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S. HRG. 116–433
EXAMINATION OF THE MAIN STREET
LENDING PROGRAM
HEARING
BEFORE THE
CONGRESSIONAL OVERSIGHT
COMMISSION
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE MAIN STREET LENDING PROGRAM CREATED BY THE
FEDERAL RESERVE, PURSUANT TO THE CARES ACT
AUGUST 7, 2020
Printed for the use of the Congressional Oversight Commission
(
Available at: https://www.govinfo.gov/
U.S. GOVERNMENT PUBLISHING OFFICE
WASHINGTON
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CONGRESSIONAL OVERSIGHT COMMISSION
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FRENCH HILL, Representative
DONNA E. SHALALA, Representative
BHARAT RAMAMURTI, Commissioner
PATRICK J. TOOMEY, Senator
AMBER VENZON, Chief Clerk
(II)
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EXAMINATION OF THE MAIN STREET LENDING PROGRAM ESTABLISHED BY THE FEDERAL RESERVE PURSUANT TO THE CARES
ACT
FRIDAY, AUGUST 7, 2020
U.S. CONGRESS,
CONGRESSIONAL OVERSIGHT COMMISSION,
Washington, DC.
The Commission met by videoconference and in person, pursuant
to notice, at 10:02 a.m., in Room G50, Dirksen Senate Office Building, the Hon. French Hill, Acting Chairman, presiding.
Present: Representative Hill, Mr. Ramamurti, Representative
Shalala, and Senator Toomey.
OPENING STATEMENT OF MR. HILL
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Mr. HILL. The hearing will come to order.
This is a hearing, a hybrid hearing, meaning that some of our
Commissioners are appearing in person and witnesses will testify
remotely. Before I begin, let me offer a few videoconferencing reminders.
Once before you start speaking, there will be a slight delay before you are displayed on the screen. To minimize background
noise, please click the mute button until your turn to speak or to
ask a question. If there is a technology issue, we will move to the
next speaker until it is resolved.
You should all have one box on your screens labeled ‘‘Clock’’ to
show you how much time is remaining. All members and witnesses
need to be especially mindful of the 5-minute clock. At 30 seconds
remaining, I will gently tap the gavel to remind members that
their time has almost expired.
To simplify the speaking order process, the Commission has decided to order ourselves alphabetically.
With that, welcome to this virtual hearing convened by the Congressional Oversight Commission. Pursuant to Section 4020 of Title
IV subtitle of the CARES Act, the Commission must conduct oversight of the $500 billion authorized for the Exchange Stabilization
Fund. As a part of our oversight work, the Commission has decided
to hold this hearing today which will examine the Main Street
Lending Facilities.
The Federal Reserve established the Main Street Lending Program to support lending to small and medium-sized businesses and
nonprofit organizations that were in sound financial condition be(1)
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fore the onset of the COVID–19 pandemic. The program operates
through five facilities which we will learn more about this morning.
The program is being administered by the Federal Reserve Bank
of Boston. Today’s hearing will have two panels. President Eric
Rosengren, President and Chief Executive Officer of the Federal
Reserve Bank of Boston will testify during the first panel, and the
second panel will include industry participants.
In the absence of a Chair, the Commissioners have agreed to
each have 1 minute of opening remarks. I will now recognize myself for an opening statement.
Our Commission is pleased to convene this hearing of the Main
Street Lending Program. Thank you to our witnesses for lending
your expertise today. I believe this is an extremely timely and important discussion.
I also commend my fellow Commissioners. Together we have
worked in a bipartisan, bicameral way to release three reports and
organize this inaugural hearing.
I would also like to thank our personal staffs for their diligence
in this area, particularly in the absence of a Chair, and on behalf
of all Commissioners, I welcome our new Chief Clerk, Amber
Venzon, and thank you to the U.S. Senator for these facilities
today. Findings from today’s hearing will be reflected in our next
report.
The Main Street Lending Program term sheet was released on
April 9th and finally became operational on July 6th. Leading to
its implementation, the program generated significant interest and
engagement. However, in the months since the program has been
available, $95 million of the $600 billion allocated has been loaned
to eligible businesses. I hope we find answers today that will help
explain why it took 3 months to stand up the program and what,
if anything, needs to be done to alter the program to expand the
universe of eligible borrowers.
I yield back, and I now recognize Commissioner Ramamurti for
1 minute.
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OPENING STATEMENT OF MR. RAMAMURTI
Mr. RAMAMURTI. Thank you, Mr. Chairman, and thank you to
each of the witnesses appearing today.
Four months ago, Congress gave the Treasury Department half
a trillion dollars to stabilize the economy. The Treasury quickly
pledged $75 billion of those dollars to the Federal Reserve’s Main
Street Lending Program for small and mid-sized companies. After
taking 3 months to set up the program, the Fed has now been operating it for about a month. In that time, it has supported only 18
loans for a total of $104 million. That is 0.017 percent of the $600
billion lending capacity that the Fed touted for the program in
April.
While all this money has been sitting on the sidelines, tens of
thousands of businesses have permanently closed, and millions of
Americans have lost their jobs. By any measure the Main Street
Program has been a failure. My goal today is to figure out why the
program has failed and how to fix it quickly before more Americans
lose their jobs and more good businesses have to shut their doors.
Thank you, Mr. Chairman.
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Mr. HILL. Thank you, Commissioner.
I now recognize Congresswoman Shalala for 1 minute.
OPENING STATEMENT OF MS. SHALALA
Ms. SHALALA. Thank you. Good morning. I would like to thank
our witnesses for being here today. I represent Florida’s 27th Congressional District, which includes most of Miami-Dade County.
COVID–19 is out of control in my district. We have a raging community spread. As a result, we have a financial disaster with 50
percent of businesses laying off workers and others going bankrupt.
In South Florida, our economy is heavily reliant on tourism. Actually, we are reliant on crowds. Unlike big businesses that can
rely on capital markets for funding, small and mid-sized businesses
are more susceptible to being permanently shut down.
Recognizing this, we approved funding in the CARES Act in
March to support up to $600 billion in lending to these businesses.
However, while some Florida businesses have benefitted from the
Main Street loans, what has been accomplished to date is simply
not enough.
We all agree that these businesses need help to survive the crisis, and I am here today to understand why the money has not
been deployed and what the impact has been on workers.
I yield back.
Mr. HILL. Thank you, Congresswoman.
I now recognize Senator Toomey for 1 minute.
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OPENING STATEMENT OF SENATOR TOOMEY
Senator TOOMEY. Thank you very much, Mr. Chairman, and I
also want to thank all the witnesses for participating in this hearing today.
Look, I think the big questions that I am looking forward to
learning about is certainly why relatively few borrowers have participated in this program, why it appears not to have a tremendous
amount of demand. I want to understand whether through this program banks are likely to originate loans that they would not otherwise engage in anyway. And at some point, we need to have a discussion about the fact that we are in a different place than we were
when we first designed these programs back in March.
We intended, at least I did as one of the negotiators of this legislation, to provide liquidity so that business could survive what we
hoped would be a very brief, although we knew would be a severe
downturn. Now we have the prospect of possibly excess capacity in
a number of industries that could persist for some time. That is a
new and different challenge.
So I look forward to exploring all of these and, again, want to
thank the witnesses for joining us.
Mr. HILL. Thank you, Senator Toomey.
All Commissioners’ statements will be added to the hearing
record. We are fortunate today to have five witnesses appearing
and appreciate their time.
President Rosengren is the President and CEO of the Federal Reserve Bank of Boston, one of the 12 regional Federal Reserve
banks. Dr. Rosengren is a participant in the Federal Open Market
Committee, the monetary policymaking arm of the United States.
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As CEO, he leads the Boston Fed’s work, which includes economic
research and analysis, banking supervision and financial stability
efforts, community economic development activities, and a wide
range of payments, technology, and finance initiative.
Ms. Lauren Anderson serves as the senior vice president and associate general counsel of the Bank Policy Institute. In this role,
she oversees the BPI’s advocacy across a range of domestic and
international issues. She brings with her over a decade of experience in financial regulation and resolution oversight, most recently
serving as the senior adviser at the Bank of England and, before
joining the Bank of England, served as Special Adviser to the Deputy of Policy at our FDIC.
Mr. Tom Bohn serves as the chief executive officer of the Association for Corporate Growth. ACG serves 90,000 investors, executives, lenders, and advisers to the growing middle-market set of
companies. Prior to joining ACG in December 2019, Mr. Bohn
served as CEO of the North American Veterinary Community
where he oversaw unprecedented growth.
Mr. Vince Foster serves as the executive chairman of the Main
Street Capital Corporation, a position he has held since November
of 2018. Mr. Foster previously served as Main Street’s CEO from
2007 until November of 2018 and served as Main Street’s president
from 2012 to 2015. He also has been a member of the management
team’s investment committee since its formation. Main Street Capital offers capital solutions for lower middle-market companies.
And our final witness, Ms. Gwen Mills, secretary-treasurer of
UNITE HERE. Ms. Mills has been working with UNITE HERE for
20 years. She served as the political director from 2015 to 2017 and
was elected secretary-treasurer in 2017. UNITE HERE has 300,000
members, largely serving the travel and tourism industry.
We will now proceed to President Rosengren’s testimony. He will
testify, and we will move into two rounds of 5-minute questioning.
Immediately following the questioning, I will recognize the second
panel of witnesses for their testimony, and then we will move into
that questioning. Each of the witnesses’ full written testimony will
be made a part of the official hearing record.
President Rosengren, welcome, and you are now recognized for 5
minutes.
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STATEMENT OF ERIC S. ROSENGREN, PH.D., PRESIDENT AND
CHIEF EXECUTIVE OFFICER, FEDERAL RESERVE BANK OF
BOSTON
Mr. ROSENGREN. Representative Hill, Commissioner Ramamurti,
Representative Shalala, and Senator Toomey, thank you for the opportunity to speak about the Main Street Lending Program, which
the Boston Fed administers for the Federal Reserve System. My
written testimony contains charts and details I hope will be useful
to you, but I will be brief in this overview.
In addition to tragic loss of life, the pandemic poses an unprecedented shock to our economy. Many entities impacted by the pandemic rely on bank for loans. The Main Street Program is designed
to facilitate lending to small and medium-sized businesses and nonprofits that have suffered disruptions. It provides credit support for
entities that have temporary cash flow problems due to the pan-
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demic and that, given the uncertain outlook, may have difficulty
obtaining credit. It can provide a bridge as loans have no interest
or principal payments in the first year and no principal payments
until year 3.
Unlike facilities that purchase standardized credit instruments,
this program purchases interests in loans that are, by nature, bespoke agreements often with complex, borrower-specific terms and
conditions. Since our portal opened for registration on the 15th of
June, 509 institutions have registered, and their assets represent
over $14 trillion, about 58 percent of banking assets in the United
States.
Main Street relies on lenders to underwrite loans and keep skin
in the game by banks retaining 5 percent of the loan. Borrowers
need to meet the lender’s underwriting standards and the program’s terms and conditions and be able to make certifications and
commitments, including those required by the CARES Act.
The program includes three loan facilities for for-profit businesses and two for nonprofits that have been announced but are
not yet live. Nonprofits and their lenders can, nonetheless, use the
published terms and documents to begin discussing program loans.
I will describe early results.
As of Tuesday, over $530 million in loans are active in the portal,
54 loans. Eighteen loans with a combined value of $109 million
have our commitment for purchase or have settled. We opened for
purchases on July 6th, and the numbers are consistent with the
gradual pace of the initial activity, more recently expanding.
The 54 loans submitted represent 29 distinct lenders. The largest
number of loans are by institutions in the $10 to $50 billion range,
but relatively small community banks have participated. To date,
there has been limited activity by banks with over $50 billion in
assets.
But the program’s modest initial numbers seem to be giving way
to more uptake as participants and banks become more familiar
with the program. Quickly scaling up a program that purchases
participations in loans from diverse borrowers in a decentralized
market that lacks standardization is inherently difficult and a significant achievement.
The eventual size of the program will be determined by the path
of the pandemic and the economy. Should conditions worsen, which
we hope does not happen, I would expect interest to expand more
rapidly. Credit interruptions prolong recessions and harm individuals. In administering the program, we will do all in our power and
purview to support the firms, nonprofits, and workers that make
up our Nation’s economy.
Thank you for the opportunity to provide this overview. I would
be happy to address any questions.
[The prepared statement of Mr. Rosengren follows:]
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Eric S. Rosengren, President and CEO, Federal Reserve Bank of Boston
Prepared Testimony for the Congressional Oversight Commission
August 7, 2020
Members of the Commission - Representative Hill, Mr. Ramamurti, Representative
Shalala, and Senator Toomey - thank you for the opportunity to speak with you about the
operationalization of the Federal Reserve's Main Street Lending Program, a facility authorized
by the Board of Governors of the Federal Reserve System ("Board of Governors") under section
13(3) of the Federal Reserve Act, with approval of the Secretary of the Treasury. As you know,
the Department of the Treasury ("Treasury") has committed to make an equity investment of$75
billion in the Program
and the funds available for investment by the Treasury were
appropriated to the Exchange Stabilization Fund under section 4027 of the Coronavirus Aid,
Relief, and Economic Security Act (the "CARES Act").
The Federal Reserve Bank of Boston, which I lead, administers the operations of the
Main Street Lending Program ("Main Street" or "Program") for the Federal Reserve System. As
such, I am very pleased to be here today to provide information that l hope will be useful to you
in your important oversight work.
Background to the Program
In addition to the tragic loss of life, all of us know that the COVlD-19 pandemic poses a
shock to the U.S. economy that is unprecedented in our lifetimes. With real GDP in the second
quarter falling by more than 30 percent, it is clear that businesses, nonprofits, and individuals
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across the country are being challenged by the fallout from the virus. We have seen a
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disproportionate impact on entities whose operating models require significant social interaction,
stemming from consumers' concern with their own health and safety as well as more formal
restrictions on movement and commerce. For example, hotels, airlines, retail stores,
entertainment venues, restaurants, and tourism-related enterprises have all suffered significant
disruptions to their businesses and cash flow, with more difficulties possible if the public health
concerns persist. Nonprofit entities like medical service providers and educational institutions
also are challenged.
Both fiscal and monetary policymakers have acted swiftly to address the economic
impacts of the pandemic and cushion the blow. The Federal Reserve, for example, has taken a
number of aggressive policy actions since late winter, aimed at blunting the economic effects of
the crisis. Seeing unusual volatility and troubled financial markets, the Federal Open Market
Committee reduced short-term interest rates to near zero and purchased significant amounts of
securities, and the Board of Governors established a variety of emergency facilities under section
13(3) of the Federal Reserve Act in order to restore market functioning and facilitate lending.
These actions helped to restore financial stability and significantly reduced spreads on
short- and long-term corporate and municipal securities
spreads which had increased due to
uncertainty, and challenged the flows of credit that underpin our economy. And the facilities
helped to unlock a great deal of private credit, as well.
Many of the emergency lending facilities are similar to facilities rolled out during the
2008-2009 financial crisis. However, many of the businesses most impacted by the pandemic
are smaller firms that rely on banks for loans, rather than accessing public credit markets (i.e.,
issuing bonds). The Main Street Lending Program is designed to facilitate lending to small and
medium-sized businesses that have suffered disruptions from the pandemic, and were in sound
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condition prior to the pandemic. The program, like all emergency lending facilities, was
authorized by the Board and Treasury, and in this case is being implemented and administered by
the Federal Reserve Bank of Boston.
