Federal Reserve Releases Updated Main Street Lending Program FAQs
On Saturday, June 20, the Federal Reserve Bank of Boston (Boston Fed) provided a slightly updated Frequently Asked Questions (FAQ) fact sheet containing some additional clarifications as it regards the Main Street Lending Program (MSLP). This change comes after the Boston Fed announced on June 15 that the MSLP was officially open for lender registration. None of the revisions affect the material terms of the various Main Street Facilities. The June 20 update to the FAQs provides the following changes:
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First, the Boston Fed revised the debt repayment restrictions as it regards the refinancing of existing debt. Prior to this change, the FAQ stated that an Eligible Borrower could, notwithstanding the repayment covenants applicable to MSLP loans, “refinanc[e] maturing debt.” This wording was unclear and could have been interpreted to only allow refinancing on or after the maturity date. The revisions now state that an Eligible Borrower may refinance debt “that is maturing no later than 90 days from the date of such refinancing.” This provides greater clarity but may be problematic for borrowers and lenders who commonly seek to refinance more than a year in advance of upcoming maturities.
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Second, the Boston Fed explained that when an Eligible Borrower or Eligible Lender makes the conflicts of interest certification of whether it is a “Covered Entity or Individual”, as required under the CARES Act, it need do so based on its actual knowledge and that as part of its diligence it must “determine whether beneficial owners of any 5% of greater equity interest are Covered Individuals.” In addition to relying on their own knowledge, Eligible Borrowers or Eligible Lenders may need to ask the applicable beneficial owner to confirm whether they are a Covered Individual.
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Furthermore, new guidance is provided with regards to the Office of the Comptroller of Currency (OCC) treatment of loans under the MSLP that are funded by a national bank or savings association, in relation to lending limits imposed by the OCC on such financial institutions. There are differences in treatment depending on whether a financial institution adopts either the “Funded Loan” or “Condition of Funding” approach discussed in question L.4 of the FAQ. Under either approach, the portion of the participation interest purchased by the Main Street SPV will not be treated as a loan for purposes of OCC lending limit regulations. The OCC would treat as a loan subject to lending limits that portion of a funded MSLP loan that is not sold as a participation interest to the Main Street SPV. Conversely, if a condition to funding of the MSLP loan included a binding commitment from the Main Street SPV to purchase the participation in the loan, then it is possible that the OCC would not treat as a loan unsold portions of funded MSLP loans. Even if the loan did count towards the Eligible Lender’s lending limit and result in the Eligible Lender being in excess of such limit, it may be possible that the loan would not cause the Eligible Lender to violate such limit. By way of example, consider the following:
- Lender A funds a MSLP loan under the Condition of Funding method on July 1. Lender A provides to the Main Street SPV a Funding Notice for such loan on the following day. The Main Street SPV then purchases the participation interest a week later and such delay did not result from circumstances within Lender A’s control. During the time from which Lender A funded the loan to the time in which the Main Street SPV purchased the participation interest, the entirety of the loan is considered for purposes of Lender A’s OCC lending limit. However, even though it is considered, if such loan would result in Lender A exceeding its lending limit, Lender A would not be considered in violation and would instead be treated as nonconforming during such interim period. The OCC would not provide this beneficial treatment to Lender A had it opted to use the Funded Loan method.
- Financial institutions subject to state lending limits are encouraged to consult with their state banking supervisor with regards to such state’s treatment of funded MSLP loans and their effect in respect of state lending limits.
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Additionally, the updated FAQs include a change to the timing procedure for the Main Street SPV’s purchase of participations of funded MSLP loans under the “Condition of Funding” method discussed above. Most notably, the Main Street SPV is no longer required to purchase the participation interest within three business days after receipt of a Funding Notice. Rather, the revised language of question L.4 now states that the Main Street SPV will generally advance funds within one business day of receipt of a Funding Notice.
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Lastly, the Boston Fed clarified that the outstanding debt of an Eligible Borrower that is being refinanced by a MSLP loan should not include in the calculation of any such Eligible Borrower’s, “existing outstanding and undrawn available debt.” If only a portion of an existing loan is being refinanced by a MSLP loan, then only that portion of such existing loan that is being refinanced can be excluded from the calculation of outstanding debt for purposes of the EBITDA calculation.