By Jon Hill

Law360 (May 19, 2020, 8:17 PM EDT) -- The heads of the U.S. Treasury Department and Federal Reserve told senators on Tuesday they're keeping an open mind about expanding eligibility for some of the central bank's emergency lending facilities to cover a wider range of companies and collateral.

At a remote hearing of the Senate Banking Committee, Treasury Secretary Steven Mnuchin said he's consulting with the Fed on potentially broadening access to the corporate credit facilities that the central bank has set up to keep credit flowing to larger employers during the COVID-19 pandemic.

The facilities, which together will have the capacity to buy hundreds of billions of dollars in corporate debt on the primary and secondary markets, are currently restricted to investment-grade issuers rated by one of the three major ratings agencies, but Mnuchin said the possibility of expanding this to allow for other ratings sources is being explored.

"I'm working with the Fed very closely to see if we can accommodate using those [National Association of Insurance Commissioners] ratings," Mnuchin said. "And if in need, there is some private ratings that can be done on a level that is not costly to the companies, but we are committed to make sure that these companies can use the facilities as well."

Mnuchin's comments came in response to Sen. Tom Cotton, R-Ark., who expressed concern that the Fed's corporate credit facilities won't be available to companies that don't want to go through the cost or hassle of getting a credit rating from one of the big three agencies but are nevertheless highly creditworthy.

Cotton said these companies tend to be privately owned and often get strong NAIC ratings on their debt, which insurers then invest in. They also can have very large numbers of employees, Cotton said, meaning some of these companies are too big to qualify for the Main Street Lending Program, another emergency lending facility the Fed is rolling out for medium-sized businesses.

"We have some in Arkansas," Cotton said. "In aggregate, they're employing thousands of workers. I think probably all the senators on this committee, maybe all 50 states, have companies that are in this category."

Fed Chairman Jerome Powell, who appeared at the hearing alongside Mnuchin, told Cotton that the Fed is "working on this problem," and Mnuchin said he expects to have a final answer on a potential expansion for the corporate credit facilities in the next week.

"We want to make sure that if there are companies that slipped through these two facilities, the [Fed] chair and I will work together to make sure that we deal with those issues, that they have funding," Mnuchin said.

Known for short as the PMCCF and SMCCF, the primary and secondary market corporate credit facilities are part of a multitrillion-dollar alphabet soup of initiatives the Fed has announced in the past two months with Treasury backing to help buoy the economy through turmoil caused by the novel coronavirus pandemic.

Senators pressed Mnuchin and Powell on Tuesday to clarify when those initiatives might actually be up and running. In the case of the Main Street Lending Program and the Municipal Liquidity Facility, which seeks to relieve short-term financial strains on state and local governments, the two regulators said the programs are about two weeks away from being operational.

Another Fed emergency program known as the Term Asset-Backed Securities Loan Facility, or TALF, is intended to promote household and business credit access by providing financing support for securitizations of assets like credit card receivables, auto loans and student loans. There have been calls from industry and lawmakers on both sides of the aisle for the Fed to broaden the types of securitized assets that the program will lend against, and at Tuesday's hearing, Sen. Thom Tillis, R-N.C., asked whether new commercial mortgage-backed securities issuances, residential mortgage-backed securities, and securitized consumer installment loans might be included as eligible collateral in the future.

Mnuchin declined to give a firm commitment but said the Fed and Treasury "will look at all of our options to make sure we support jobs across the spectrum."

Echoing the Treasury secretary, Powell said they will be "looking at evolving those facilities as we've learned more."

Their responses track with comments made by the Fed's Vice Chair for Supervision Randal Quarles at a House Financial Services subcommittee hearing last week, when he was asked by Rep. Barry Loudermilk, R-Ga., about expanding TALF to include securities backed by unsecured consumer installment loans, like those offered by marketplace lenders and other nonbanks.

"We are continuing to look at the issue of consumer finance under TALF," Quarles said, adding that the eligibility criteria were set with an eye toward getting the program launched as quickly and effectively as possible but aren't set in stone. "We haven't made a final decision either to reject or accept," he said.

--Editing by Janice Carter Brown.

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