The terms of the Main Street Program were enhanced and expanded by the Board and
Treasury prior to the Program's opening, and more recently a term sheet has been released that
makes the Program available to non-profit organizations as well as for-profit businesses. I would
note that in addition to providing loans for borrowers in current need of funds, the Program
offers a credit backstop for firms that do not currently need financing, but may if the pandemic
continues to erode the financial condition of these firms over late summer and fall.
Importantly, the Main Street Lending Program differs from other programs for businesses
made possible by the CARES Act, reflecting the parameters of what the Federal Reserve is
authorized by Congress to do. Unlike the Paycheck Protection Program, where many loans
could tum into grants funded by the CARES Act, the Main Street program involves loans that
must be repaid. The Program has no loan guarantee like the Small Business Administration
provided for the Paycheck Protection Program, and requires both the borrower and lender to be
eligible to participate in the Program.
We engaged in a great deal of consultation with potential borrowers and lenders as we set
up the Program. In addition to soliciting public comment, staff at the Board of Governors,
Treasury, and the Federal Reserve Bank of Boston conducted outreach to potential borrowers
and lenders of all sizes - ranging from community banks to the largest lenders in the country - in
an effort to gather information to inform policy judgments and operational decisions related to
the Program. In addition to the variety of outreach calls, we have hosted a series of 14 (so far)
webinars that have been tailored to borrowers and lenders, and in which presenters review the
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terms, conditions, and operational details of the Program. All of the sessions have been well
attended with many having more than 1,500 participants.
To ensure the Program is widely known, in conducting these webinars and otherwise
sharing information we have made an intentional effort to reach nonprofits, minority and
women-owned businesses, minority depository institutions, and tribal businesses. In addition,
robust Frequently Asked Questions documents provide detail on many aspects of the for-profit
and non-profit program facilities, and are updated with some frequency.
Parameters of the Program
The Main Street Lending Program was designed to provide credit support for business or
nonprofit borrowers that have temporary cash-flow problems due to the pandemic - and given
the uncertain outlook might otherwise have difficulty in obtaining credit from a lender that
would have to hold JOO percent of the loan. Main Street can provide a loan to bridge the
borrower over this current challenge. Main Street loans have no interest or principal payments in
the first year, and indeed no principal payments until year three, making the cash-flow aspects of
the loan attractive to borrowers experiencing a pandemic-related, temporary disruption of their
business model.
The Program includes three lending components for for-profit businesses. They have
similar interest rates, maturities, and terms, but have somewhat different collateral arrangements,
loan-size limitations, and underwriting. For mid-sized businesses with existing term or revolving
lines of credit, the Main Street Expanded Loan Facility (MSELF) allows businesses to upsize
their current loans, with additional lending of$10 million to $300 million. For smaller
businesses, the Main Street Priority Loan Facility (MSPLF) allows businesses to borrow from
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$250,000 to $50 million. Under each of these facilities the Main Street loans must be senior or
pari passu (of equivalent status) with the borrower's other loans and debt instruments (excluding
mortgage debt).
For smaller business loans without collateral, there is the Main Street New Loan Facility
(MSNLF) that provides loans from $250,000 to $35 million dollars, which cannot be
contractually subordinated to other debt. Because these loans do not have security or collateral
requirements, they are only available for firms whose debt including the Main Street loan does
not exceed four times the borrower's EBITDA - a more restrictive underwriting criterion than
the other two loan types, which set maximum loan size based on six times the borrower's
EBITDA
The two nonprojit lending components of Main Street are announced but not yet live.
They will have broadly similar terms as the for-profit Main Street facilities, for example in
maturity and interest rate. The Nonprofit Organization F,xpanded Loan Facility (NOELF) and
the Nonprofit Organization New Loan Facility (NONLF) have similar priority and size
requirements to their for-profit counterparts. They differ in that the underwriting is tailored to
the special characteristics of nonprofits.
Lending, and Lenders
We have taken great care to operationalize the Main Street program to ensure it functions
smoothly and securely. Of course, setting up a program to serve many different borrowers and
lenders is inherently complex, but I believe the Commission in its oversight role can feel
confident that this challenge is being met in strong fashion, in the public interest.
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Unlike the corporate credit and muni facilities, which purchase largely standardized
credit instruments, Main Street purchases interests in loans that are, by nature, bespoke
agreements between borrowers and lenders. Loan agreements and loan terms can be quite
different across banks, and even within a bank the agreements are the result of negotiation
between borrower and lender that often result in complex, borrower-specific terms and
conditions. For example, banks differ on whether they require personal guarantees or collateral
in excess of Program requirements; and those policies may vary based on the financial condition
or business model of the borrower.
Constructing a Program that handles this complexity is something we have been intensely
engaged with these last few months at the Federal Reserve Bank of Boston. We are pleased to
have the opportunity to do this important work, in the spirit of public service that runs through
our work and our staff.
Shifting to how the program works, to become an eligible lender for the Program the
financial institution must first register via our Main Street lender portal. As part of the
enrollment process, the institution must verify that it meets our eligibility requirements, and
make attestations regarding CARES Act provisions which require the signature of the principal
executive officer and principal financial officer. Furthermore, the institution must set up and
verify arrangements to transfer funds effectively and safely, to ensure security and resilience.
Since our portal opened for lender registration on June 15, 509 financial institutions have
registered with the Program, and their assets represent $14.25 trillion, which is approximately 58
percent of total banking assets in the United States. The attached Figure l shows the size
distribution ofregistered MSLP lenders. It includes the largest universal banks and regional
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banks, and a sizable number of banks in the $1-10 billion asset range as well as in the under $1
billion asset category. Participation is of course strictly voluntary for financial institutions.
During the extensive outreach that we did prior to launching Main Street, we heard
concerns from some businesses that their current lender would not be participating in the
Program or that they might find it difficult to locate a participating financial institution that
would work with new customers. In aiming to address these concerns, we ask lenders during the
registration process if they plan to accept loan applications from new customers. We contact
each lender that says they would consider loan applications from new customers, and ask
whether they will join a public list of such lenders. Figure 2 shows the interactive map we
created that allows borrowers to identify which lenders in their state are registered with Main
Street, are prepared to consider new customers, and are willing to be listed as such. The
interactive map is available on the program website, www.bostonfed.org/mslp, and we update
the list daily as new lenders register. Currently it contains 153 lenders. Figure 2 shows, for an
example, the financial institutions on the map for my home state of Massachusetts.
It is important to note that Main Street relies on lenders to underwrite the loans, and
indeed the lenders have " skin in the game" by retaining 5 percent of the loan participation.
Borrowers need to meet the underwriting standards of the financial institution, and the terms and
conditions of the Main Street Lending Program, whether they have an existing relationship with
the lender or are a new customer.
Borrowers also must meet the eligibility criteria set out in the Program term sheet, and
must be able to make the certifications and commitments required by the Program, including
those required under the CARES Act. Also, while the loan interest rate of 300 basis points over
LIBOR is likely attractive to somewhat higher-risk borrowers, those businesses that have strong
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balance sheets and have not been significantly impacted by the pandemic may very well find
their lender can give them more attractive terms than the Main Street Program. Because the
loans are not forgivable by the Federal Reserve and lenders retain a 5 percent interest in the loan,
borrowers must have the ability to pay back the loan. For borrowers with severe problems,
additional debt may not be helpful, and neither the lender nor the borrower will find taking
additional debt attractive. But for many others, the program can serve as a vital bridge to address
cash flow intermption ushered in by the pandemic.
Early Results
Figure 3 shows the flow of potential loan participation purchases through the Program's
portal as of the end of the day on Tuesday (August 4). As you see on the summary bottom line,
currently over $530 million in loans are active in the portal, representing 54 loans. Of that total,
18 loans with a combined value of $109 million have commitments for purchase or have been
settled. In addition, over $421 million in loans are in various stages ofreview in the portal. As a
reminder, the program opened for loan purchases on July 6. The numbers I share with you today
are consistent with what I would characterize as a gradual pace of initial activity, which is more
recently expanding.
The 54 loans submitted in the portal currently represent 29 distinct lenders. Almost all
the loans currently in the portal have been initiated by financial institutions with under $50
billion in assets. Additionally, there are 36 lenders with draft entries in progress in the system.
mention these draft entries because they reinforce that additional lenders are active in the portal
and getting familiar with Program operations.
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Figure 4 breaks out the total of potential loans in the portal by the particular branch or
facility of the Program. The largest number of loans
29
are in the New Loan Facility.
The Priority Loan Facility currently has 24 loans valued at $328 million in the portal. And
currently there is only one loan utilizing the Expanded Loan Facility in the portal. The
Expanded loan facility will generally encompass larger loans and require current participating
banks to alter existing loan agreements to upsize existing credit facilities.
Figure 5 provides the size distribution of potential loans currently in the portal. While
the largest number of loans are in the size cohort between $ 1 million and $2. 5 million dollars,
there are loans under $1 million and greater than $30 million. The industries represented include
construction and design firms, dental offices, retailers, and entertainment-related firms like
movie theaters. Thus, the loans we have seen to date have reflected what one might broadly
expect of small and mid-sized firms whose businesses have been disrupted by the current efforts
at social distancing.
Figure 6 shows the potential loan distribution by the asset size of the lender registered in
the Program. The largest number ofloans are by financial institutions in the $10-50 billion size
range. However, there has been participation by relatively small community banks as well. To
date, there has been only limited activity by banks with more than $50 billion in assets.
As l alluded to a moment ago, the Program's relatively modest initial numbers seem to be
giving way to more uptake as participants become familiar with the program's parameters. I
believe the gradual uptake is a function of participants adjusting to a few unavoidable factors.
First and foremost, loans are bespoke, and the Program needs to accommodate lending across a
wide range of industries, jurisdictions, and business profiles, which makes for operational
challenges. Also, the Program's complexity reflects the underlying loan agreements, the terms
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15
and conditions in the Program, and requirements related to the CARES Act. As a result, it can
take some time for borrowers and lenders to gather the required documents for submission to the
Program. Loan documents not in compliance with terms and conditions have slowed some of the
intake. We are working to help participants understand and avoid common errors that can slow
the process down.
Summary Observations
Designing and operationalizing a program of this breadth and nuance, delivered through
highly secure technology, is a significant achievement in a few months' time. Everyone
involved is focused on helping to provide important credit support to businesses and nonprofits
at this critical and challenging time.
As we speak today, in early August, I can say that we have worked through many
challenges. Among the emergency lending facilities established by the Federal Reserve since
late winter - and indeed in comparison to the emergency programs of the 2008 financial crisis the Main Street Lending Program is operationally complex. Quickly scaling up a program that
purchases participations in bespoke loans - from a very diverse group of borrowers in a
decentralized market that lacks standardization - is inherently difficult. There are also tradeoffs
between limiting credit risk, targeting support, reaching scale, and achieving operational
efficiency. Considerations such as these have made the Main Street Lending Program one of the
most challenging emergency lending programs the Federal Reserve has ever put in place. The
Commission can be assured that the Federal Reserve and Treasury have sought to design a
program that is well managed with respect to risks, efficiency, and resilience, while being
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responsive to the needs of borrowers experiencing difficult times.
16
The eventual size of the Program will be determined by the path of the pandemic and the
economy, generally. Should the pandemic and the economy worsen, or financial institutions
experience larger than expected loan losses and depletion of capital - all things we hope do not
happen - then I would expect interest in using this Program to expand more rapidly.
In conclusion, the pandemic's shock to our economy is unprecedented, and the pain for
businesses, organizations, and workers has been unparalleled in our lifetimes. It is important that
the Federal Reserve stands ready at this time of distress, in the public interest and in pursuit of
our Congressional mandates, to support lending to for-profit businesses and nonprofit
organizations of many sizes at reasonable rates. From many decades of research and
policymaking, I can attest that credit interruptions prolong recessions and ultimately harm
individuals on Main Streets across America. I pledge to you that in administering the Program,
the Boston Fed and the Federal Reserve as a whole will do all that is in our power and purview to
effectively support the firms, nonprofits, and individuals that make up our nation's economy.
Thank you for the opportunity to provide this high-level overview of the Program.
would now be happy to address any questions.
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August?,2020
17
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Figures included in the Prepared Testimony of
Eric S. Rosengren
President and CEO
Federal Reserve Bank of Boston
for the Congressional Oversight Commission
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Figure 1: Asset Size Distribution of MSLP Registered Lenders
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Number of Lenders
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150
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100
50
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0
Less than $100 - $250 $250 - $500 $500 - $750 $750 Mil lion
$100 Million
Million
Million
Million
- $1 Billion
$10 - $50
Billion
$50 Billion Greater th an
- $1 Trillion
$1 Trillion
Lender Asset Size
A488
Note: Registered lenders totaled 509 as of August 4, 2020.
Source: Federal Reserve Bank of Boston
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$1 - $10
Billion
2
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Figure 2: Interactive Map of MSLP Registered Lenders by State
Select your State
Select a Lender
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~
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Alaska
Hawaii
District of
Columbia
Puerto Rico &
U.S. Virgin Islands
•
Businesses .J I Nooprollts./
CITIZENSBANK
Businesses.II Nonprofits./
ENVISIONBANK
Businesses.II Nooprolits./
FALL RIVER FIVE CENTS SAVINGS BANK
Businesses./ I Nooprolits ./
GFA FEDERAL CREDIT UNION
Businesses ./ I Nooprollts✓
HARBOR BANKSHAAES ASSET MANAGEMENT, LLC
Businesses./ I NonprolitS.J
JPMORGAN CHASE & co
Businesses ✓ I Nonprofits ✓
KEYBANK
Buslnesses.11 Nooprollts.1
NEW VALLEY BANK & TRUST
Businesses .1 I Nooprollts .1
PEOPLE'S UNITED BANK
Businesses.JI Nooprotlts.J
SANTANDER BANK
Businesses .1 I Nooproms .1
STEALING NATIONAL BANK
Businesses.JI Nonprolits.1
STONEHAM BANK
Businesses.JI Noopror1ts.1
WEBSTER BANK
Buslr.esses .1 1 Nooprolits✓
WEBSTER FIVE CENTS SAVINGS BANK
Businesses .1 I Noopror1ts.1
WORKERS CREDIT UNTION
Businesses.JI Nonprofits ✓
Listing of Lenders Accepting
New Customers
Borrowers can view a state-bystate listing of lenders
participating in the Main Street
Lending Program who are
currently accepting applications
from new customers by viewing
the interactive map.
This list reflects a subset of the
lenders participating in the Main
Street Lending Program specifically, lenders registered
for the program who are
accepting applications from new
customers, in addition to existing
ones; and also elect to be listed.
19
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© 2020 Mapt>ox © OpenS1ree1Map
BANKOFAMERICA
A488
Source: Federal Reserve Bank of Boston, Interactive Map
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3
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Figure 3: MSLP Loans to Borrowers by Status
Number of
Loans
Participation
Amount
Loan Amount
18
$104,006,000
$109,480,000
Loans Under Review
36
$400,327,014
$421,396,857
Sfmt 6633
Total
54
$504,333,014
$530,876,857
20
Loans Committed or Settled
Fmt 6633
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Processing Status
as of August 4, 2020
E:\HR\OC\A488.XXX
Note: Additionally, there were 36 lenders with 53 draft entries in progress in the system, reinforcing that
lenders are active in the portal and getting familiar with program operations.
A488
Source: Federal Reserve Bank of Boston
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Figure 4: MSLP Loans to Borrowers by Facility
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Facility
Frm 00023
New Loan Facility
Number of
Loans
29
Participation
Amount
Loan Amount
$66,001,250
$69,475,000
24
$311,885,864
$328,300,909
Total
54
$504,333,014
$530,876,857
21
Priority Loan Facility
E:\HR\OC\A488.XXX
Expanded Loan Facility
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$133,100,948
Fmt 6633
$126,445,901
Note: Additionally, there were 36 lenders with 53 draft entries in progress in the system, reinforcing that
lenders are active in the portal and getting familiar with program operations.
