As lenders are continuing to deal with the high volume of loans under the Small Business Association’s (SBA) Paycheck Protection Program (PPP), they must also now look at how to plan for the upcoming rollout of the Department of Treasury and Federal Reserve’s Main Street Lending Program.
With details still being finalized (comments were due by April 16), there is still a great deal of uncertainty for both lenders and borrowers, but there are several steps that can be taken now to help prepare for this program.
Although there is currently no operational guidance on the application process, we expect the program will likely be open for disbursements by early May. This gives institutions time to start looking into how they will be able to manage the process with a focus on answering the following questions:
- For clients with existing credit facilities, do lenders have an idea of how many will take advantage of the Main Street Expanded Loan Facility (MSELF)?
An outreach campaign by Relationship Managers to assess the potential number of interested clients would help lenders understand the potential volume of MSELF to expect.
- Based on the challenging user experiences of the SBA PPP, are lenders assessing the use of or developing automated workflows to handle the surge in loan applications?
Lenders would want to make sure some of these SBA challenges are not repeated and are addressed before this new program goes live.
- Are current lender workflows and automation programs able to be leveraged with tweaks in order to administer this specific loan disbursement?
The identification and implementation of quick changes to current systems will drastically improve the lender’s ability to manage this process.
- For the MSELF loans, how are lenders going to account for the drastic differences in terms between existing and new portions of the loan? For example, how will interest and principal payments, as well as maturity dates of existing facilities, be managed?
As more guidance is issued, lenders should proactively address these issues and develop procedures to be followed, as well as an escalation framework for any disputes that may arise throughout this process.
- What internal credit approval process should be followed for each loan? Is it based on the entire principal of the loan or the 5 percent that the lender retains?
Each bank will have a credit approval process that differs based on several credit factors, including the loan amount. This could result in drastically different requirements and timeframes to approve each loan, so developing a consensus approach upfront and having the credit committee approval in advance of the start of the applications, will reduce the administrative burden and delay during the process.
- How do banks get comfortable with the lender’s calculation of earnings before interest, taxes, depreciation, and amortization (EBITDA)?
With so may potential adjustments that could be made to EBITDA, lenders should look to create a simple tool that will easily calculate and validate that the appropriate number is used.
- How should a lender account for the various loan fees associated with the Main Street Lending Program?
With each loan containing facility, origination and servicing fees, involving the borrower, lender and Federal Reserve, there are several complex calculations needed to ensure that each loan and associated fee is calculated correctly. Creating a clear methodology for each Main Street New Loan Facility (MSNLF) to follow will be critical to ensuring consistent and correct accounting treatment.
- How should banks apply CECL to these loans?
For the MSNLF, it is straightforward to create a reserve based on the 5 percent of the loan that the lender retains, but for the MSELF, it becomes more complicated. It may require treating the expanded part of the facility as a separate loan for CECL purposes and have two separate reserves for the same facility to ensure consistent treatment is applied across the lender’s portfolio.
We will be following the developments closely as the program is finalized and will be providing insights on these challenges as more details emerge. We have also developed a comprehensive Risk and Control Framework to mitigate key risk considerations for the SBA PPP process, and we will update considerations for this specific program to further inform and assist our clients.
Overview of the Main Street Lending Program:
- The Federal Reserve will purchase up to $600 billion of loans made to qualifying businesses through two separate facilities. The MSNLF will provide new loans to eligible borrowers, while the MSELF will allow companies to increase existing loans.
- One key difference between this program and the SBA’s PPP is that loans under the Main Street Lending Program are not eligible for full or partial forgiveness.
- Borrowers must employ less than 10,000 people or have annual revenues of less than $2.5 billion to meet the eligibility requirements.
- Lenders will be required to keep 5 percent of the loan on their balance sheet to have a stake in the result with the Fed, eventually purchasing 95 percent of the loan balance.
- This loan is open to borrowers who would have used other programs, including the SBA PPP, however they are only allowed to avail of one of the above facilities and not both. They are also not eligible if they participate in the Fed Primary Market Corporate Credit Facility.
- Term: This is a 4-year loan with interest and principal payments deferred for one year. The interest rate is the LIBOR alternative SOFR adjustable rate plus 250-400 basis points.
- Origination fees to the borrower are 100 basis points of the principal amount and servicing fees of 25 basis points of the principal amount.
- New loans under the MSNLF can be between $1 million and a maximum of $25 million, with the maximum being the lesser of $25 million or borrower's total debt not to exceed four times its 2019 EBITDA
- Increase to existing loans under the MSELF can be between $1 million and a maximum of $150 million, with the maximum being the lesser of $150 million OR 30 percent of the borrower’s existing outstanding and committed, but undrawn, bank debt OR borrower's total debt not to exceed six times its 2019 EBITDA
- Businesses must commit to make reasonable efforts to maintain payroll and retain workers.
- Borrowers must also follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act.
- Business most refrain from using proceeds of the loan to repay other loan balances or debt except for mandatory principal payments. They must also not cancel or reduce existing lines of credit.
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