Tom Curry

Since mid-March, nearly all states and most major municipalities imposed “stay-at-home” orders shutting down all non-essential businesses. As a result, unemployment increased dramatically with approximately 17 million Americans filing for unemployment benefits as of April 10.  

In response, the federal government has taken unprecedented measures to address the economic shocks resulting from the COVID-19 pandemic. Most notably, Congress passed the Coronavirus Aid, Relief, and Economic Security, or “CARES,” Act, to provide relief for individuals and small businesses negatively impacted by the COVID-19 outbreak.  

This massive $2 trillion package is nothing short of “pulling out the bazooka,” a phrase made famous by former Treasury Secretary Henry Paulson during the 2008 global financial crisis, to combat the resulting economic downturn and avoid a deep depression. 

Dan Hartman

Implementation Not Easy 

Under the CARES Act, the U.S. Small Business Administration  and the U.S. Department of the Treasury are charged with implementing regulations and drafting guidance for small business borrowers and lenders eager to participate in the Paycheck Protection Program, a $350 billion program designed to support small businesses and their employees during this period of national emergency.  

The PPP’s immediate goal is to provide quick relief to small businesses and to encourage them to maintain employment levels by allowing lenders to make SBA guaranteed loans to eligible borrowers for up to $10 million. Eligible borrowers who appropriately allocate their PPP loan proceeds to payroll costs and certain mortgage, rent, and utilities payments can qualify for loan forgiveness. Massachusetts banks are playing an important role in getting PPP loans processed, and local lenders are hopeful that funds will soon flow to small business borrowers. 

Implementing the PPP has not been easy. In response to the growing economic crisis, the SBA rolled out this unprecedented program just one week after the CARES Act was signed into law. The aggressive timeline made it difficult for bankers and small businesses to get clear guidance from federal regulators. Even after the SBA released an Interim Final Rule on April 2, successive FAQs and other updates issued by the Treasury and the SBA caused as much confusion as clarity. The initial $350 billion ran out quickly, although as of this writing Congress appears poised to approve $300 billion in additional funding.  

Blake C. Tyler

To bolster the CARES Act, the Federal Reserve is using its crisis management authority under Section 13(3) of the Federal Reserve Act to provide additional liquidity to financial institutions. Under this authority, the Fed can broadly lend during times of “unusual or exigent circumstances” with approval from the Treasury.  

Fed Supplies a Backstop 

To mitigate potential PPP-related liquidity issues for banks, the Fed established the Paycheck Protection Program Liquidity Facility, or PPPLF. Using the PPPLF, the Fed extends credit to financial institutions originating the PPP loans and takes the loans as collateral at face value. This facility is designed to increase the effectiveness of the PPP by supplying liquidity to participating financial institutions through term financing backed by the PPP loans to small businesses. 

The Fed also took immediate action under Section 13(3) to assist mid-sized businesses impacted by the COVID-19 pandemic. Certain businesses, some too large for the PPP, can obtain financing from financial institutions participating in one of two lending facilities under the CARES Act’s Main Street Lending Program, or MSLP. These facilities are called the Main Street New Loan Facility, or MSNLF and the Main Street Expanded Loan Facility, or MSELF. The MSNLF, through financial institutions, facilitates new loans to eligible businesses and the MSELF extends already existing loans as of April 8. Together, both facilities will provide $600 billion in financing to mid-sized businesses that were in good financial standing before the crisis. 

The MSLP and its two facilities will provide financing for four-year loans to U.S. companies employing up to 10,000 employees or with 2019 annual revenues of less than $2.5 billion. Principal and interest payments will be deferred for one year and borrowers are permitted to prepay without penalty. Banks will be required to “have skin in the game” by retaining a five percent share in loans sold to the applicable facility.  

Both borrowers and lenders should note that there are strings attached to loans under the MSLP that may make them less attractive. Borrowers must commit to make reasonable efforts to maintain payroll, retain workers, and follow restrictions imposed under the CARES Act governing compensation, stock repurchase, and dividends. Lenders cannot cancel or reduce existing lines of credit available to the borrower or use proceeds to repay or refinance pre-existing loans or lines of credit to the borrower. 

Political leaders are hopeful that the CARES Act and the rapid response of federal regulators to support small and medium sized businesses will address the adverse impact of the COVID-19 pandemic on the U.S. economy. However, a rapid regulatory response does not guarantee immediate economic stabilization. To once again quote Secretary Paulson, “there’s always a light at the end of the tunnel . . . it just depends on how long the tunnel is.” 

Thomas J. Curry is a partner in Nutter’s corporate and transactions department. Daniel W. Hartman is an associate in Nutter’s litigation department. Blake C. Tyler is an associate in Nutter’s corporate and transactions department. Curry is former U.S. comptroller of the currency and all are members of the firm’s banking and financial services group.