A488
Source: Federal Reserve Bank of Boston
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Figure 5: Distribution of MSLP Loans to Borrowers by Loan Size
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Number of Loans
20
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15
22
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10
5
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0
Less than $1
Million
$1 - $2.5 Million $2.5 - $5 Million
$10 - $20 Million $20 - $30 Million Greater than $30
Million
Loan Size
A488
Note: Does not include the additional 53 draft entries which include loans as large as $47.5 million.
Source: Federal Reserve Bank of Boston
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$5 - $10
Million
6
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Figure 6: Distribution of MSLP Loans to Borrowers by Asset Size of
MSLP Registered Lender
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Number of Loans
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23
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10
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0
Less than $500
Million
$1 - $10
Bill ion
$10 - $50
Billion
Greater than
$50 Billion
Lender Asset Size
A488
Note: Does not include the additional 53 draft entries which include loans as large as $47.5 million.
Source: Federal Reserve Bank of Boston
Insert offset folio 27 here 41488A.018
$500 Million
- $1 Billion
7
=
24
_ . - , FEDERAL RESERVE
BANKOFBOSTON"M
600 ATLANTIC AVENUE• BOSTON MA 02210
ERIC S. ROSENGREN
PRESIDENT AND
WWW.BOSTONFED.ORG
CHtEF EXECUTIVE OFFICER
August 3 I, 2020
Mr. Bharat Ramamurti, Commissioner
Congressional Oversight Commission
Washington, D.C. 20510
Dear Commissioner Ramamurti:
Enclosed are my responses to the questions you submitted following the
August 7, 2020, 1 hearing before the Congressional Oversight Commission.
Please let me know if! may be of further assistance.
Sincerely,
Enclosure
VerDate Sep 11 2014
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Questions related to this hearing were receiYcd on August 14. 2020.
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1
25
CONGRESSIONAL OVERSIGHT COMMISSION
August 7, 2020 Hearing: Examination of the Main Street Lending Program Established by the
Federal Reserve Pursuant to the CARES Act.
Follow-Up Questions Submitted to President Eric Rosengren, Federal Reserve Bank of Boston
(Witness Name) from Commissioner Ramamurti
Question 1: Many smaller cities, towns, school districts, and other public entities like hospitals
function much like non-profits-both in terms of the essential role they play in our
communities and with respect to how they obtain credit, with bank lending to local
governmental entities constituting a large share of all outstanding municipal credit.2 The
Municipal Lending Facility (MLF) is ill-suited to serving these smaller governmental entities,
who cannot participate directly in the MLF. Moreover, they may have trouble participating
indirectly in the MLF through larger borrowers like state governments. Has the Federal
Reserve considered whether there are unmet credit needs of such smaller governmental
borrowers that could be met by expanding the MSLF to encompass them? Please explain
whether the Federal Reserve believes such an expansion warranted.
In general, the Federal Reserve believes that the Municipal Liquidity Facility (MLF) is the best tool
to address the liquidity challenges in the municipal bond market through which these entities
normally obtain credit, rather than the Main Street Lending Program (Main Street or Program),
which is a loan participation program. The purpose of the MLF is to enhance the liquidity of the
municipal securities market by increasing the availability of funding to eligible issuers through
purchases of their short-term notes. By addressing the cash management needs of eligible issuers,
the MLF was also intended to encourage private investors to reengage in the municipal securities
market, including across longer maturities. The MLF also encourages eligible issuers to borrow on
behalf of and lend to smaller local governments and other entities that are not otherwise eligible for
direct participation in the MLF. As a result of the deployment of the MLF and other Federal
Reserve monetary tools, the municipal market has substantially recovered from its unprecedented
sell-off in March and the vast majority of municipal issuers currently have access to capital at
historically low costs of funds 3 We will continue to closely monitor conditions in the markets for
municipal securities and will evaluate whether additional measures are needed to support the flow
of credit and liquidity to state and local governments.
The Main Street facilities for nonprofit organizations also have a role to play in providing credit to
certain public entities, including public hospitals and public colleges and universities, that operate in
a manner similar to other types of nonprofit organizations recognized as tax-exempt pursuant to
50l(c)(3) of the Internal Revenue Code. The Federal Reserve has published the requirements that
such public entities must meet to qualify as eligible borrowers for purposes of the Main Street
facilities for nonprofit organizations. The eligibility criteria for the nonprofit lending facilities were
designed in light of underwriting standards often applied by lenders in making loans to nonprofit
borrowers, including nonprofit hospitals, colleges, and universities that have a similar financial
profile to their public counterparts. The Federal Reserve is currently working to create the
infrastructure necessary to full y operationalize the Main Street facilities for nonprofit organizations.
2
3
Ivanov, Ivan and Tom Zimmennan, "The Privatization of Municipal Debt," Brookings Institution Hutch.ins Center
Working Paper #45 (Sept. 2018), available at https: //www.brookings.edu/wp-<:ontent/uploads/20 l 8/08/WP45.pdf.
https :I/libertystreeteconomics. newyorkfed.org/2020/06/municipal-debt-markets-and-the-covid- l 9-pancte,nic. html .
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26
CONGRESSIONAL OVERSIGHT COMMISSION
August 7, 2020 Hearing: Examination of the Main Street Lending Program Established by the
Federal Resen>e Pursuant to the CARES Act
Question 2: In a recent study examining the Payment Protection Program (PPP) administered
by the Small Business Administration, the Federal Reserve Bank of New York found
"significant coverage gaps" in the PPP's ability to reach Black-owned businesses, despite the
pandemic's outsized impact on communities of color. 4 Will the Federal Reserve conduct a
similar study of whether and how the CARES Act programs that it administers have
impacted racial and ethnic minorities?
The Federal Reserve has taken a number of actions to facilitate broad coverage by Main Street
Recognizing that the circumstances, structure, and needs of small and medium sized for-profit and
nonprofit organizations vary considerably, the Federal Reserve sought feedback from a wide range
of potential borrowers, lenders and the general public on the proposed terms of the facilities to help
make the Program as efficient and effective as possible. Based on this feedback, the Federal
Reserve has modified the terms of the Program to provide greater access to credit for small and
medium-sized for-profit and nonprofit organizations that were in sound financial condition prior to
the pandemic.
To provide potential lenders with information about Main Street and to address their questions in
real time, to date the Federal Reserve has held (and posted recordings of) 14 webinars and
conducted a number of other events (including three in collaboration with the Small Business
Administration) explaining aspects of the Program and engaging in question and answer sessions.
On June 24, the Federal Reserve hosted a webinar on Main Street targeted toward minority- and
women-owned businesses, and on August 4, the Federal Reserve hosted a webinar targeted toward
tribal businesses. The Federal Reserve is conducting additional outreach to raise awareness of the
program among women- and minority-owned businesses and in low- and middle-income
communities, including sharing program information and updates with more than 70 associations
and networks working with minority-owned and women-owned businesses.
To encourage their involvement, the Federal Reserve has also conducted outreach to minority
depository institutions (MDis) and community development financial institutions (CDFis) to
provide opportunities to learn about the Program. On Jul y 1, as part of the Federal Reserve' s
Partnership for Progress program, staff of the Federal Reserve Board and FRBB, together with the
National Bankers Association, held a briefing on Main Street for MDis. On August 4, Federal
Reserve Board and FRBB staff attended a National Business Inclusion Consortium event to present
the details of the Main Street Program . On August 12, staff participated in an event sponsored by
the Department of Commerce' s Minority Business Development Agency and provided a Main
Street Program overview.
4
Claire Kramer Mills, "Double Jeopardy: COVID-19 's Concentrated Health and Wealth Effects in Black
Communities," Federal Reserve Bank of New York (Aug. 2020), available at
https: /hv,vw.newvorkfed.org/ medialibrarv/media/smallbusiness/DoubleJeopardv CO YID I 9and.BlackOwned.Business
~.
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27
CONGRESSIONAL OVERSIGHT COMMISSION
August 7, 2020 Hearing: Examination of the Main Street Lending Program Established by the
Federal Reserve Pursuant to the CARES Act.
These efforts will contribute to broad coverage. The Federal Reserve will continue to assess the
efficacy of the Program, including its effects on low-income or minority communities.
Question 3: Will the Federal Reserve collect and report any data on whether minority-owned
businesses are participating in the MSLF program?
The Federal Reserve will collect and disclose information regarding Main Street during the
operation of the facilities, including information regarding names oflenders and borrowers,
amounts borrowed and interest rates charged, and overall costs, revenues, and other fees. The
Federal Reserve does not plan to collect information on minority status of borrowing entities. We
will continue to conduct outreach sessions to underserved communities to promote Program
awareness. Further, we will continue to monitor broader credit conditions across different
communities and geographies and weigh adjustments needed to reach eligible borrowers.
Question 4: President Rosengren testified that Federal Reserve's outreach plan for the MSLF
included an intentional effort to reach minority and women-owned businesses, minority
depository institutions, and tribal businesses. What further steps is the Federal Reserve taking
to ensure that the MSLF program is made available on an inclusive basis? For example, in
light of reports of lending discrimination by banks participating in the PPP, 5 what steps will
the Federal Reserve take to ensure that banks participating in the MSLF offer MSLF-backed
loans on a non-discriminatory basis?
As indicated in response to Question 2, the Program is designed to have wide coverage, and the
Federal Reserve has conducted outreach targeted toward minority, women-owned, and tribal
businesses, as well as MDis and depository CDFis.
All eligible lenders under Main Street are federally regulated financial institutions, subject to
ongoing federal supervision. Such lenders are instructed to employ their existing underwriting
processes in relation to Main Street loans, and to use loan documentation that is substantially
similar, including with respect to required covenants, to the loan documentation that the eligible
lender uses in its ordinary course lending to similarly situated borrowers, adjusted only as
appropriate to reflect the requirements of the Program. By structuring the Program in this way, the
Federal Reserve expects that Main Street loans would be subject to the same regulatory
infrastructure and supervisory scrutiny (including by the Federal Reserve, where applicable) as
other loans made by the eligible lenders. As such, any discriminatory behavior by lenders will be
addressed as appropriate under the law.
Question 5: In response to questions about whether certain MSLF program terms and
requirements were changed in response to requests from the oil and gas industry, President
Rosengren testified that "[i]n the discussions (he] ha(s] been involved in, we do not discuss
5
Anneliese Lederer, et al., "lending Discrimination within the Paycheck Protection Program, " National Comm unity
Reinvestment Coalition (Ju~y 2020) , available at https://www.ncrc.org/lending-discrimination-within-the-pavcheckprotection-program/.
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28
CONGRESSIONAL OVERSIGHT COMMJSSION
August 7, 2020 Hearing: Examination of the Main Street Lending Program Established by the
Federal Resen,e Pursuant to the CARES Act.
specific industries." However, the Energy Secretary has stated publicly that he and Treasury
Secretary Mnuchin worked with the Federal Reserve to ensure that the energy industry could
participate in the Federal Reserve's lending facilities. 6 Is President Rosengren aware of any
discussions, deliberations, meetings, or communications in which specific industries or
companies were discussed-irrespective of whether he was personally involved in those
discussions? If so, please identify what officials or agencies may have been involved.
The Main Street facilities are intended to improve financial or credit conditions broadly, not to
allocate credit to narrowly defined sectors, industries, or classes of borrowers. I am not aware of
any conversations regarding how the terms and conditions of the Main Street facilities would apply
to oil and gas companies beyond conversations discussing how Main Street would apply to broad
sectors of the economy.
From time-to-time, the needs of specific industries or types of borrowers are raised in internal
discussions and deliberations in relation to Main Street In designing the Program, the Federal
Reserve received more than 2,200 comments from businesses of all sizes, across industries, and
representing many sectors of the economy. Federal Reserve staff has considered issues pertaining
to particular companies or industries - including manufacturers, commercial real estate companies,
and retailers - when such concerns are raised by members of Congress or other public
commenters. However, any decisions that the Federal Reserve has made in designing the Program
were intended to meet the needs ofa wide range of businesses across the economy, not in response
to any particular industry ' s concerns or to ensure any particular industry 's participation.
Question 5: The Federal Reserve publicly disclosed public comments that it received, which
reportedly were the basis for changes to the MSLF made on April 30, 2020. 7 However, some of
the changes made on April 30, 2020 are not reflected in any of those publicly disclosed
comments, such as the deletion of the required attestation that the loan was needed "due to
the exigent circumstances presented by the ... COVID-19 pandemic." As the public record
currently stands, the only evidence of anyone requesting that change and certain other
changes is that they were requested only by the oil and gas industry,8 and that requests by
6
E.g., Timothy Gardner, "Trump administration working to ease drilling industry cash crunch," Reuters (Apr. 17,
2020), available at https://www.reuters.com/articlc/us-health-coronavirus-usa-oil-credit/tmmp-administrationworking-to-ease-drilling-industrv-cash-crunch-idUSKBN 21Z I JY; Saleha Mohsin & Ari Natter, "Energy Chief Says
Fed Asked lo Expand Lending for Oil Finns," Bloomberg.com (May 12, 2020), available at
https: //www.bloomberg.com/news/articles/2020-05-12/energv-chief-savs-fed-was-asked-to-expand-lending-for-oi 1finns.
7
See Press Release, "Federal Reserve Board announces it is expanding the scope and eligibility for the Main Street
Lending Program," Federal Reserve (Apr. 30, 2020), available at
https: //www.federalreserve.gov/ newsevents/pressreleases/monetarv20200-l30a.htm (citing public comments as basis
for loan tenn sheet adjustments).
8
E.g., Letter to Secretary Mnuchin and Chainnan Powell from Senator Ted Cruz (Apr. 24, 2020), available at
https: I/\V\vw.cruz.senate.gov/files/documents/Lettersl-l.2-l.2020%20Oil%20Gas%20Fed%20Lending%20Facilitv%20
Letter.pdf (stating that " condition ... tlk1t a borrower must attest tl1ey require financing because of circumstances
attributed to COVID-19 ... may prove to be too restrictive" " in the context of energy" ).
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29
CONGRESSIONAL OVERSIGHT COMMISSION
August 7, 2020 Hearing: Examination of the Main Street Lending Program Established by the
Federal Reserve Pursuant to the CARES Act.
that industry were sometimes made outside the ordinary public comment process available to
everyone else.9 Will the Federal Reserve publicly disclose all documents, communications, and
records of communications that relate to the energy industry's participation in the MSLF?
When issuing the April 30, 2020 term sheets, the Federal Reserve and Treasury made a number of
changes to the attestations that would have been required under the initial April 8, 2020 term sheets
in light of the public comment period and further internal discussion and analysis . In particular, a
number of changes were driven by comments raising questions about the precise meaning of certain
proposed attestations, how borrowers and lenders could determine and evidence their compliance
with such requirements, and how such attestations would be enforced. In the course of this careful
review and rationalization, it was determined that there was not sufficient reason to retain the
initially proposed borrower attestation that a loan was needed " due to the exigent circumstances
presented by the ... COVID-19 pandemic." The following considerations informed this decision:
•
Due to the widespread effects of the pandemic, the Federal Reserve and Treasury anticipated
that nearly all borrowers that would desire to access Main Street would have been affected
adversely by the pandemic. Further, the Federal Reserve and Treasury determined that it
would be difficult for many businesses to evidence the pandemic' s effect on their business
outside of pointing to decreased demand, which may not conclusively demonstrate a
connection to the pandemic. 10
•
Under the Board's Regulation A, each borrower must certify that it is unable to secure
adequate credit accommodations from other banking institutions. It was determined that this
required certification would serve much of the same purpose as the removed attestation,
because each address whether the Program is being used as a back-stop.
