Federal Reserve Releases Updated FAQs for Main Street Lending Program

Authored by Emily Watson

On Sunday night, the Federal Reserve released updated Frequently Asked Questions (FAQs) that provide additional guidance to lenders and borrowers considering MSLP loans. Below is a brief summary:

• Priority Loan Facility (MSPLF) Borrowers’ calculation of “existing outstanding and undrawn available debt”: The new guidance makes clear that an Eligible Borrower seeking to use the proceeds of its Priority loan to refinance existing debt with another lender does not need to count the debt being refinanced for purposes of calculating its “existing outstanding and undrawn available debt,” which is relevant in determining the borrower’s maximum loan amount (defined as the lesser of $50 million and the amount which, when added to the borrower’s total existing outstanding and undrawn available debt, does not exceed such borrower’s 2019 adjusted EBITDA). If such existing debt is only being partially refinanced, only the portion that is being refinanced may be excluded. (FAQ C.6)
• Extent of Required Diligence in Confirming Financial Intermediary Equity Owners are not “Covered Individuals”: Under the CARES Act, each Eligible Borrower and Eligible Lender must certify that none of the beneficial owners of five percent or greater of its equity interests are, directly or indirectly, “Covered Individuals” – i.e., the President, Vice President, executive department heads, Congressional members or certain immediate family members of such officials. In conducting such diligence, the entity must apply a “reasonable diligence standard,” meaning that it must consider its actual knowledge, as well as any information regarding beneficial ownership, disclosed under the Exchange Act. Given that beneficial owners may hold their ownership stake through a financial intermediary (e.g., broker-dealers, custodians, and investment funds), the entity must apply these same considerations in determining whether any identified financial institution owners of five percent or greater of its equity interests are Covered Individuals. (FAQ H.11)
• Application of Lending Limits to MSLP Loans by a National Bank or Savings Association: Loans made under the MSLP will apply towards an Eligible Lender’s lending limit. For Eligible Lenders who are national banks, federal savings associations, or state savings associations, the lender has two options for funding the loan, each with a different impact on the lender’s lending limit:
  • Funded Loan Method: An Eligible Lender who has funded a MSLP loan before seeking to sell a participation to the Main Street special purpose vehicle (SPV) will have the full amount of the loan counted towards the Eligible Lender’s lending limit until such time as the SPV has purchased the participation (and the Eligible Lender has received full payment therefor). After such purchase, the portion of the loan that was sold as a participation would no longer be treated as a loan to the relevant Eligible Borrower for purposes of lending limit regulations.
  • Condition of Funding Method: An Eligible Lender has the option of entering into a loan agreement with an Eligible Borrower, for which the funding of such loan is contingent on the SPV issuing a binding commitment to purchase a participation in the loan. Under this option, so long as the Eligible Lender provides a Funding Notice to the SPV by the specified deadline, the Eligible Lender need only include the retained percentage of the loan when calculating its lending limit. The SPV generally will advance funds to purchase the participation within one business day of receiving such notice, so long as the notice is received before 7 p.m. ET. (FAQ K.5)

Note that this FAQ only applies to national banks and savings associations. State-chartered banks will need to review applicable state law to determine the extent to which a MSLP loan applies to its lending limit. State member and nonmember banks should consult with their state banking supervisor.

• One-Day Funding Under Condition of Funding Method: If an Eligible Lender elects the Condition of Funding Method outlined above, then it must submit all of the required documentation to the SPV for processing, and indicate that the loan has not yet been funded. If the documentation is consistent with MSLP requirements, the SPV will issue a binding Commitment Letter to the Eligible Lender to purchase the loan after it has been funded. The updates provide a template for the Commitment Letter, which will state that the Eligible Lender (i) is required to fund the loan within three business days of the date of the letter and (ii) must then provide notice to the SPV of the funding date. (FAQ L.4)
• SPV Purchases Under Earlier Program Terms: Any loans issued in reliance on the April 30, 2020 term sheets will be accepted for purchase by the SPV during the first 14 days of the relevant MSLP facility’s operation, provided that the required documentation is consistent with MSLP requirements and the loan was funded on or before June 10, 2020 (previously the loan had to be funded prior to June 10). (FAQ L.5)

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