Fed Expands Main Street Lending Program To Larger Cos.

By Elise Hansen
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Law360 (April 30, 2020, 7:29 PM EDT) -- The Federal Reserve Board said Thursday it's expanding its upcoming $600 billion Main Street Lending Program to include larger businesses as part of the central bank's response to the economic effects of the coronavirus pandemic.

The board members voted unanimously to lower the minimum loan amount, increase the size of eligible borrowers to include more mid-size businesses and create a separate loan facility for businesses with higher debt loads. The refinements come after the Fed received 2,200 letters in response to its request for feedback on the program, according to the announcement.

The program is not yet operational but was unveiled earlier in April as part of the Fed's efforts to support small and mid-size businesses during the pandemic. The Main Street Lending Program originally consisted of two types of loans: new loans and expanded loans, in which lenders boost the amount of an existing loan.

The program is structured so that a vehicle set up by the Federal Reserve Bank of Boston purchases 95% of eligible loans to businesses that are made by qualifying lenders. The lenders, in turn, hold on to a 5% participation in the loan, according to an April 16 report to Congress.

The Federal Reserve committed to purchase up to $600 billion in loans, and the U.S. Department of Treasury is expected to provide $75 billion in equity with funds from the Coronavirus Aid, Relief, and Economic Security Act, according to an April 8 announcement about the program.

Under the latest changes, the loans will keep many of their existing features: they have four-year terms and payments are deferred for the first year, the announcement said. But the Fed lowered the minimum size for new loans from $1 million to $500,000, and opened the program to more mid-size companies by allowing companies with up to 15,000 employees or $5 billion in 2019 revenue to participate, the announcement said.

Previously, only companies with up to 10,000 employees or $2.5 billion in annual revenue in 2019 were eligible.

The Fed also created a third type of loan, so-called priority loans, which are open to companies with higher preexisting debt loads. For priority loans, the central bank purchases 85% of the loan while the original lender holds onto a larger, 15% chunk, the announcement said.

Any would-be borrower must certify that it "requires financing because the exigent circumstances presented by the COVID-19 pandemic," according to the April 16 report, and attest that "it will make reasonable efforts to maintain its payroll and retain its employees during the term of the eligible loan."

Borrowers also have to follow restrictions that feature in other CARES Act direct loans, including restrictions on executive compensation, stock buybacks and capital distribution, the April 16 report said.

The requirement that the loans be repaid as well as the certifications required of borrowers and lenders could help the program avoid some of the ambiguities around eligibility and borrowers' "need" for funds --- questions that have dogged other CARES Act loan programs. 

The Small Business Administration has issued multiple rounds of guidance clarifying which companies qualify for the Paycheck Protection Program, and Democratic lawmakers are pushing for a probe of the program following reports that larger companies received preferential treatment from lenders at the expense of smaller businesses.

--Additional reporting by Philip Rosenstein. Editing by Amy Rowe.

Update: this story has been updated with additional information about the Main Street Lending Program.

For a reprint of this article, please contact reprints@law360.com.

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