•
Under section 13(3) of the Federal Reserve Act and the Board's Regulation A, each
borrower must certify that it is not "insol vent." As clarified in the Main Street Borrower
Certifications and Covenants, a borrower is insolvent if it has been "generally failing to pay
undisputed debts as they become due" during the 90 days preceding the date of borrowing to
the extent it is behind on its debts for reasons other than disruptions to its business resulting
from the pandemic. For those behind on their debts due to the pandemic, the borrower is
considered insolvent if it was generally failing to pay its undisputed debts in the 90 days
9
E.g. , Timothy Gardner, "Trump administration working to ease drilling industry cash crunch," Reuters (Apr. 17,
2020), available at https://www.reuters.com/article/us-health-coronavirus-usa-oil-credit/trump-administrationworking-to-casc-drilling-industrv-cash-crunch-idUSKBN21Z IJY (reporting Energy Secretary's statement tlmt he met
with U.S. energy industry representatives to discuss tl1e size of loans tl1ey would need in order to participate in tl1e
MSLF).
10
Similar concerns were raised by other commenters, including on p. 63 of the document, available at
https://www.federalreserve.gov/monetarvpolicv/files/mslp-public-comments-202007015.pdf: and p. 41 of the
document available at https ://www. federa Ireserve. gov/monetarvpolicv /files/mslp-pub lic-comments-2020070 16. pdf.
In addition, during outreach to a trade association representing companies of all sizes and across all sectors, concerns
were raised that this particular attestation could trigger material adverse change clauses in borrower' s existing debt
covenants.
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CONGRESSIONAL OVERSIGHT COMMISSION
August 7, 2020 Hearing: Examination of the Main Street Lending Program Established by the
Federal Reserve Pursuant to the CARES Act.
preceding the later of March I, 2020, or the date on which changes in its business activity
related to the COVID-19 pandemic commenced. It was determined that this required
attestation would serve much of the same purpose as the removed attestation by focusing on
the financial condition of the borrower outside of the effects of the pandemic.
•
The Program requires that any outstanding loans that the eligible borrower had with the
eligible lender as of December 31 , 2019 , 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. A borrower meeting this criteria, but desiring a Main Street loan, is
likely to have been adversely affected by the pandemic. It was determined that this
requirement would serve much of the same purpose as the removed attestation by focusing
on the financial condition of the borrower prior to the pandemic.
The Federal Reserve has disclosed the comments it received during the comment period, including
those submitted by or on behalf of the oil and gas industry.
Question 6: Title 12 U.S.C. § 343(3) and 12 C.F.R. § 201.4 require the Federal Reserve's
emergency lending programs to be "broad-based." In the Federal Reserve's view, as a legal
matter, do these provisions permit changes to a program designed to benefit a particular
industry or particular companies, so long as the program as a whole has broad eligibility?
Please explain the Federal Reserve's view of what the broad-based requirement does and does
not encompass.
Consistent with section 13(3) of the Federal Reserve Act, all of the Federal Reserve's facilities have
broad, neutrally defined eligibility requirements and pricing mechanisms and are designed to
minimize credit allocation while also minimizing risk to the taxpayer.11 As the Federal Reserve and
Treasury stated in March 2009, "actions taken by the Federal Reserve should aim to improve
financial or credit conditions broadly, not to allocate credit to narrowly-defined sectors or classes of
borrowers." 12
The Federal Reserve Board formally interpreted the statutory "broad-based" requirement at 12 CFR
201.4(d)(4), which clarifies that "a program or facility has broad-based eligibility only if [it] is
designed to provide liquidity to an identifiable market or sector of the financial system," and that a
program or facility is not considered broad-based if it is designed to aid one or more failing
companies, or iffewer than five persons or entities would be eligible to participate.13
II
12
13
12 U.SC. § 343(3).
Joint Press Release, The Role of the Federal Reserve in Preserving Financial and Monetary Stability Joint Statement
by the Department of the Treasury and the Federal Reserve (Mar. 23 , 2009), available at
https://www.federalreserve.gov/newsevents/pressreleases/monetarv20090323b.htm.
12 CFR 201.4(d)(4)(ii)-(iii).
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CONGRESSIONAL OVERSIGHT COMMISSION
August 7, 2020 Hearing: Examination of the Main Street Len<ling Program Established by the
Federal Reserve Pursuant to the CARES Act.
Question 7: For the Secondary Market Corporate Credit Facility (SMCCF), the Federal
Reserve has stated that it will leverage the Treasury equity at a ratio as low as 3 to 1, 14 while
the MSLF appears to have a larger equity cushion. Is the Federal Reserve more willing to
absorb risks with respect to the SMCCF than with respect to the MSLF? If so, why?
The Secondary Market Corporate Credit Facility (SMCCF) uses credit ratings to identify which
debt instruments it may purchase and how much Treasury equity will be allocated to protect against
losses from those instruments. The historical default rates of companies rated below investment
grade are higher than those of companies rated above investment grade, but the SMCCF adjusts for
heightened credit risk by allocating more Treasury equity to support purchases of companies rated
below investment grade. In particular, the SMCCF leverages the Treasury equity at 10 to 1 when
acquiring corporate bonds of issuers that are investment grade but only at 7 to 1 when acquiring
corporate bonds of issuers that were previously rated investment grade but are now rated one rating
grade below investment grade. When the SMCCF purchases exchange-traded fund (ETF) shares, it
leverages the Treasury equity at between 10 to 1 and 3 to 1, depending on the risk profile of the
ETF.
For Main Street, which lends primarily to companies that were in sound financial condition prior to
the onset of the COVID-19 pandemic, and to companies for which a credit rating is usually not
readily available, the Federal Reserve has leveraged the $75 billion equity investment at a
maximum of 8 to I . We feel that this ratio is appropriate given the creditworthiness of the
borrowers for whom Main Street was designed.
Question 8: Has the Federal Reserve analyzed whether more companies would be served by
the MSLF if the loan term were extended an additional year or more? Please explain whether
the Federal Reserve believes such an extension warranted.
The five-year maturity for Main Street loans facilitates the provision of credit over the mediumterm to bridge near-term cash flow di sruptions that result from the COVID-19 pandemic. A longer
maturity may contribute to the ability of some borrowers to repay a loan. A longer maturity may
also increase risk to lenders or the taxpayer. The fi ve-year maturity balances these competing
considerations.
We will continue to monitor lending conditions broadly and consider adjustments to Main Street
terms and conditions, as appropriate, working with the Department of the Treasury which has made
an equity investment in a Special Purpose Vehicle (Main Street SPY) in connection with the
Program. The facility was established by the Federal Reserve under the authority of Section 13(3)
of the Federal Reserve Act, with approval of the Treasury Secretary.
14
Tenns Sheet, Secondary Marl<et Corporate Credit Facility. Federal Reserve (July 28. 2020), available at
https://ww1v.federalreserve.gov/newsevents/pressreleases/files/monetarv20200728a I .pelf.
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CONGRESSIONAL OVERSIGHT COMMISSION
August 7, 2020 Hearing: Examination of the Main Street Lending Program Established by the
Federal Reserve Pursuant to the CARES Act.
Question 9: Has the Federal Reserve analyzed whether Community Development Financing
Institutions (CDFI) are able to originate MSLF loans? Please explain whether the Federal
Reserve believes any changes to the MSLF would be needed to facilitate participation by
CD Fis that serve low-income and minority communities, and whether it believes such changes
warranted?
CDFis that are depository institutions are eligible lenders under Main Street. At this time, non bank
CD Fis are not considered eligible lenders for purposes of the Program. Some aspects of the
Program may limit participation by eligible CDFis, which often originate loans smaller than the
minimum Main Street loan or that emphasize underwriting criteria that differ from those used by
Main Street. The Federal Reserve will continue to analyze these issues. As emphasized in my
testimony and responses to questions at the hearing, adjustments to the Program, including a lower
minimum loan size, would provide benefits but also entail operational costs, and there may be more
efficient approaches to supporting CDFls and the communities they serve than adjustments to Main
Street.
Question 10: Has the Federal Reserve analyzed whether lowering the minimum loan size
further would facilitate participation by more businesses with unmet needs? Please explain
whether the Federal Reserve believes such changes warranted. To the extent the Federal
Reserve believes a lower loan size would present administrability issues given the capacity of
the Boston branch to oversee this complex program, has it considered creating another facility
administered by a branch other than Boston?
In order to manage the operational elements of the Program, we have maintained a minimum loan
size of$250,000. Allowing for smaller loans may increase the number of businesses that wish to
participate in the Program. However, managing intake and credit administration during the life of
the loan for many thousands of small loans would require significant additional operational capacity
on the part of lenders. In addition, the fixed costs for both borrowers and lenders of legal and
accounting fees and administration costs of originating and administering loans would be very high
as a percentage of the loan amount for smaller loans. The additional volume and the costs of
originating smaller loans could therefore reduce lenders' willingness to participate in the Program.
We will continue to monitor credit conditions for small businesses to determine if additional
adjustments to the Program are needed. 15 And the Federal Reserve will continue to assess the
optimal arrangements for administering programs, in the public interest.
Question 11: Has the Federal Reserve analyzed whether decoupling lender fees from loan size
could better incentivize lenders to identify and onboard smaller borrowers? Please explain
whether the Federal Reserve believes higher fees for smaller-size loans could better
incentivize lenders to originate loans.
To date. !here has been limited uptake for loans near !he Program's $250,000 minimum loan size.
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33
CONGRESSIONAL OVERSIGHT COMMISSION
August 7, 2020 Hearing: Examination of the Main Street Lending Program Established by the
Federal Resen,e Pursuant to the ('ARES Act.
The fee structure on each of the Main Street facility loan products is a fixed percentage of the
principal amount of the loan at the time of origination or upsizing. The fee is designed to cover
costs of undenvriting the loan and incentivize eligible lenders to participate in the Program.
Linking fees to loan size is also a standard industry practice. While higher fees for origination of
smaller loans may provide some incentives to lenders, higher fees would also place additional
burden on smaller borrowers. Changes of this type would need to be considered in terms of their
overall effect on Program operations and efficacy; in this regard, it may be useful to assess the
potential benefits and costs of such adjustments relative to adjustments to other government
programs to support lending to small businesses that have the experience and expertise to execute
such programs quickly and effectively.
As with other aspects of Main Street, we will continue to monitor the efficacy of the fee structure
and will make adjustments as necessary.
Question 12: Were the MSLF affiliation rules to be relaxed, what would prevent privateequity companies from transferring wealth out of the borrowing business to the private-equity
sponsor, and what kinds of restrictions would prevent such wealth transfers?
To determine eligibility for Main Street, a business must aggregate the employees and 2019
revenues of the business itself with those of the business's affiliated entities in accordance with the
affiliation test set forth in 13 CFR 121.301(f) (1/1/2019 ed) This affiliation test applies to private
equity-owned businesses in the same manner as any other business subject to outside ownership or
control. As a result, some businesses owned by private equity companies are not eligible to
participate in Main Street, or are otherwise constrained in the amount they can borrow due to
maximum loan size restrictions on borrowing by an affiliated group.
Should such restrictions be amended, and a greater share of businesses affiliated with private-equity
companies become eligible borrowers, restrictions on capital distributions and the repayment of
debt owed to private-sector lenders would limit the ability of such businesses to transfer funds to the
private-equity sponsor.
Question 13: Were the MSLF to be expanded to include an asset-based lending facility, how
would the Federal Reserve ensure that assets are appropriately appraised, particularly in
light of the significant uncertainty surrounding how COVID-19 will impact commercial
propriety values? Would the Federal Reserve be equipped to oversee aud euforce appraisals,
so that taxpayers are not on the hook if private parties' appraisals turn out to be overvalued?
Main Street currently focuses on cash flow-based lending, for which adjusted earnings before
interest, taxes, depreciation, and amortization (EBITDA) is a key underwriting metric used by
lenders in evaluating the credit risk of small and medium-sized businesses. The Federal Reserve
recognizes that, for some borrowers, collateral values or other factors are more indicative of the
ability to obtain credit than cash flows. Staff continue to monitor lending conditions broadly. If
credit conditions for collateral-based borrowing deteriorate or other factors indicate strains on
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CONGRESSIONAL OVERSIGHT COMMISSION
August 7, 2020 Hearing: Examination of the Main Street Lending Program Established by the
Federal Resen,e Pursuant to the CARES Act.
borrowers or lenders in these markets, the Federal Reserve would carefully evaluate whether its
authorities could support the availability of credit.
If conditions warrant adjusting Main Street in a manner that relied on collateral values as a
complement or replacement to the ratio of debt to adjusted EBITDA in determining maximum loan
size, the Program would need to have features to protect taxpayers against losses. Among these
features would be the amount of collateral required and how such collateral would be valued.
Analysis of these issues would be important before establishing such a loan option.
Question 14: Were the MSLF to be expanded to include an asset-based lending facility, would
the Federal Reserve be prepared to foreclose on assets if the borrower lacks the cash-flow to
make loan payments? How would the Federal Reserve administer foreclosures?
If conditions warranted adjusting Main Street in a manner that relied on collateral values as a
complement or replacement to the ratio of debt to adjusted EBITDA in determining maximum loan
size, the Program would need to have features to protect taxpayers against losses. Among these
features would be the process for recovering value from collateral in the event of default. Analysis
of these issues would be important before establishing such a loan option. 16
16
In connection with the existing Main Street facilities. the Federal Resc1ve has stated that, consistent with Section
l 3(3) of the Federal Reserve Act and the Federal Reserve ·s obligations under the CARES Act, the Main Street SPY
will make commercially reasonable decisions to protect l1xpaycrs from losses on Main Street loans and will not be
influenced by non-economic factors \vhcn exercising its rights, including with respect to a borrmver that is the subject
of a ,vorkout or restructuring.
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Mr. HILL. Well, thank you, Mr. President, for your testimony,
and I will recognize myself for 5 minutes of questions.
First, let me say that I was pleased to see the CFO confidence
survey from Duke University recently showing that business believes that they are doing better than maybe they thought they
would at this stage of business reopening and that market access
is improving. They are concerned mostly about obviously the demand for their products.
Also, I was encouraged yesterday that 1.8 million jobs were created and that the unemployment rate fell to 10 percent. We still
have a long way to go, and we are going to be talking about that
today as we still have over 10 million people eager to go back to
work.
And then in my home State of Arkansas, we had a very positive
week in the sense that tax revenues, particularly sales tax revenues, were actually over trend and set a record. Our income taxes
were 4 percent over forecast, and our sales taxes were 16 percent
over forecast and 15 percent over 2019. So, clearly, the economy is
reopening, and as Senator Toomey says, we have to keep that in
mind as we think through these Federal Reserve facilities and
what their best structure should be to accelerate that and get more
people back to work in this country.
I am concerned, Mr. Rosengren, about the affiliation rules. When
I looked at the Main Street term sheets, I am concerned about two
things. One, it took 3 months to get the program up and running,
and I would like you to address that first. And, secondly, it appears
to me in this middle market that these affiliation rules that the
Federal Reserve has adopted in the Main Street Program really are
a significant barrier to more entrepreneurial middle-size companies
that do not have access to PPP and do not have access to the public
markets to have access. And I wondered why the Fed, in your view,
adopted the SBA 7(a) type limitations on affiliation rules. Could
you handle those two for me, please?
Mr. ROSENGREN. Certainly. First, why don’t I address the question that you raised in your opening statement and have in this
question about why it took so long for this facility to get set up.
