Main Street Lending Program – Lessons Learned
As part of the CARES Act the Federal Reserve Bank of Boston has established a special purpose vehicle (SPV) that will purchase a 95% participation in certain qualifying term loans originated by financial institutions. The terms of the loans have been written about elsewhere so we won’t reiterate them here (but would be happy to discuss them with you if you have questions). We recently helped Starion Bank with loan documents for a Main Street Priority Loan that the SPV purchased. It was the SPV’s first purchase in the country. Here are some lessons for those considering making a loan under the Main Street Lending Program umbrella:
1. It’s going to take effort on the bank’s part. Simply registering to be an eligible lender can take days because the CEO and the CFO of the bank both have to take certain actions and then wait for the SPV to respond. If you’re interested in making a Main Street loan, you should register as an eligible lender at the beginning of the loan process. You don’t have to make a loan if you subsequently choose to not do so.
You will have to provide your borrower’s financial information, along with other information the SPV requires, to the SPV through a portal that only you and the SPV have access to. As a result, you will have to collect all the required documents provided by the borrower and the executed loan documents and upload them to the portal. It’s time-consuming to collect the information and loan documents and then upload them to the portal. Allocate plenty of time to upload the required documentation once the loan documents are signed. It’s going to take a lot of patience on the bank’s part so don’t leave the closing of the loan to the last minute.
2. The bank can use its own loan documentation or counsel can draft loan documents. The SPV doesn’t require the use of any specific loan documents but it does require that the loan documents contain certain provisions. The SPV has provided form language that complies with the requirement to include these provisions but the SPV doesn’t mandate the use of those sample provisions. That means you can use your own loan documentation but may have to include riders or addendums to comply with the SPV requirements. In the loan we just completed we used a hybrid approach. I drafted the loan agreement and note (and some additional documents that were specific to the deal) and the bank used its own security agreements and guaranties. That approach requires a little attention to make sure the documents work together but it might save the borrower some money in attorneys’ fees. The SPV accepted this hybrid approach.
3. The Fed will respond to general questions posed in emails but it won’t discuss specific questions about the transaction. The Boston Fed has issued FAQs that it updates regularly and it responds to emailed questions relatively quickly. However, it won’t review drafts of loan documents or respond to direct questions about specific loan terms. This can mean making some assumptions as to what the Fed will accept. The good news is that you can make funding the loan contingent on the Fed’s binding commitment to purchase the loan (and the SPV has provided the language that should be included in the loan documents to add as a condition precedent). If the SPV doesn’t purchase the loan you are not required to fund the loan.
4. The terms of the loan are (relatively) flexible. While it’s true that you can’t change any of the terms that are mandated by the Fed (interest rate, deferral period, maturity date, etc.) if the Boston Fed hasn’t mandated a provision or prohibited an action, you and your borrower can negotiate the terms of the deal without interference from the SPV. The SPV and the Boston Fed do expect, however, that you apply your normal credit underwriting criteria to the transaction. That is, if you typically require a minimum DSCR or guaranties or other criteria, you should continue to do so. One of the questions the Boston Fed and the SPV might ask you is how you treat similarly situated borrowers. You should be prepared to respond honestly that you treat other similarly situated borrowers similarly.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.