Federal Reserve Board Improves Terms of the Main Street Lending Program

In prior alerts (here and here), we discussed changes to the Main Street Lending Program (MSLP), a $600 billion loan program funded through the CARES Act. Compared to its sister program, the Paycheck Protection Program (PPP), which has disbursed more than $500 billion in loans to small businesses and non-profits, MSLP has been a disappointment. To date, it has funded less than 400 loans representing $3.7 billion of the $600 billion available under the program. The program is set to expire at the end of this year.

On Friday, the Federal Reserve Board (Fed) again made changes to the program in an effort to better support small businesses. The Fed reduced the minimum loan amount from $250,000 to $100,000 for two of its for-profit facilities (New Loan Facility and Priority Loan Facility) and one of its nonprofit facilities. This is the third time that the Fed has reduced the minimum loan amount, which began at $1,000,000, was reduced to $500,000 in April, and further reduced to $250,000 in June.

In addition, and perhaps equally important, the Fed sweetened the pot for lenders, hoping to incentivize them to make more loans. For loans less than $250,000, it eliminated the lender’s payment of a 100 basis point transaction fee and it increased the lender’s origination fee from 100 to 200 basis points, and its servicing fee from 25 to 50 basis points. Unlike PPP, lenders carry risk under the MSLP as they retain a five percent interest in the loan. Lenders utilize their own underwriting standards when deciding whether to approve a MSLP loan and many borrowers have reported being turned down for loans. The Fed’s changes to lender fees will hopefully encourage more lenders to begin issuing loans before the program expires.

Finally, the Fed also provided enhanced flexibility for potential MSLP borrowers with existing PPP loans less than $2 million. When assessing eligibility for a MSLP loan, the borrower’s PPP loan may now be excluded, in certain cases, from “existing outstanding and undrawn available debt” prior to loan forgiveness. This is an important change because outstanding debt may impact—either by reducing or eliminating—the loan amount that a borrower is eligible to obtain under the MSLP. In particular, many small businesses were excluded from MSLP eligibility because of outstanding PPP debt and this change may now allow them to qualify. See our prior alert to learn more about whether you may qualify.

To learn more about the issues raised by this client bulletin, please contact Derek Adams at dadams@potomaclaw.com.

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