This facility is very different than some of the other traditional
kinds of facilities that central banks operate during a time of crisis.
So most of our facilities operate through markets. Market securities, you can purchase them very easily through the market. They
clear usually in a couple days, depending on the security. So it is
relatively easy to quickly purchase a large number of securities and
hold those securities over time.
This facility is facility we did not have during the financial crisis
and really tries to get to a different segment of the population,
which is those businesses that are bigger than the PPP program
was designed for and smaller than what the corporate facilities are
designed for.
Bank loans are inherently difficult because they are an agreement between a bank and a borrower. They take a long time for
banks to negotiate with the borrower, and this facility has a variety of complex elements including the requirements of the CARES
Act and the 13(3) requirements.
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So in order to design this program, we first had an initial term
sheet. There were very substantial revisions to that term sheet.
Again, we came out with another term sheet, which was then again
revised. And each of those times where we revised the term sheet,
we were expanding the ability of more businesses to access the facility.
So the types of changes that were made included lowering the
loan size, changing the repayment terms, and lowering the Fed
participation amount.
The final term sheet for the for-profit businesses started on June
8th. On June 15th, we had the lender registration, and on July 6th,
we had loan participation intake. I would highlight as part of this
process that it is a highly automated process. We have to do programming, so we needed the legal documents to be in order. We
needed the final term sheet to be completed, and we needed to be
able to do the programming and then check and make sure that
the programming worked as expected and met all the security
needs of this program.
So that does take some time. It did take time to start up. And
I think that gives you some idea of the complexity of the program
and why it took so longer.
Mr. HILL. Yes. Thank you for that. I think the key thing is if we
want to change the program, you do not anticipate it taking another 3 months to produce a different kind of Main Street term
sheet if that were necessary.
Mr. ROSENGREN. It would depend on what the nature of the term
sheet changes were. If the term sheet does not affect the underlying legal documents, it is much easier to implement. So there are
changes that have been made as we have had changes in the term
sheet. That is true for the nonprofit term sheet as well. Depending
on the nature of what the changes were would determine how long
it took us to actually get set up.
Mr. HILL. Thank you, sir, very much. I yield back and turn to
Commissioner Ramamurti for 5 minutes of questioning.
Mr. RAMAMURTI. Thank you, Mr. Chairman.
President Rosengren, you admit that the Main Street Program is
off to a slow start, but your testimony is that interest in the program will likely pick up if ‘‘the pandemic and the economy worsen.’’
But if you look at the data, Main Street companies are already
getting crushed. The latest middle-market indicator and economic
outlook survey of executives of mid-sized companies shows that, in
the second quarter, these companies experienced the largest decline
in employment in the survey’s history. They also had the biggest
drop-off in revenue in the survey’s history.
Other surveys like the U.S. Chamber of Commerce’s Middle Market Business Index show the same thing: massive layoffs and furloughs and widespread revenue declines.
So my question is: How much worse do things have to get before
companies are interested in the Main Street Lending Program?
Mr. ROSENGREN. Well, I think we actually have seen significant
pickup recently in the portal. Just as an example, there were $109
million in loans committed or settled as of last Tuesday, and 2 days
later we now have 29 loans and $189 million. So there is a pickup
in volume. It is particularly in the community and mid-sized banks.
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Similarly, we had $530 million in loans in the portal 2 days ago.
As of last night, that is $635 million.
And so I think this is early stages of this program, and the reason is because banks and borrowers have to negotiate the terms.
They had to know what the term sheet was. They had to understand the characteristics of the program and how the portal
worked. And so it takes some time for the banks and the borrowers
to get familiar with the program and to start pledging those loans
to the facility.
So in the first couple of weeks, the banks have not completed
that process, and the borrowers have not completed the process,
and there was not much volume. And we are slowly seeing an increase in volume over time that I would expect to continue.
So one of the challenges with trying to deal with bank loans as
opposed to securities is it does not happen quickly. If you talk to
large firms about a renegotiation of a line of credit, it can frequently take many, many months before they get the negotiation
completed.
So one of the advantages of a bank loan is that you are able to
tailor it to the needs of the borrower and the bank. There are conditions that a different bank may put on that same kind of loan,
and there are a lot of differences across both banks and borrowers
and what these loan agreements look like. So this is——
Mr. RAMAMURTI. Thank you, President Rosengren. In the interest
of time I will move on, and I will just note that even $530 million,
which you said is in the pipeline right now, that is still a tiny fraction of the total lending capacity that was created for this program.
Look, as I said in my opening remarks, I think this program has
been a failure, and the basic reason for that is that the Fed could
only offer loans. The data show that companies, even distressed
companies, are not looking for loans. Just this week, the Fed released a survey of senior loan officers finding that, in the second
quarter of 2020, demand for loans from companies of all sizes went
down. Similarly, the most recent National Federation of Independent Business Survey of small businesses found that only 3 percent of business owners reported that all their borrowing needs
were not satisfied. And in the testimony they submitted today, the
Bank Policy Institute, which represents some of the biggest banks
in the country, said they have seen ‘‘a lack of demand for Main
Street Program loans from their clients.’’
So, President Rosengren, if the Main Street Program can only
offer loans and it is clear that most small and mid-sized firms are
not looking for loans right now, even though they are already
struggling badly, then how is this program going to stop widespread business closures and job losses?
Mr. ROSENGREN. So this program is tailored to organizations that
will be helped by loans. So if you are a business that has had no
problem from the pandemic and have a pristine balance sheet, you
are probably going to get better financing than the Main Street
Program provides. If you are a business that is deeply troubled and
is in danger of closing imminently, this program is not going to
solve the problem because debt does not solve that kind of problem,
equity does.
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This program is designed for a business that had a disruption in
short-term credit, that was in good shape prior to the crisis, and
who, after the pandemic subsides, would be able to be a viable
business as well. There are businesses that fit those characteristics. We are seeing some of those businesses actually coming to the
facility. I am expecting over time that we will see more pickup.
Again, we are seeing some significant activity by some of the
community banks and mid-sized banks, particularly those located
in States like Florida, Texas, and places that have been badly impacted by the pandemic recently.
Mr. RAMAMURTI. Okay. Thank you, President Rosengren. Look, I
recognize that you and the Fed staff have done a lot of work on
this, but I think the issue is that the Fed is trying to solve a problem that does not exist and it is incapable of solving the problem
that does exist. By law, the Fed can only support loans, and more
loans are not the answer here for most companies. And this is a
giant hole in our economic response to the crisis. Congress helped
small businesses through the PPP. Congress helped large companies that are big enough to issue bonds by empowering the Fed to
purchase corporate bonds and reduce the cost of borrowing. But the
only thing that the Government has offered all these companies in
between is the Main Street Program, and it is just not working.
And these mid-sized companies employ 45 million people and represent a third of private-sector GDP.
So, look, I do not think continuing to tweak this program is going
to work. I think Congress needs to act to provide direct support to
mid-sized firms and for that money to come with real strings attached so the money benefits working people.
Thank you, Mr. Chairman.
Mr. HILL. The gentleman yields back. Thank you.
Congresswoman Shalala is recognized for 5 minutes.
Ms. SHALALA. Thank you. Let me follow up a little on that. Particular sectors like the hospitality industry have been very hard hit
by the virus, in my district in particular. And as has been noted,
only $109 million of the $600 billion has been injected into the
economy.
I want to know whether there is actually a design flaw, not the
issue that Bharat raised about whether we should have this program at all, but whether it is designed in a way which is another
way of getting at that. In particular, some have suggested the
terms of the program, such as the leverage ratio requirements and
the loans’ priority and security requirements, are better designed
to protect the Government from losses than the provide liquidity to
a broad range of small and mid-sized businesses.
Could you respond to that?
Mr. ROSENGREN. Yes. So this program is designed as a cash flow
program. So it is designed for a business that expects to be able
to pay off the debt and pay off the debt with the cash flow from
its normal business operations. So that first for many businesses.
It does not fit for all businesses.
For the smallest type of businesses, I agree that the PPP program is a much better program for them. It is more of a grant program than it is a debt program, and debt may not help them in
that situation.
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In terms of the underwriting standards, the debt-to-EBITDA
standard follows industry practice. So depending on which of the
facility parts, you either have a debt-to-EBITDA of 4 or a debt-toEBITDA of 6. Many fellows expect to have a debt-to-EBITDA below
that, and so I think that this program actually closely mirrors the
kind of coverage that NAB banks themselves are expecting when
they are looking for a loan to be bankable. So it is a combination
of an underwriting standard—there are not many underwriting
standards in this program. It is basically a debt-to-EBITDA and
the fact that the bank is willing to underwrite the loan themselves
and take a 5-percent stake.
Ms. SHALALA. The Federal Reserve recently reported that banks
were actually tightening their credit standards due to the uncertain economic outlook that has resulted from the pandemic. The
Fed allows banks to use these tighter credit standards in determining whether or not to make a loan under the Main Street Lending Program. If the goal is to get money out to needy borrowers,
doesn’t the policy of letting the banks use their tighter credit
standards undermine that goal?
Mr. ROSENGREN. So the challenge is that this is a lending program, and so loans have to be paid back. And we are asking banks
to voluntarily participate in the program, and we are asking banks
to be sure that when they underwrite the loan, it is a loan that is
to a business that has had their credit disrupted, but that over
time you expect it to be a thriving business. So that does not qualify all businesses. It qualifies a particular kind of business that is
appropriate for this program.
So business has been disrupted, and it is likely to be suffering.
That is not attractive for this program, and from the perspective
of the bank, they might not be willing to do that loan otherwise.
Let me just give a simple example: a movie theater. So if you are
a movie theater located in Miami and you have been closed in the
spring, you opened up temporarily, and now you may have to be
closed again because of the restrictions either imposed at the State
level or because people do not want to be in a movie theater at a
time of a pandemic.
The bank may be quite uncertain about when that loan would actually be paying because they do not know how long the pandemic
will occur; they do not know when there will be a vaccine or a
treatment and might not be willing to take that loan at this kind
of rate given that uncertainty.
So because they are providing 95 percent of the loan to the Federal Reserve, they might be willing to provide support to that
movie theater because the bulk of the risk is being taken by the
Federal Reserve. So this is a lending program. It is focused on, in
part, getting most of these loans paid. That is a requirement of the
13(3) procedures.
Ms. SHALALA. Ms. Anderson, who is here on behalf of the Bank
Policy Institute, suggested in her written testimony that if the Fed
wants banks to lend to borrowers who do not meet the bank’s current underwriting standards, which have tightened in response to
the economic uncertainty caused by the pandemic, the Fed must
modify the design of the program to provide downside credit risk
protection. In making this observation, she cites the negative treat-
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40
ment of these loans by regulators as disincentivizing banks to loosen their underwriting standards.
Has the Fed considered this issue?
Mr. ROSENGREN. Yeah, we have spent quite a bit of time thinking about the supervisory issues related to these loans. So the pandemic, like other natural disasters, if there was a hurricane that
hit Miami, we then use guidance to make clear that we want to
have a little more leeway given to those loans because of the nature of the crisis that occurred. The same thing has been done for
this pandemic. So we have asked our bank examiners to work with
bank management in the instances in which we are making a decision such as a Main Street loan where the borrower has been disrupted. The other regulators have agreed to this and are following
the same general guidelines. So I think that in the end the loan
has to have the same classification standards that a standard loan
does, but the regulators now are looking at loans a little bit differently and asking the banks to work with their borrowers.
Mr. HILL. Thank you.
Mr. ROSENGREN. And that is what they are doing for the pandemic. That is what we do during other natural crises.
Mr. HILL. Thank you, Doctor. The gentlewoman’s time has expired.
Senator Toomey.
Senator TOOMEY. Thanks, Mr. Chairman. Dr. Rosengren, thank
you for testifying today.
Let me just start by pointing out, you know, Government money
can never be a replacement for an economy, and we have spent
many hundreds of billions of dollars covering 8 weeks of payroll for
very small companies. This program was never designed to pick up
the tab for the payroll of the American workforce.
What it was designed to do, as I recall, was to provide emergency
liquidity in the hopes that it would keep viable companies alive so
that workers would have a place to go back to. Part of the reason
that we made unemployment benefits so much more generous than
they have ever been in the history of the country is because we
knew that it was inevitable that in a very, very severe, hopefully
brief recession, there would unavoidably be people laid off who had
no work to do because in some cases their companies were closed,
forbidden from working.
What I would like to understand—and this has come up, and
maybe this is just another way to think about this, but to what extent do you think that the loans that have been made so far
through this program are loans that would not have been made in
the absence of the program? In other words, is this designed in
such a way that the only loans that are going to take place are
loans that would have happened anyway, especially given the underwriting requirements on the banks and their required participation?
Mr. ROSENGREN. I mean, these loans have a different characteristic than the traditional bank loan, so it is not traditional
that you have no payment of principal or interest the first year and
no payment of principal the second year. That really is designed for
disrupted cash flow with the ability of the borrower over time to
actually be able to make payments.
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When we have talked to some of the banks that have been making the loans, they have told us that these are loans that more
than likely they would not have made in the absence of this program. The reason is because there is a great deal of uncertainty
right now.
Congresswoman Shalala highlighted the uncertainty and the survey of terms of lending that she cited. Uncertainty is very, very
high right now, and that is a situation where banks become more
reluctant to lend because they do not know what the condition of
the borrowers will be. So I do think that this plays an important
role in reducing the risk, and if the pandemic gets worse in the fall,
as at least some epidemiologists are saying, this program will probably be more extensively used.
I completely agree with your observation that a 13(3) facility
does not solve the pandemic problem. It is primarily a public
health problem. But we can certainly mitigate the costs of that
public health problem by trying to help those businesses that have
been disrupted, but were very good businesses prior to the pandemic and will be very good businesses after the pandemic.
Senator TOOMEY. And just a technical question about the fee
structure because it is a little confusing the way it appears in the
term sheets. When a bank makes a loan and 95 percent of it is
taken by the Fed, the fee structure that the bank keeps, certainly
they have the net interest income that they can earn on the 5 percent that they keep. The fee structure, which if it is 100 basis
points, which I think is contemplated in the term sheet, does the
bank keep 100 basis points on the 5 percent that it keeps and the
balance goes to—how does that fee structure work out?
Mr. ROSENGREN. It is on the total loan. This is an incentive for
the banks to participate in the program.
Senator TOOMEY. So the banks start off with 20 percent of their
credit exposure in fee income. Is that correct?
Mr. ROSENGREN. That is correct, but there are costs to doing the
underwriting of the loan.
Senator TOOMEY. Of course there are. But if you do a large—that
is extremely unusual, right? One of the—so that would appear on
the surface to be an inducement and encouragement and incentive
to take more risk. But the banks are institutionally not oriented towards lowering their standards because there is an outsized source
of revenue. Would there be other kinds of lending institutions, for
instance, BDCs that might be more inclined by their nature to be
able and willing to take more credit risk because they recognize
that coming out of the block with 20 percent of your credit risk in
fees covers a lot of risk?
Mr. ROSENGREN. There are other types of organizations that provide loans in the market other than banks. This program is designed for depository organizations. In part, we want to be able to
get this facility up and running quickly. In part, we have to make
sure that BSA, AML, and Know Your Customer kinds of conditions
are also met. So that is why this program has primarily been operated through the banking system.
Senator TOOMEY. Well, I see I am out of time, but I do want to
follow up on the possibility that this kind of risk-return structure
might be even better suited for other financial institutions. That is
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not to say that banks should not participate, but maybe we should
broaden the universe of institutions that are permitted to participate.
Thanks, Mr. Chairman.
