19 resources and updates available at our website.