Tom Curry
The Federal Reserve Board continues to focus on small– to medium-sized businesses as part of its ongoing efforts to maintain the U.S. economy in the wake of the COVID-19 global pandemic.
In a May 13 speech before the Peterson Institute for International Economics, Fed Chair Jerome Powell emphasized the importance of small- and medium-sized businesses to economic recovery, noting that such businesses are “a principal source of job creation” and “something we will sorely need as people seek to return to work.”
While the Fed has shied away from providing credit to small- and medium-sized businesses in past crises, Chair Powell’s remarks underscore that “[t]he scope and speed of this downturn are without modern precedent.”
Dan Hartman
CARES Act and MSLP Rollout
On April 9, the Fed, in coordination with the U.S. Treasury and acting under the CARES Act, released the terms for the Main Street Lending Program (MSLP) under the Federal Reserve Act’s Section 13(3) emergency lending authority.
The MSLP leverages $75 billion in U.S. Treasury equity funding from the CARES Act, which allows it to purchase up to $600 billion in loans to eligible small– and medium-sized businesses that were in good financial standing prior to the COVID-19 economic crisis. The MSLP was implemented, in part, to ensure credit flows to small– and medium-sized businesses and to complement the Small Business Administration Paycheck Protection Program, another Section 13(3) program.
Kate Henry
Together, the MSLP and the PPP are aimed at ensuring that small– and medium-sized businesses can obtain immediate and longer-term credit to finance their businesses and maintain employment levels.
The MSLP’s support for small- and medium-sized businesses is an integral part of the CARES Act’s extraordinary fiscal support of such businesses because it combines direct financial support from the U.S. Treasury with the leveraging permitted under the Fed’s emergency lending authority. The Fed initially announced its intent to establish the MSLP on March 23, well before the CARES Act’s enactment, demonstrating its commitment to small- and medium-sized businesses.
Blake C. Tyler
MSLP Expansion
On April 30, after receiving public feedback on potential refinements to the MSLP, the Fed expanded the program to benefit more small- and medium-sized business and address bankers’ concerns.
The expanded MSLP establishes a new loan facility such that the program now operates through three facilities: the Main Street New Loan Facility, the Main Street Expanded Loan Facility and the Main Street Priority Loan Facility. Both the New Loan Facility and the Priority Loan Facility will finance loans originated on or after April 24 and the Expanded Loan Facility will finance additional credit on loans originated on or before April 24. Borrowers can only participate in one of the facilities.
The Fed also expanded the scope of eligible borrowers for all three facilities and reduced the minimum loan size for the New Loan Facility and Priority Loan Facility.
A borrower must have either 15,000 or fewer employees or 2019 annual revenues of $5 billion or less to be eligible under the expanded MSLP. This is an increase from 10,000 or fewer employees or 2019 annual revenues of $2.5 billion in the initial MSLP program. The number of employees is determined by calculating the average total number of employees for each pay period during the 12 months prior to origination. This number includes full-time, part-time, seasonal, or otherwise employed individuals. A borrower should count its own employees and those of its affiliates.
To calculate its 2019 revenue, a borrower can either use its 2019 GAAP revenue reflected on audited financial statements or its 2019 receipts reported on the borrower’s 2019 federal tax return. For purposes of calculating annual revenue, a borrower must aggregate its revenue with its affiliates. Additionally, eligible borrowers cannot be otherwise ineligible for an SBA loan (with limited exceptions) or, with the exception of PPP loans, have received specific support pursuant to the CARES Act.
The Fed’s revised roll out of the MSLP seeks to avoid many of the pitfalls associated with the CARES Act’s hastily launched PPP by seeking stakeholder feedback on the MSLP’s initial terms and conditions. Hopefully, the resulting expansion of the scope, terms and eligibility requirements of the MSLP will make the program more attractive to the small- and medium-sized borrowers and their banks.
Thomas J. Curry is a partner in Nutter’s corporate and transactions department. Daniel W. Hartman is an associate in Nutter’s litigation department. Kate Henry and Blake C. Tyler are associates in Nutter’s corporate and transactions department. Curry is former U.S. comptroller of the currency and all are members of Nutter’s banking and financial services group.