Mr. HILL. Thank you, Senator Toomey. We are going to do a second round now with Dr. Rosengren, and I will start that with 5
minutes. And as I start my second round, I want to ask unanimous
consent to put two letters in the record: one from Senator Crapo
dated July 31st with comments about the Main Street Lending Facility, and also a letter dated August 4th from Senators Loeffler,
Cornyn, Braun, and Tillis on the Main Street. Not hearing any objection, those will be included in the record.
[The letters follow:]
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43
r4'
i
;JI A_meri~ans for
f"5J'II' F1nanc1al Reform
Education Fund
August 12, 2020
Chairman Jay Powell
Board of Governors of the Federal Reserve System
20 th St. and Constitution Ave. NW
Washington, DC 20551
ATTN: Staff of Main Street Lending Facilities
President Eric Rosengren
Federal Reserve Bank of Boston
600 Atlantic Avenue
Boston, MA 02210
Dear Chairman Powell and President Rosengren:
On behalf of the 17 undersigned organizations, we are writing concerning the application of the
affiliation rules governing eligibility for loans from the Main Street Lending Programs (MSLP),
which are only available due to the appropriation of public funds by Congress. These rules
determine whether Main Street loans are limited to mid-size businesses or will become
accessible to what are effectively much larger companies. We are particularly concerned about
the possibility that weakening affiliation rules could provide inappropriate access to Main Street
Lending Facilities for private equity owned companies, without requiring strict conditions to
protect public funds from being diverted from their public purpose by the private equity owner.
As it stands, a majority owner of a company that collectively employs over 15,000 employees is
ineligible for access to the Main Street Lending Program. For important public policy reasons,
which the Federal Reserve is well aware of, this affiliation requirement blocks access by larger
firms and should not include artificially un-affiliated portfolio firms of private equity companies.
While many businesses are struggling as a result of the pandemic, private equity backed
businesses are distinct in that their business model is based on extreme leverage, often pushing
the companies to operate on the very edge of bankruptcy to maximize the private equity owners'
short term profits. Moreover, private equity firms are generally based on a wealth-extraction
business model where the owners often divert funds from portfolio companies to the private
equity fund or general partners, through dividend payments or in the form of monitoring or other
fees charged to the company. Once diverted, such funds are not available for internal company
purposes. Importantly, they will also not be available to pay back the loan, as the private equity
firm is structured so the fund owners are bankruptcy remote from the portfolio companies.
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Weakening the affiliation rule and making it easier for private equity firms to benefit from these
programs - especially in the absence of strong conditions requiring worker retention, wage
protection, investment in worker safety, or other public priorities - puts public funds at risk of
supporting the private equity firms' partners while doing little if anything to preserve jobs or
Main Street businesses.
44
In previous letters and comments our organizations have supported strong job retention and
worker safety preconditions to any Federal Reserve assistance.1 We continue to support such
conditions and believe that they would achieve the public purpose of these programs while
greatly reducing the likelihood of exploitation and abuse. In the specific case of affiliation rules
and potential pri vate equity access to the MSLP, we make the following additional
recommendations:
•
Maintain strong affiliation rules so that large private equity companies with access to
capital markets financing (not to mention access to ample "dry powder" ) cannot take out
loans for their portfolio companies.
•
If private equity firms are allowed to access the public funds in the MSLP for their
portfolio companies, require that loan proceeds be kept in the portfolio companies by
banning dividends, monitoring fees, or any other form of transferring funds from the
portfolio firm to the parent fund , general partner, or any other business or indi vidual
directly or indirectly affiliated with the parent fund or general partner. While dividends
denominated as such are currently banned, other forms of transferring or draining value
are not but should be.
•
If private equity firms are allowed to access Main Street loans for portfolio companies,
the Federal Reserve must require that the private equity fund be jointly liable with the
portfolio firm for repaying the loan and for any other liability associated with the receipt
or use of the proceeds of the loan. In the absence of such requirements, any funds moved
from the portfolio company to the private equity parent will not be available to achieve
the public purpose of the loan or to repay the public.
It is also important to take additional steps to make sure that the affiliation rules are properly
enforced, including by ensuring that private equity owners do not use controlled shell companies
to evade the majority ownership requirement of the affiliation rules. Many private equity backed
companies which were not statutorily exempted from affiliation rules have been able to access
the PPP program _2
We urge you to maintain strong affiliation rules in order to continue to focus the MSLP on
genuine middle market companies, and, in the event that the Federal Reserve allows private
equity firms to access the public funds made available in the program, to take steps to eliminate
the ability of the parent fund to misuse or drain loan proceeds from the portfolio company and
avoid liability for paying back the loan. Finally, we urge you, again, to impose meaningful
conditions around retaining jobs, worker safety, or adequate protections against diversions to
executives for all companies, including those that are owned or controlled by private equity
firms. Thank you for your attention to these matters.
1
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"Letter to Congressional Leadership on Conditions for Covid-Related Assistance", available at
https://bit.ly/3 0OPK3V ; Americans for Financial Refonn Education Fund, " Comment Letter to the Federal Reserve
on April 9"' Facilities", available at https://bit.lv/3gMOJzg .
2
Louch, William, "Private Equity Firms Borrow from PPP Program, Despite Later Rules Barring Them", Wall
Street Journal, July 7, 2020. Available at https://on.wsj.com/3iDodJo
45
Sincerely,
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Action Center for Race and the Economy (ACRE)
AFL-CIO
American Economic Liberties Project
American Federation of State, County and Municipal Employees (AFSCME)
Americans for Financial Reform Education Fund
Better Markets
California Reinvestment Coalition
Center on Economic and Policy Research (CEPR)
Center for Popular Democracy (CPD)
Communications Workers of America
Consumer Federation of America
Private Equity Stakeholder Project
Project on Government Oversight (POGO)
Public Citizen
Strong Economy for All
Transform Finance
United for Respect
46
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COMMITTEE ON BANKING, HOUSING, AND
URBAN AFFAIRS
WASHINGTON, DC 20510-6075
July 31 , 2020
The Honorable Steven T. Mnuchin
Secretary
Department of the Treasury
1500 Pennsylvania Avenue NW
Washington, DC 20220
The Honorable Jerome H. Powell
Chairman
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Washington, DC 20551
Dear Secretary Mnuchin and Chairman Powell:
The Federal Reserve and Treasury Department recently announced that they would be extending various
13(3) emergency lending programs by three months, through December 31 , 2020, in order to "facilitate
planning by potential facility participants and provide certainty that the facilities will continue to be
available to help the economy recover. " There are also still funds available under section 4003(b)(4) of
the CARES Act intended for Federal Reserve 13(3) facilities and I encourage the Federal Reserve and
Treasury Department to quickly expand the Main Street Lending Program by setting up an asset-based
lending program and commercial real estate program.
•
Establishing a facility to accommodate asset-based lending could open access to critical resources for
several industries that could not otherwise access the MSLP based on earnings or cash flow metrics.
Such asset-based lending would be predicated on pledged collateral.
•
Addressing the unique circumstances faced by commercial real estate, including securitized
commercial mortgages, whether through access in the MSLP or a separate facility. Several options
have been circulated and shou ld be carefully considered in crafting the appropriate terms.
The Federal Reserve and Treasury have taken important steps to support the broader economy and I look
forward to working with you both to continue to expand the Main Street Lending Program.
Sincerely,
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Mike Crapo
Chairman
47
iinittd iStatts ~matt
WASHINGTON, DC 20510-1010
August 4, 2020
The Honorable Steven T. Mnuchin
Secretary of the Treasury
U.S . Department of the Treasury
1500 Pennsylvania Avenue NW
Washington, D.C . 20220
The Honorable Jerome H. Powell
Chairman
Board of Governors of the Federal Reserve
20th Street and Constitution Avenue NW
Washington, D.C . 20551
Dear Secretary Mnuchin and Chairman Powell:
Thank you for your leadership of the Board of Governors of the Federal Reserve System (Fed)
and the Department of the Treasury, and for the extraordinary, unprecedented steps you have
taken in just four months to provide critically needed assistance to the U.S economy. The
Primary and Secondary Market Corporate Credit Facilities have restored pre-COVID liquidity in
many asset classes, enabling larger companies with market access the ability to borrow capital to
bridge over economic impacts of the pandemic and support American working families .
Similarly, the Paycheck Protection Program has provided a lifeline to small businesses and
spared the loss of millions of American jobs.
The programs for medium sized employers, however, have proven to be more challenging. We
recognize that the Main Street Lending Program (MSLP), consisting of five credit facilities,
offers to serve borrowers across industries with diverse collateral ; no two borrowers' loans are
exactly alike, and the assets are far less fungible than large companies' corporate bonds. In our
view, the MSLP's success should be judged by the number of borrowers that are able to access
the program (i.e. , the take-up rate of the programs) and ultimately the number of jobs it saves.
Judging by these standards, the MSLP has had a slow start, with only a handful of our nation ' s
banks having signed up to be MSLP lenders and the issuance of only a few loans. In our
judgment, more support to our nation ' s employers is needed. The MSLP is an untapped resource
that has the potential to save thousands of jobs, but these could all be lost if businesses can't
access the credit they need at this moment in time. As companies look to set 2021 budgets for
hiring and capital expenditures, enhancements to the MSLP would give employers the certainty
they need to maintain workers, hire, and invest in the coming year.
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As Congress deliberates a new round ofCOVID-related relief, we encourage you to make full
use of the tools available to the Treasury and the Federal Reserve in the CARES Act. While it is
incumbent upon all ofus in government to be good stewards of taxpayer dollars, we believe that
48
the MSLP is far too restrictive to support employers and their employees through unprecedented
economic hardship. The Exchange Stabilization Fund (ESF) is designed to backstop and provide
stability in times of financial tmmoiL Restricting the MSLP only to companies that can obtain
financing outside of the program diminishes the usefulness of a program that Congress approved
in March.
Based on feedback to our offices, middle-market companies are being turned away for a variety
of reasons. Many banks seem disinterested in the program because they either wish to retain
more than five percent of a profitable loan or they have no interest in retaining any stake at all in
an unprofitable loan. Other banks are questioning the terms of the MSLP, such as the
requirement that a loan be 200% collateralized in the Main Street Priority Loan Facility
(MSPLF). And as a general matter, some are disinterested due to the complexities and reporting
requirements.
We deeply respect your leadership and tenacity in the development of the MSLP and all of the
recovery programs to stabilize our economy and workforce. But we also wish to convey-with
urgency-our expectation that your agencies will take swift action to utilize the Title IV CARES
Act credit support for small and medium sized employers. Below are views on how the program
could be amended to better serve borrowers in our states and across the nation to save millions of
American jobs.
•
Reduce the minimum loan amount for the MSELF and MSPLF. The barrier to entry for
small businesses is too great. We recommend lowering the minimum loan amount for
those facilities, as the present minimum of $250,000 is overly restrictive and prevents
small business access.
•
Increase the maximum debt-to-EBITDA leverage ratio that qualifies borrowers for loans.
While we continue to hear challenges faced by borrowers that currently qualify for a
MSLP loan but cannot seem to get one, we also receive daily feedback from businesses in
our state that do not qualify for the MSLP because of the leverage criteria. To be clear:
we support the use of the MSLP to provide "rescue capital" to our economy. Businesses
that were shut down by government orders and for which the MSLP is their only
potential source of credit should not be allowed to fail for the sake of an unnecessarily
restrictive CARES Act investment strategy. The MSLP should support cash flow-based
lending to businesses that have strong earning potential, especially as the pandemic
subsides, but which may not presently have any unencumbered collateral to offer;
second-lien loans should also be considered. Businesses that were likely to fail before
the shutdown should not be assisted, but businesses that were easily servicing their debt
before the pandemic are quintessentially those the MSLP should be serving.
•
Eliminate the 200% collateralization requirement in the MSPLF and increase the
maximum loan amount. This facility offers loans to new borrowers (i.e., those without an
existing facility with the lending bank) up to six-times 2019 EBITDA. Per the FAQs for
the program, however, the maximum advance rate on a secured loan is limited to 50%
because the program requires a 200% collateral coverage ratio. Many would-be
borrowers have collateral to offer as security for which normal advance rate would be
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2
49
much higher than 50%. A prudent policy would be to require lenders to use their normal
advance rates, which have been approved and continue to be monitored by their banking
regulators. Additionally, the maximum loan amount should be increased to $300 million,
setting it on par with the MSELF. Under current policy, if a borrower needs more than
the $50 million available in the MSPLF and its existing lender does not want to extend it
any new credit, the borrower cannot turn to another bank to seek a MSPLF loan.
Increasing the MSPLF maximum loan size will encourage competition-and thus better
terms-for borrowers.
•
Provide greater incentives for lenders to participate in the MSLP. Currently, the only
incentive for banks to participate appears to be in the Main Street Expanded Loan Facility
(MSELF), where a bank with temporarily impaired collateral can have the Fed provide
95% of new credit to rehabilitate the business and, with it, the prior loan. Balance sheet
support, which banks typically have no problem solving through syndication, seems to be
the only incentive in the other two facilities. We suggest that the most effective solution
is to eliminate the risk retention feature altogether and pay lenders a fee for originating
loans according to Fed-provided underwriting criteria (much like the PPP' slender-asdistributor model). Alternatively, place the Special Purpose Vehicle's (SPY) resources in
a first-loss position up to a certain percentage of credit loss rather than the current model
of sharing losses pari passu. A third option is to allow lenders to collect more than 5% of
the interest payable on the loan while retaining only 5% of the credit risk.
•
Permit borrowers ofMSLP loans to refinance debt within at least 12 months of the
maturity period, revising the present prohibition on refinancing debt until it comes within
90 days of the maturity date. Business will need maximum flexibility during this crisis,
and refinancing is a crucial tool in maintaining viability. Standard practice is to refinance
debt 12-18 months before maturity; refinancing debt on a short schedule could create
rollover risk and further imperil the financial health of businesses impacted by the
pandemic.
Below are just a few examples of specific companies we have heard from that would benefit
from the proposed changes outlined and better able to access capital to save jobs and invest in
our economy through the lending facility:
•
An oil and gas producer seeking a $130 million MSELF loan to maintain their employees
and restart planned 2020 drilling programs.
•
A fertilizer company seeking a $150 million MSELF loan to maintain and expand
operations to help America's farmers.
•
A COVlD and Genomaic Testing Company seeking a $30 million loan to increase testing
capacity to over a million tests per month and hire more workers.
In addition to these changes, we welcome your input on areas where the law may need to be
changed to better serve businesses and their employees in our states. For example, structure
MSLP loans at a lower interest rate than LIBOR+300 (note that the CARES Act envisioned a
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50
Main Street facility at L+200, but Congress is aware of the "penalty rate of interest" language of
the Federal Reserve Act). We welcome your constructive feedback on what changes, if any, may
be needed to federal law to make the MSLP more effective and keep more employees on the
job.
In closing, please be assured of our gratitude for your steady leadership during the COVID-19
pandemic. Our comments are offered in the hope that we can continue to have a constructive
and productive approach to meeting the needs of small and medium-sized companies and saving
millions of jobs in our states. lfyou have any questions, please do not hesitate to reach out to us
directly.
Sincerely,
!rtffE=
United States Senator
John Cornyn
United States Senator
Mike Braun
United States Senator
Thom Tillis
United States Senator
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51
Mr. HILL. Dr. Rosengren, you have talked about you limited to
depository institutions to get up and running quickly, and yet there
are only 150 banks or so listed on the Fed’s website thus far as registered lenders. And I cite that because in the emergency environment, right at the end of March and April, we were able to stand
up the PPP program over in the CARES Act, and 5,400 banks
swung into action in a patriotic way and in 7 days began distributing $520 billion and making 5 million PPP loans.
