By Jon Hill

Law360 (September 18, 2020, 7:51 PM EDT) -- The Federal Reserve on Friday issued new guidance on its emergency lending program for mid-sized businesses and nonprofits, stressing that participating lenders should be looking at borrowers' "pre-pandemic financial condition and post-pandemic prospects" when reviewing loan applications. 

The Fed said it was issuing the updated guidance to clarify regulatory expectations around underwriting for the Main Street Lending Program, one of several initiatives rolled out by the central bank with backing from the U.S. Treasury Department in response to the novel coronavirus pandemic.

The program aims to aims to facilitate the flow of credit to mid-sized businesses and nonprofits during the coronavirus pandemic by purchasing qualifying loans from participating lenders. Previous guidance has said that lenders are to vet potential borrowers' "financial condition at the time of … application."

But the revised guidance, which the Fed said was developed in collaboration with the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, shifts the focus to emphasize consideration of the periods before and after the pandemic.

"At the time of the potential borrower's application, an eligible lender is expected to assess each borrower's pre-pandemic financial condition and post-pandemic prospects, while also taking into account the payment deferral features in Main Street loans," the guidance said.

The new guidance also said that lenders in the program will not receive supervisory criticism for "originating Main Street loans in accordance with the program's requirements."

That includes "cases when such loans are considered non-pass at the time of origination, provided these weaknesses stem from the pandemic and are expected to be temporary or if such loans are part of a bank's prudent risk mitigation strategy for an existing borrower," according to the Fed.  

Friday's guidance, which was released as an updated set of frequently asked questions, comes amid concerns that the Main Street program hasn't been bold enough in providing lending support, with only about $2 billion of its $600 billion in firepower deployed since it began operation two months ago.

Some observers have suggested that the eligibility rules should be expanded to accept more types of borrowers, and that the loan terms supported by the program need to be sweetened to make them more attractive to borrowers.

The risk-sharing feature built into the program's design has also been cited as a source of friction. Although lenders participating in the program get to sell their eligible loans to the Fed, they're still supposed to hold on to a sliver of each loan, a requirement that some see as incentivizing financial institutions to be overly cautious and less willing to take on borrowers most in need.

At a press conference on Wednesday, Fed Chairman Jerome Powell acknowledged the concerns that have been raised about the Main Street program's relatively slow start and said changes to the program were being studied, though he noted that the central bank can legally only lend to solvent borrowers.

But Powell also pointed out that industry surveys have found businesses aren't flagging tight credit as a major problem they're facing. And if economic conditions change, the Main Street program has capacity to "scale up" accordingly, Powell said.

"I would also just say, for many borrowers, they're in a situation where their business is still relatively shut down and they won't be able to service a loan, so they may need more fiscal support," Powell said. "Having said that, we're continuing to work to improve Main Street to make it more broadly available, pretty much to any company that needs it and that can service a loan."

--Editing by Michael Watanabe.

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