In our last general discussion on the Main Street Lending Program (the “Program”), we focused on providing an overview of the Program and some key commercial and legal matters for borrowers and lenders to consider when making a determination as to whether procuring a loan under one of the Program’s facilities was the preferred option for such business. Since that publication, the Program has been operational for about four months, and to date, it has not achieved the desired market participation for a variety of reasons. As such, the Federal Reserve has again modified the Program to expand the base of potential borrowers that could access loans under the Program and to encourage lenders to make smaller sized loans. In this note, we will provide a short summary of these updates to the Program and explain how each modification is intended make the Program more accessible to a wider range of borrowers and encourage lenders to make loans of a smaller size.
As of October 30, 2020, the Federal Reserve has made almost 400 loans totaling $3.7 billion under the various Program facilities. However, given the total available amount of $600 billion for the Program, such deployment numbers do not indicate the Program is achieving its intended purpose of supporting a wide range of well-run small and medium sized businesses during the pandemic. Commentators have provided a number of reasons as to why there has been a relatively small uptake of loans under the Program, including that the loan covenants are too onerous for many borrowers and that many businesses adversely impacted by the pandemic are not creditworthy enough to pass the lenders’ underwriting criteria to be eligible for such loans. Additional reasons for the slow uptake of the Program relate to a number of different factors, including the loan amount thresholds being too high for many smaller businesses, the fee structure not being attractive enough for lenders and lack of clarity with regard to how concurrent and forgivable loans under the Paycheck Protection Program (PPP) should be treated by lenders when assessing borrower eligibility for the Program.
The most recent revisions to the terms of the Program aim to resolve certain of these issues by lowering the loan amount thresholds, altering the Program’s fee structure and providing a clear policy for how borrowings below a certain dollar threshold under the PPP should be treated vis-à-vis borrower eligibility for the Program facilities.
Prior to the October updates, the minimum threshold for a loan under either of the Main Street New Loan Facility (MSNLF) or the Main Street Priority Loan Facility (MSPLF) was set at $250,000, while the Main Street Expanded Loan Facility at a $10 million minimum. Initial feedback from various interest groups indicated a lower threshold would be more appropriate for smaller businesses heavily affected by the pandemic and could expand the potential borrower base to the extent of the Program’s intended goals. To make the Program accessible to a wider range of borrowers and stimulate demand for the Program, the Federal Reserve reduced the loan amount threshold from $250,000 to $100,000 for the MSNLF and MSPLF.
In relation to the MSNLF and MSPLF, adjustments to the transaction, origination and servicing fees have been made to facilitate deployment of loans that are below $250,000. Transaction fees (paid by lending banks to the Program’s special purpose vehicle) for loans that are below $250,000 have been eliminated entirely, while loans above $250,000 still cost lenders 100 basis points in transaction fees. Conjunctively, the cap on origination fees, charged by lenders to borrowers, has been increased to 200 basis points for loans that are below $250,000, as opposed to 100 basis points for loans above that amount. Lastly, the cap on servicing fees that lenders may charge the Program special purpose vehicle for its participations in loans below $250,000 is set at 50 basis points, versus 25 basis points for loans above $250,000.
These amendments to the Program fee structure have been enacted to incentivize lenders to make these smaller loans by making the loans more profitable for them.
Finally, many small businesses took advantage of the PPP during the initial days of the pandemic to cover payroll costs and stay afloat. Prior to the most recent updates to the Program, it was unclear if these businesses could also make use of the Program facilities, in spite of the fact that, in many cases, PPP loans could be forgiven. As such, many businesses that promptly made use of the PPP loans perceived themselves as blocked out of eligibility for a loan under the Program facilities because these loan amounts counted as outstanding debt.
To resolve this issue, the Federal Reserve provided a clear-cut policy as to the relationship between loans under the PPP and borrower eligibility under the Program. When assessing borrower eligibility, lenders should exclude from borrower’s debt any loans under the PPP, if the total principal amount of a borrower’s PPP loans is less than $2 million and if such borrower has applied for forgiveness (or believes in good faith they are eligible for forgiveness) under the PPP.
Many smaller businesses were unable to afford (or were not eligible for) loans with a minimum $1 million size and lenders were not sufficiently incentivized to make smaller loans given the requirements and fee structure of the Program. The Federal Reserve Board hopes that by making the adjustments to the terms of the Program described above, it will make the program accessible to a larger number of businesses, while also encouraging lenders to make loans of a smaller size through the enhanced fee structure. A number of commentators have noted that, given the uncertainty of when a new federal stimulus deal will be reached and whether such stimulus package will include another round of grants like the PPP, making the Program more flexible to borrowers and economically attractive for lenders should attract increased usage of the Program. It is worthwhile to note that if the measures are successful, loan amounts will likely be in lesser amounts, and so one may not see the dollar volume of loans rise as rapidly, however, the key indicator to track over the coming months will be the number of loans made under the updated terms of the Program.