Granted, certainly the underwriting was very different. The mission was very different. I got that. But I am concerned about the
reluctance of banks to participate in the program. Arkansas has 86
banks and yet only two banks headquartered in my State that are
local banks have agreed to participate. So I really hope as we have
this hearing today we will talk more about that.
Let me turn and talk about the term sheet. As you have noted,
it is really a cash flow lending exercise based on a pre-tax, pre-depreciation, amortization multiple and implied leverage. In other
words, it looks like a very traditional bank loan.
Where is the higher risk component that was contemplated in
the CARES Act section that encourage help for particularly distressed sectors of the economy? Could you comment on that, Dr.
Rosengren?
Mr. ROSENGREN. So I think these loans already are going to be
risky. Doing lending in the middle of a pandemic, particularly if it
is a sector of the economy where social distancing is difficult, so
tourism, hotels, retail have all been badly affected by the pandemic. And some of those, as we have seen, there have been very
large bankruptcies of retailers, for example. So these loans are not
without risk, and I fully expect that some of the loans that we are
going to do over time will have a loss. So that is why we have a
Treasury backstop.
So I think this program has taken on a fair bit of risk. I think
that over time, as the portfolio grows, we are going to have some
significant losses. Hopefully that does not occur. Hopefully everybody is able to pay back the loan completely. But if the economy
does not do well, particularly if the pandemic worsens, it is quite
possible that we will experience significant losses.
Mr. HILL. Thank you——
Mr. ROSENGREN. So I expect that this program did focus on trying to get loans to fairly risky borrowers.
Mr. HILL. Thank you for that. But when you do look at the
terms, I mean, you really are—I agree, companies at the margin
are certainly middle-market companies that could not access the
public markets or were not eligible for PPP, many would qualify
here. But as I noted earlier, I think the affiliation rules make that
more difficult. And I think the very traditional lending profile that
is contained in this term sheet also could be a detriment to companies.
Let me give you an example, and this was talked about with Secretary Mnuchin and Chairman Powell at our meeting of a few
weeks ago, and that is, someone who does not have good EBITDA
in 2019, they certainly do not have it in 2020. But at the end of
the year in 2019, they had very good collateral valuation. They had
a low loan-to-cost potentially. They had a low loan-to-value poten-
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tially. They have room to lend, but they cannot meet the EBITDA
standards. And both Jay Powell and Steve Mnuchin said they were
‘‘interested in looking at a collateral-dependent or asset-based
loan.’’
Can you tell us what the status of that look is?
Mr. ROSENGREN. So the Main Street Program is a cash flow program. As a base financing——
Mr. HILL. But there are a lot of Main Street firms, Mr. President,
that do not have cash flow in 2019, but they are absolutely a small
middle-market type company. And so I know the Main Street term
sheet is currently a cash flow. I am asking, is there current discussion underway to expand a different Main Street Facility that
would be more of an asset-based loan rather than a cash flow loan?
Mr. ROSENGREN. I know there are discussions about asset-based
financing and some of the difficulties experienced, for example, in
commercial real estate. So there have been ongoing discussions
about this, but there is no term sheet that is imminent.
Mr. HILL. Thank you for that.
Also, startup companies, truly people in the startup space have
a disproportionate amount of costs. Are you looking at startups and
what they might need in the Main Street arena?
Mr. ROSENGREN. Many times startups need equity more than
they need debt, so I think frequently a true startup is going to find
other types of financing vehicles more attractive. This is more of
a program for established businesses that have experienced a disruption of cash flow.
Mr. HILL. Thank you, Mr. President.
Let me yield to my friend Mr. Ramamurti for 5 minutes.
Mr. RAMAMURTI. Thank you, Mr. Chairman.
In early April, the Fed announced the first version of the Main
Street Lending Program. That announcement described certain
basic features of the program like the maximum loan amount and
the rates and terms for loans.
A few weeks later, the Fed announced major changes to the program. Many of those changes lined up exactly with what members
of the oil and gas industry had requested. That did not appear to
be a coincidence. Shortly before the changes were announced,
President Trump publicly promised that oil and gas companies
would be taken care of. And then shortly after the changes were
announced, the Energy Secretary went on TV and bragged about
how he and Treasury Secretary Mnuchin had succeeded in getting
the Fed to make changes that the oil and gas industry wanted.
But when asked by reporters, a spokesperson for the Fed denied
that the Fed had made any adjustments out of consideration for
the oil and gas industry. Instead, the Fed said that the April
changes reflected the more than 2,000 public comments that the
Fed had received about the initial design of the program.
So, President Rosengren, as the Regional Fed President responsible for the Main Street Program, do you stand by the Fed’s earlier statement that certain adjustments were not made specifically
to help oil and gas companies?
Mr. ROSENGREN. I do. This is a broad-based program. It has been
a broad-based program from the start. 13(3) facilities require
broad-based kinds of terms, and so it is not targeted at specific
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firms or specific industries. 13(3) facilities are not available for that
kind of lending.
Mr. RAMAMURTI. Thank you. And, look, I want to focus specifically on the changes that were made to the facility in April. Let
us look at one of them. According to Reuters, in mid-April one of
the key changes the Energy Secretary and Treasury Secretary were
pushing for to help the oil and gas industry was increasing the
maximum loan amount to at least $200 million. A couple of weeks
later, when the Fed announced its changes to the Main Street Program, the maximum loan amount had gone up to exactly $200 million.
President Rosengren, out of the more than 2,000 public comments that were submitted to the Fed on the Main Street Program,
are you aware of a single one that requested increasing the maximum loan amount to $200 million?
Mr. ROSENGREN. We got many comments from both banks and
businesses that if the loan amount was larger, that it would be a
more attractive facility for them. Remember, a lot of this discussion
was occurring in March and April. The economic conditions and the
pandemic conditions were very different at that time, and there
was a lot of concern that some fairly large businesses would have
difficulty getting financing.
Fortunately, the pandemic subsided, at least for a couple months,
and as a result, many of those large borrowers that thought that
they were going to need the financing at least to date have not actually accessed the program. I would highlight—
Mr. RAMAMURTI. Thank you. Just in the interest of time, I want
to move on because, look, I reviewed each and every one of those
2,000-plus comments, and there was not a single one that requested specifically a $200 million maximum loan amount. The
only people making that request were the Energy Secretary and
the Treasury Secretary after meetings with the oil and gas industry.
Here is another change. The first version of the Main Street Program required companies to say in writing that they needed the
loan ‘‘due to the exigent circumstances presented by the COVID–
19 pandemic.’’ Advocates for the oil and gas industry pushed to
eliminate that requirement, presumably because many oil and gas
firms were struggling before COVID and could not satisfy the requirement. And, again, in the final version, the Fed eliminated that
requirement.
President Rosengren, again, out of the more than 2,000 public
comments that the Fed received, are you aware of a single one outside the oil and gas industry that requested that the Fed remove
this important requirement?
Mr. ROSENGREN. In the discussions I have been involved in, we
do not discuss specific industries. We discuss how we can provide
a broad-based financing scheme.
Mr. RAMAMURTI. Okay. I appreciate that. But, again, I reviewed
the public comments, and there was not a single one that requested
this change. Only the oil and gas lobby had requested it.
So I just want to ask one more time. Despite evidence that President Trump wanted oil and gas companies to get Federal relief,
that the Energy Secretary and the Treasury Secretary pushed the
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Fed for specific changes to accommodate the oil and gas industry,
and that the Fed made changes that the oil and gas industry requested but no other industry or group requested, is it still your
position that the Fed did not make certain changes to accommodate
the oil and gas industry?
Mr. ROSENGREN. It is my position that the focus has been a
broad-based lending program, not focused on any particular industry.
Mr. RAMAMURTI. Okay. Look, I think that, again, my focus is on
specifically the changes that were made, not the overall scope of
the program. And I think the evidence here is strong and deeply
concerning. This is just not how the Fed is supposed to operate.
The Fed is not supposed to be changing the rules of these programs
so that the President’s favorite companies can get access to billions
of dollars in public money. In fact, it is illegal for the Fed to structure these lending programs to help specific companies avoid bankruptcy.
I urge this Commission to further investigate this issue, including by requesting all communications on this topic between the Fed
and the Energy Secretary, the Treasury Secretary, and any representatives of the oil and gas industry.
Thank you, Mr. Chairman.
Mr. HILL. Thank you. The gentleman yields back.
Congresswoman Shalala is recognized for 5 minutes.
Ms. SHALALA. Thank you. My colleague is appropriately asking
why the loan is as big as it is. I am actually interested in why it
is not smaller.
Commentators have speculated the minimum loan amount of
$250,000 is too large and precludes participation by many small
and mid-sized businesses. I am aware that the Fed has already reduced the minimum loan amount down from $1 million to
$250,000, which may still be too high. For instance, the American
Bankers Association and the Marketplace Lending Association
have separately suggested that $50,000 may be a more appropriate
amount.
Has the Fed conducted studies on whether the $250,000 loan
minimum excludes parts of the market that this program is supposed to help? What changes can be made to make the program
more broadly acceptable and accessible?
Mr. ROSENGREN. So for many of those smaller businesses, the
PPP program was designed to target that segment of the industry.
The PPP program is much more attractive to a small business because it has the ability to be a grant. So this program was really
designed for businesses that did not qualify for the PPP program
and, nonetheless, might have a need for credit.
So if you look at the actual loans that are in our portal, just the
loans that are actually in the portal is $1 to $5 million. That is,
the type of loan that we are seeing is dental companies, construction companies, design companies, retailers. These are businesses
that frequently are going to have a $1 to $5 million loan, and it
is not surprising that that is what we are actually seeing.
Now, we have seen some loans that are much bigger. We have
seen some loans that are much smaller. But I would say that so
far has been where we have seen the bulk of the activity.
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Ms. SHALALA. So you are not considering going below $250,000?
Mr. ROSENGREN. I think there are probably other programs that
are better designed, so a real question is whether a cash flow lending program such as Main Street is appropriate for very small businesses and whether there might be better targeted tools that can
address that.
In particular, will more debt help that small business, or might
it push it towards bankruptcy and closure? So we want to make
sure that we provide debt to businesses that can use it and actually
pay it back. We do not want to give businesses so much debt that
they are not able to survive.
Ms. SHALALA. Thank you. Let me talk about the nonprofit organizations. A few weeks ago, you expanded the Main Street Lending
Program to nonprofit organizations. Although these facilities are
not yet live, I am concerned that the program requirements are too
rigorous and will preclude participation by many of the nonprofits
that need credit to survive the pandemic.
For example, the minimum loan size is $250,000, which may be
too large for many smaller organizations. Borrowers are also required to have at least 60 percent of their expenses covered by nondonation revenue, which can be very hard for many nonprofits to
achieve.
Can you talk about why the program was designed this way? I
am very familiar with nonprofits, and that 60-percent requirement
seems to me will block many nonprofits. I would appreciate hearing
about any analysis that the Fed has done regarding the nonprofit
interest and eligibility in the program. Have you considered changing any of the eligibility requirements? And, lastly, when do you
expect the program to be launched?
Mr. ROSENGREN. So in terms of the nonprofit term sheet, when
the first term sheet came out, we got extensive comments from a
wide variety of nonprofits and a wide variety of banks. Many banks
actually do not lend to nonprofits because it is a very different nature. Many of the large nonprofits—the University of Wisconsin,
which you used to be associated with, probably goes to debt markets rather than relying primarily on bank markets. That is true
for many hospitals as well.
So this is a market that has not been extensively tapped by
many banks, and I think it is a new market for many banks. I
think there is an opportunity for more nonprofits to be able to access bank financing through this program. We did make significant
adjustments in the term sheet. When we were thinking about the
term sheet and the adjustments we made between the first and the
second term sheet, we spent an extensive amount of outreach understanding how banks underwrote these loans and how rating
agencies underwrote these loans. These criteria broadly match
what many of the banks told us the criteria was that they used.
And between the first and second term sheet, we did relax it in response to the comment that it was being too restrictive.
In terms of when this facility is going to be up, we just got the
legal documents up. The term sheet is now finished. We are in the
process of doing the programming now. It is going to probably take
us another several weeks before it is up and running. But I would
highlight that now that the legal—bank loans do not get made
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quickly. So now that the legal documents are up and running, now
that the term sheet is widely available, banks can start the negotiation with nonprofits about what facility is available. They are
able to quickly submit it to the facility and get it funded.
So because of the long lags in making these kinds of agreements——
Mr. HILL. Thank you, Doctor.
Mr. ROSENGREN [continuing]. I think that this will be about the
time that if a bank was going to do a nonprofit loan, that we will
probably be up and running around the time that they complete
the agreement with the borrower.
Mr. HILL. Thank you, Dr. Rosengren. The gentlewoman’s time
has expired.
Senator Toomey.
Senator TOOMEY. Thanks, Mr. Chairman.
Dr. Rosengren, I would like just to have final clarity on this. Just
answer this, if you would. Is there any Main Street Lending Program that is available only to the oil and gas sector?
Mr. ROSENGREN. No.
Senator TOOMEY. And is there any program the terms of which
are suitable only to the oil and gas sector?
Mr. RAMAMURTI. No.
Senator TOOMEY. Thank you.
I want to underscore a point that Congressman Hill raised,
which is some real challenges with the affiliation rule, firms that,
when we were drafting this legislation, we did not think would be
automatically excluded from financing. I also want to underscore
his point about considering asset-based facilities. I think you are
very well aware there are some real challenges in the commercial
mortgage-backed security market right now. In particular, the
hotel subset of the commercial mortgage-backed sector is experiencing some real difficulties. And because they generally do not
qualify for the EBITDA criteria, there is no access to this. As you
know, the problem is exacerbated by the obligation of the servicers
to go on and make payments, you know, irrespective of the ability
of the borrower to do so.
So I would like to encourage you, as I have encouraged Secretary
Mnuchin and Chairman Powell, to consider whether there should
not be an asset-based category if there is an appropriate loan-tovalue, that maybe that is a criteria that we ought to consider. Do
you have any thoughts on whether we ought to stand up a facility
specifically designed—it would be designed generally for the broad
category of real estate, I think, and other categories that would be
more suitable for an asset-based lending than they are for an
EBITDA constraint?
Mr. RAMAMURTI. Yes, so an asset-based program would differ
from what we have for Main Street, so it would be a different facility if it was done through a facility. Most of that type of lending
has a much longer maturity than 5 years, so as you know, these
are 5-year loans with a balloon payment at the end of the 5 years.
That is probably not appropriate, for example, for retail or commercial real estate such as hotels.
So the nature of that program would be quite different. I know
there is work being done thinking about how asset-based can be
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addressed, including through the SBA. So I think there are a number of proposals that are being considered. I am certainly aware
that there are many concerns in the commercial real estate industry, and those concerns will get even worse if the pandemic gets
worse.
Senator TOOMEY. Okay. So I want to go back to that. On page
11 of your testimony, you indicated that you believe that should the
pandemic and the economic circumstances worsen, we might very
well see greater interest in the Main Street Lending Programs.
And I can certainly understand that leading to greater demand on
the corporate borrower side. But could you address why you believe
that that would not be offset by greater reluctance on the part of
banks to take on the exposure in that scenario in which the environment worsens?
Mr. ROSENGREN. So there are many borrowers who could take 2
or 3 months of disrupted cash flow, and if it was only 2 or 3
months, those may be bankable loans right now, and they might
be able to get a rate that is better than LIBOR plus 300 basis
points.
