Best Practices: Overview of the Main Street Lending Program

While most small business borrowers impacted by the COVID-19 pandemic have been solely focused on financial assistance from lenders participating in the Paycheck Protection Program, established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), another lending program aimed at assisting small and medium size businesses is getting off the ground.  The Federal Reserve’s Main Street Lending Program (“MSLP”), authorized under the CARES Act and Federal Reserve Act, is now fully operational, according to a press release from the Federal Reserve Bank of Boston issued Monday.  The Federal Reserve is encouraging eligible lenders across the country to register in the MSLP.  There are some key considerations for both borrowers and lenders in determining whether to participate in the MSLP.  This article will provide a cursory overview of the MSLP program.

The MSLP will include three different credit facilities, the Main Street New Loan Facility (“MSNLF”), the Main Street Priority Loan Facility (“MSPLF”), and the Main Street Expanded Loan Facility (“MSELF”), using the same eligible lender and eligible borrower criteria, and the same maturity, interest rate, deferral of principal for two years, deferral of interest for one year, and ability of the borrower to prepay without penalty.  Notably, loan sizes, ranging between $250,000 to $300 million, and relative priority of each type of MSLP loan facility to an eligible borrower’s existing credit facilities differs amongst the three MSLP loan facilities.   Currently, the Federal Reserve’s Main Street Special Purpose Vehicle (“Main Street SPV”) is authorized to purchase up to $600 billion of participations in the three MSLP loan facilities until September 30, 2020, unless extended and/or expanded by the Federal Reserve board and U.S. Treasury Department.  Specific term sheets can be found on the Federal Reserve’s website.

There are detailed eligibility requirements set forth in the issued term sheets for borrowers who wish to participate in the MSLP.  An eligible borrower may only participate in one Main Street facility.   A PPP or EIDL borrower may also be eligible to participate in the MSLP.  Prospective borrowers and participating lenders should review the applicable borrower certification and covenant instruction and guide for each MSLP facility.  Unlike the PPP program, lenders under the MSLP will apply their own credit underwriting standards in determining whether to extend a MSLP loan.  Borrowers should also keep in mind that the MSLP facilities may be secured or unsecured, at the lender’s discretion and dependent upon which MSLP facility is offered.  There also may be origination fees associated with a MSLP facility.  However, unlike PPP loans, there are less restrictions on the use of MSLP loan proceeds.

Currently, U.S. federally-insured depository institutions, U.S. branches or agencies or foreign banks, U.S. bank holding companies, U.S. savings and loan holdings companies, U.S. intermediate holding companies of foreign banking organizations, or any U.S. subsidiary of any of the foregoing are eligible to participate the MSLP.  Eligible lenders will use their own loan documentation in extending MSLP loans.  The Federal Reserve sets forth certain covenants and financial information that must be included in lender’s loan documentation to comply with MSLP program requirements.  The Federal Reserve’s Loan Participation Agreement details the participation agreement between the Federal Reserve and eligible lender.  Lenders are required to hold 5% of each MSLP facility until (i) the MSLP facility matures or (ii) neither the Main Street SPV nor a Governmental Assignee holds an interest in the MSLP facility in any capacity, whichever occurs first.  Eligible lenders may fund MSLP facilities prior to or after submitting for purchase of the participation interest to the Main Street SPV.  Lenders are required to service the MSLP credit facilities as outlined in program requirements.  

More detailed terms related to each MSLP facility and lender requirements for participation and servicing can be found on the Federal Reserve’s website.  Eligible borrowers and lenders may consider the MSLP as another option to assist affected eligible businesses with the ongoing impact of the COVID-19 pandemic.  For assistance with commercial lending matters, contact the attorneys at Starfield & Smith at 215.542.7070.