Federal Reserve Board Changes Some Loan Terms and Issues New Requirements for the Main Street Lending Program 

On April 30, 2020, the Federal Reserve Board released some new requirements and changed some loan terms for its Main Street Lending Program geared to assist small and medium sized businesses deal with the economic fallout caused by the COVID-19 pandemic. 

Here are some of the new changes and new requirements following the initial details of the Main Street Lending Program which were released by the Federal Reserve Board on April 9, 2020:

Changes to who is eligible:

• businesses must have been established prior to March 13, 2020
• eligible businesses are now businesses meeting at least one of the following two conditions: (i) has 15,000 employees or fewer (was previously 10,000 or fewer), or (ii) had 2019 annual revenues of $5 billion or less (was previously $2.5 billion or less)
• a business is now defined as “an entity that is organized for profit as a partnership; a limited liability company; a corporation; an association; a trust; a cooperative; a joint venture with no more than 49 percent participation by foreign business entities; or a tribal business concern as defined in 15 U.S.C. § 657a(b)(2)(C)…”
• not-for-profits are now specifically excluded from the Main Street Lending Program. In explaining the rational for the exclusion, the Federal Reserve Board stated that it recognizes that the credit risk of non-profit organizations, as a matter of practice, is generally not evaluated on the basis of EBITDA, which is the key underwriting metric required for eligibility under the Main Street Lending Program. 

Changes to loan terms:

• minimum loan size is now $500,000 (previously $1 million)
• principal and interest payments will still be deferred for the first year, however, interest will be capitalized
• interest will now be calculated at the 1 month or 3 month LIBOR Rate plus 3.00% (previously the Secured Overnight Financing Rate (SOFR) plus 2.50% to 4.00%)

Other new requirements:

• if the borrower had other loans with the lender as of December 31, 2019, such loans must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system on that date
• lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application
• the methodology used by the lender to calculate adjusted 2019 EBITDA to determine a borrower’s eligibility must be the methodology it has previously used for adjusting EBITDA when extending credit to the borrower or similarly situated borrowers before April 24, 2020
• the eligible borrower must certify that it has a reasonable basis to believe that, as of the date of origination of the loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period

It is important to note that the Board of Governors of the Federal Reserve System and the Secretary of the Treasury may continue to make adjustments to the terms and conditions of the Main Street Lending Program.  We will continue to monitor for any additional updates to the terms and conditions of this Program and for any additional guidance received from the Federal Reserve Board. 

Pullman and Comley has experienced and knowledgeable commercial finance professionals working hard to assist their clients during these unprecedented and uncertain times.  For specific guidance or more information, whether you are a business applying for a Main Street Lending Program loan or a lender looking to make a Main Street Lending Program loan, please contact us. 

For more information on the CARES Act and guidance during concerning the impacts of the COVID-19 crisis, please visit https://www.pullcom.com/newsroom-publications-FOCUS-Responding-to-COVID-19.