The Federal Reserve took an important step toward the launch of the long-awaited Main Street Lending Program (MSLP) on Wednesday with the release of details about how the program will work.
Based on these new details, which were released by the Boston Federal Reserve, and recent comments from Eric Rosengren, its president, we believe the launch of the program is imminent.
With the release of the program’s details, those who were considering participating will most likely have what they need to move forward.
The latest forms and documents released include an update to the FAQs, the lender registration certification and guidance, standard terms and conditions for participating in the program, the loan participation agreement and a host of additional legal documents necessary under the program.
The program continues to offer three lending facilities – the Main Street New Loan Facility (MSNLF), Main Street Priority Loan Facility (MSPLF) and Main Street Expanded Loan Facility (MSELF).
Ironing out the details
Ever since the MSLP was announced on March 23 as part of the CARES Act, speculation has grown about the demand for the funds in the program given the lack of clarity surrounding its terms as well as the strict rules surrounding certain compensation provisions.
That speculation has been fueled by the significant decline in demand by small businesses for funds under the Paycheck Protection Program (PPP). But this is by design – to successfully launch and ultimately maximize the MSLP’s benefit to businesses, time had to be taken to improve its chances for success.
Unlike the PPP, which was hastily launched with multiple clarifications and rule updates as the program went along through two rounds of funding, the Federal Reserve solicited comments about the MSLP early on to understand the questions and concerns of eligible borrowers and lenders.
The resulting 2,000-plus comments were instrumental in helping the Federal Reserve set the terms and conditions for the program.
Looking to participate
It is in light of the newest release of information that we believe eligible lenders and borrowers that were already strongly considering participating in the MSLP will most likely have what they need to move forward.
Those that remain hesitant will most likely continue to stand by until they gain greater clarity on the rules, or until they have no other option to receive needed liquidity.
With the Federal Reserve pledging to release further information on demand for loans, we expect further clarity and possible rule changes to be made. Although frustrating to many, future changes will benefit both the eligible borrower and lender, leading to greater use of the funds in the program.
The specifics
Within the FAQ, much-needed clarity has been provided to assist lenders in planning for the program’s launch. Highlights include:
- Underwriting documentation requirements. An eligible lender should use its own loan documentation requirements to underwrite program loans, adjusting only as appropriate to reflect requirements of the program.
- Refinancing of existing loans. The proceeds of a loan from the Main Street Priority Loan Facility may be used to prepay existing debt at the time of origination that is outstanding and owed to lenders other than that of the eligible lender through which the program loan was originated.
- Minimum loan sizes. In the event that a calculated maximum loan amount an eligible borrower could receive under a facility’s criteria is less than the loan size minimum, an eligible borrower is precluded from receiving a loan.
- Additional fees to originate loans. An eligible lender may charge an eligible borrower de minimis fees for services that it would that normally charge its underwriting practices – such customary and necessary fees would include appraisal and legal fees.
- Adjusted EBITDA methodology clarification. In situations where an eligible lender has used multiple EBITDA adjustment methods in its prior underwriting and credit monitoring practices of an eligible borrower, the lender should choose the most conservative method it employed – ‘cherry picking’ adjustments is prohibited.
- Verification of eligible borrower certifications and covenants. The eligible lender is required to collect required certifications and covenants from the eligible borrower at origination or upsizing, but is not expected to independently verify the certifications or actively monitor ongoing compliance with covenants required under the program. Should an eligible lender become aware of a material misstatement of an eligible borrower, or an otherwise breached covenant during the program loan, the lender should notify the Federal Reserve Bank of Boston.
- Program loans structured to meet sale accounting. Eligible loans to be sold to the Main Street special purpose vehicle are expected to be structured in a way to meet necessary accounting rules to qualify for sale treatment; however, eligible lender consideration of specific facts is still necessary to support sale treatment. Further, loans under the Main Street Expanded Loan Facility will need to be evaluated further to support that the upsized tranche is a separate and distinct unit of account to qualify for sale treatment.
- No limitation on eligible lender participation in the program. Outside of the overall MSLP size and time limitations, there is no limit on the number of participations an eligible lender may sell to the Main Street special purpose vehicle.
- Deterioration in eligible borrower financial condition. In the event that a borrower’s repayment ability is called into question, the Federal Reserve expects the eligible lenders to follow market-standard workout processes as if the lender obtained a full interest in the loan and to exercise the standard care set out in the loan participation agreement.
- Loan funding. Once eligible loans are approved by the eligible lender, the loan funding may occur prior to the sale to the Main Street special purpose vehicle, or contingent upon the eligible lender entering into a binding commitment with the special purpose vehicle to purchase a participation in the loan from the lender.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