However, if we go through another 3 months so that in 1 year’s
time they have experienced 6 months of badly disrupted cash flow,
some of those loans that might have been attractive to get direct
financing from the bank through the standard bank-borrower relationship may no longer be possible, and the bank may only be willing to do it if the Federal Reserve takes the 95-percent stake that
is part of this Main Street Program.
So I agree with you that risk aversion by banks may increase if
the pandemic gets worse, and there already is very substantial uncertainty. But many borrowers that cannot get access from their
banks are going to be looking to the Main Street Program to provide that type of financing.
Senator TOOMEY. Thank you very much.
Thank you, Mr. Chairman.
Mr. HILL. The gentleman yields back. Thank you, Mr. Toomey.
And now we will hear from Ms. Anderson on our second—well,
first let me thank Dr. Rosengren from his testimony today. We very
much appreciate your written testimony and the interaction with
our Commissioners.
And now let us turn to our second panel. We are going to hear
from Ms. Anderson with the Bank Policy Institute first. Ms. Anderson, you are recognized for 5 minutes.
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STATEMENT OF LAUREN ANDERSON, SENIOR VICE PRESIDENT AND ASSOCIATE GENERAL COUNSEL, BANK POLICY
INSTITUTE
Ms. ANDERSON. Thank you. Members of the Commission, my
name is Lauren Anderson, and I am a senior vice president and associate general counsel at the Bank Policy Institute. I thank you
for the opportunity to be a witness at today’s hearing regarding the
Main Street Lending Program. BPI is a nonpartisan public policy,
research, and advocacy group, representing the Nation’s leading
banks. Our members employ nearly 2 million Americans, make 72
percent of all loans and nearly half of the Nation’s small business
loans. BPI strongly supports the efforts to date as well as ongoing
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58
efforts by Congress, the Treasury, and the Federal Reserve to tackle the COVID crisis and provide much needed relief to households
and businesses.
At the outset, it is worth noting how unique the Main Street Program is in relation to emergency lending programs established during the pandemic—or even in 2008 and 2009. It is not a loan forgiveness or grant program like the PPP, and it is not a market liquidity program for debt of investment grade borrowers. Main
Street requires credit underwriting decisions on a heterogeneous
set of individual nonbank borrowers, which is challenging and not
something the Federal Reserve has done before. With the expansion of Main Street to nonprofit organizations, which themselves
are very different across different sectors, the Federal Reserve ventured even further into unchartered territory. BPI, working with
commercial lending experts from our member banks, has been actively engaged in commenting on the program since the initial term
sheets were published in early April and through subsequent
iterations.
The focus of our comments has largely been on ensuring the
terms of the program are consistent with market practices and ensuring prudent risk management to safeguard taxpayer funds. We
commend the Federal Reserve for seeking public comment on the
terms of the program and engaging in an iterative process to try
to improve the end result.
We are very pleased that the program began accepting lender
registration in June and officially became operational on July 6.
Since then, lenders continue to register, and loans, albeit a small
amount, are being made. Many BPI member banks have registered
and are in the process of reviewing borrower inquiries. While the
limited number of loans made thus far has been a concern to some,
it must be assessed in the context of a larger commercial credit ecosystem.
First, for many small businesses, Main Street may not be the
right fit given the complexity of the program and the compliance
requirements. However, BPI member banks helped to provide over
1.6 million PPP loans totaling over $188 billion to help small businesses meet payroll needs.
Second, larger corporates retain access to capital markets, which
remain extremely active with the support of numerous Federal Reserve programs. Investment grade debt and corporate debt has
been issued at record levels, with U.S. companies raising over $1
trillion year to date.
Third, and perhaps most significantly, over the course of March
and April, both small and large businesses drew down on existing
credit lines. Between February 12 and April 1, bank loans increased by approximately $700 billion. Thus, the lack of demand
for Main Street loans likely indicates that many other eligible businesses are finding credit through other market channels.
A second reason why there is limited demand for Main Street,
the fact that the program not only requires borrowers to meet certain eligibility criteria, but also to satisfy bank underwriting standards. And if a borrower can meet bank underwriting standards, it
is not surprising that they are finding credit solutions through traditional market channels. Where the Main Street Program may be-
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come more useful is if banks become balance sheet constrained and
cannot lend the full amount needed by a creditworthy borrower. If
there were to occur, Main Street may provide the solution. But so
far bank balance sheets are robust in weathering the crisis. If,
however, Congress, the Treasury, or the Federal Reserve desires to
provide further relief to small and mid-sized businesses experiencing acute stress due to the pandemic, including less creditworthy borrowers who would not currently pass bank underwriting
standards, the design of the program would need to be modified.
At the moment the program is not designed to provide loans to less
than creditworthy borrowers. If banks are to provide loans to borrowers who cannot meet current bank underwriting standards, the
Government would need to provide downside credit risk protection
that would allow Main Street loans to be considered lower risk.
I thank you again for the opportunity to be a witness for the
Commission, and I look forward to answering your questions.
Thank you very much.
[The prepared statement of Ms. Anderson follows:]
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Lauren Anderson, Senior Vice President and Associate General Counsel, The Bank Policy Institute
Testimony before the Congressional Oversight Commission
"Hearing to Examine the Main Street Lending Program"
August 7, 2020
Members of the Commission, my name is Lauren Anderson and I am a Senior Vice President and
Associate General Counsel at the Bank Policy Institute (BPI). I thank you for the opportunity to be a
witness at today's hearing regarding the Main Street Lending Program (MSLP). BPI is a nonpartisan
public policy, research and advocacy group, representing the nation's leading banks. Our members
include universal banks, regional banks and the major foreign banks doing business in the United States.
Collectively, they employ nearly 2 million Americans, make 72% of all loans and nearly half of the
nation's small business loans and serve as an engine for financial innovation and economic growth. BPI
strongly supports the efforts to date by Congress, the Treasury and the Federal Reserve to tackle the
COVID crisis and provide much needed relief to households and businesses.
On March 23, 2020, the Federal Reserve announced that it wou ld be establishing a Main Street
Business Lending Program;' and, as part of Title IV of the CARES Act, Congress shortly thereafter
provided $454 billion to be used to support loan and loan guarantees provided by Federal Reserve
lending facilities, including the MSLP. On April 9, 2020, the Federal Reserve announced the first
iteration of the term sheets for the MSLP and indicated that it would be able to purchase up to $600
billion in loans supported by $75 billion in equity provided by Treasury through the Exchange
Stabilization Fund (ESF). 2 Last week, the Federal Reserve announced that it would be extending the
scheduled expiration of its emergency lending programs, including the MSLP, from September 30
through the end of the year. 3 BPI, working with commercial lending experts from its member banks, has
been actively engaged in commenting on the MSLP since these initial term sheets were published in
early April and through subsequent iterations, including the newly added facilities related to nonprofit
organizations.
At the outset, it is worth noting how unique the MSLP is in relation to emergency lending
programs established during the pandemic--and even in relation to emergency programs established
during the financial crisis in 2008 and 2009. This program is not a loan forgiveness or grant program like
the Paycheck Protection Program, and it is not a market liquidity program for debt of investment grade
borrowers. The MSLP requires credit underwriting decisions on a heterogeneous set of individual nonbank borrowers, which is challenging and not something the Federal Reserve has done before. With the
expansion of the MSLP to nonprofit organizations, which themselves are very different across different
sectors, the Federal Reserve ventured even further into unchartered territory. Given the complexity of
the task and the need to complete it as soon as possible, it was entirely sensible for the Federal Reserve
1
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See "Federal Reserve announces extensive new measures to support the economy," (March 23, 2020); available
at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm
2
See "Federal Reserve takes additional actions to provide up to $2.3 trillion in loans to support the economy,"
(April 9, 2020); available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm
3
See "Federa l Reserve Board announces an extension through December 31 of its lending facilities that were
scheduled to expire on or around September 30," (July 28, 2020); available at
https:J/www.federalreserve.gov/newsevents/pressreleases/monetary20200728a.htm
61
to leverage the expertise of banks in making lending decisions and to seek comment from lenders to
establish the terms of the program.
The focus of BP l's comments to date has largely been on ensuring the terms of the program are
consistent with market practices, so the program can quickly achieve the broadest participation
possible, and ensuring prudent risk management to safeguard taxpayer funds. We commend the
Federal Reserve for seeking public comment on the terms of the program and engaging in an iterative
process to try to improve the end result. For example, we welcomed the adjustments to the original
term sheets with regard to the definition of EBITDA, the move from SOFR to LIBOR and the more recent
adjustments to lengthen loan tenure from 4 to 5 years and allow for co-borrowers.
We are very pleased that the program began accepting lender registration in June 4 and officially
became operational for business lending and to purchase participations in eligible loans on July 6. s
Since then, lenders continue to register and loans, albeit a small amount, are being made. According to
testimony from Federal Reserve Chairman Powell in front of the House Financial Services Committee at
the end of June, over 300 lenders had begun the process of registering 6 • A number of BPI member
banks have registered; and 11 BPI members have indicated that they will be accepting applications from
new customers. ' As of July 29, the Federal Reserve had purchased $82 million in participations of Main
Street Loans . 8
The limited number of loans made thus far under the MSLP can best be understood by
recognizing its place in a larger commercial credit ecosystem. First, many smaller businesses that
received PPP loans, and eventually grants, did not require MSLP loans in addition. BPI member banks
for instance helped provide over 1.6 million PPP loans totaling over $188 billion to help small businesses
meet payroll needs. 9 Second, the largest businesses retain access to capital markets, which remain
extremely active with the support of numerous Federal Reserve programs. Investment grade and
corporate debt has been issued at record levels, with U.S. companies raising over $1 trillion year to date.
Third, and perhaps most significantly, as the severity of the health crisis became evident in the first
quarter, both small and large businesses prudently accessed credit from their banks to ensure liquidity.
Between February 12, 2020 and April 1, bank loans increased approximately $700 billion, in large part
because banks were funding draws on lines of credit as large and small businesses sought to stockpile
4
See "Federal Reserve's Main Street Lending Program opens for lender registration," (June 15, 2020); available at
https://www.bostonfed.org/news-and-events/press-releases/2020/federal-reserves-main-street-lending-program-
opens-for-lender-registration.aspx
5
See "Boston Fed announces Main Street Lending Program is fully operational," (July 6, 2020); available at
(https://www.bostonfed.org/news-and-events/press-releases/2020/boston-fed-announces-main-street-1endingprogram-is-fully-operationa1.aspx
See Testimony of Chairman Jay Powell before the House Financial Services Committee "Oversight of the Treasury
Department's and Federal Reserve's Pandemic Response," (June 30, 2020); available at
https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=406688
7
Information retrieved on August 4, 2020 from https://www.bostonfed.org/supervision-andregulation/supervision/special-facilities/main -street-lending-program/information-for-borrowers.aspx#map
8
Information retrieved on August 4, 2020 from https://www.federalreserve.gov/releases/h41/current/h41.htm
9
See "Paycheck Protection Program (PPP) Report," (July 31, 2020); available at
https://home.treasury.gov/system/files/136/SBA-Paycheck-Protection-Program-Loan-Report-Round2.pdf
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62
cash. 10 Thus, a lack of demand for MSLP loans likely indicates that most businesses are finding credit
through other market channels.
Given the fact that the MSLP requires borrowers to not only meet certain eligibility criteria, but
also to satisfy bank underwriting standards, it is not surprising that creditworthy borrowers are finding
solutions through normal market channels: borrowers generally prefer to avoid the stigma of
government assistance if private sector funding is available, and lenders have incentives to continue
serving creditworthy borrowers. Where the MSLP may be more useful is where a bank is balance sheet
constrained and cannot lend the full amount needed by a creditworthy borrower. In this instance, an
MSLP loan may be attractive to both a borrower and a lender as the MSLP SPV will buy 95% of the loan
through the participation structure. However, as demonstrated by the Federal Reserve's recent stress
test in which nearly all banks were projected to remain well capitalized even in a severe further
downturn, banks currently have plenty of capital to support their lending. In this regard, we believe the
MSLP may be of greater utility if the economic downturn worsens and banks come under greater
pressure.
If, however, Congress desires to provide further relief to small and midsize businesses
experiencing acute stress due to the pandemic, including less creditworthy borrowers who would not
currently pass bank underwriting standards, the design of the program would need to be modified.
MSLP loans originated as "non-pass" credits would be classified by bank examiners and treated as
workouts; non-pass credits would also likely trigger examiner criticism, higher capital charges, and other
regulatory constraints. Furthermore, the additional leverage created by an MSLP loan might cause a
downgrade of an existing bank credit. So, even a 5 percent participation in an MSLP loan to a borrower
that is anything but creditworthy carries significant disincentives for a bank to participate. To avoid this
outcome, the government would need to provide downside credit risk protection that would allow the
MSLP loan, and existing credit, to be considered lower risk.
I thank you again for the opportunity to be a witness for the Commission and I look forward to
answering your questions.
10
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Recent regulatory reports and banks' earnings reports indicate that many of the recent draws on credit lines
have been repaid.
63
BANK POLICY INSTITUTE
August 31, 2020
Via Electronic Mail
Commissioner Ramamurti
Congressional Oversight Commission
Re:
Follow-up Question from Hearing on August 7, 2020 Examination of the Main Street
Lending Program Established by the Federal Reserve Pursuant to the CARES Act
Dear Commissioner Ramamurti:
The Bank Policy Institute appreciated the opportunity to be a witness before the Commission on
August 7, 2020 and we thank you for your follow-up question and continued engagement regarding the
Main Street Lending Program (MSLP). With regard to your specific question, please find our response
below.
I.
Do lenders collect demographic data on borrowers in the absence of federal program
mandate to collect and report such data? If not, will BPI commit to working with its members
to collect such demographic data for MSLP loans?
BPI is not specifically aware of BPI member banks collecting demographic data on MSLP applicants or
MSLP borrowers who ultimately receive funds under the Program.
Given BPI member banks repre sent less than 10% of registered lenders it may be more appropriate for
such data to be systematically collected by the Federal Reserve Bank of Boston to get a more accurate
picture of loan distribution across demographics. BPI member banks would of course be willing to work
with the Federal Reserve Bank of Boston to determine how best to capture such data through the portal
process.
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Alongside working with the Federal Reserve Board, the Federal Reserve Bank of Boston and the Treasury
to ensure the MSLP is reaching LMI communities and minority-owned businesses, BPI banks are very
committed to serving such communities and businesses. For example, about four-in-ten PPP loans
originated by large banks went to businesses in low- to moderate-income or predominantly minority
64
Congressional Oversight Commission
-2-
August 31, 2020
areas, according to a recent BPI survey of its largest member banks. 1 Additionally, BPI members are
partnering with Community Development Financial Institutions and Minority Depository Institutions to
better support financial inclusion and minority entrepreneurship and success. As a result, BPI is
supportive of efforts in Congress to expand investments in CDFls and MDls, including legislation that
would provide long term equity to these institutions to deliver further support to underserved
borrowers and borrowers in minority communities.
**
***
Bank Policy Institute appreciates the opportunity to engage with the Commission. If you have
any questions, please contact the undersigned by phone at 202-737-3536 or by email at
Lauren.Anderson@bpi.com.
Respectfully submitted,
Lauren Anderson
Senior Vice President and Associate General Counsel
Bonk Policy Institute
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1
See "Large Banks Are Serving the Credit Needs of Small Businesses in Low- and Moderate-Income and Minority
Conununities Through the Paycheck Protection Program," (June 22, 2020); available at https://bpi.com/pressreleases/large-banks-are-serving-the-<:redit-needs-of-small-businesses-in-low-and-moderate-income-and-minoritvcommunities-through-the-paycheck-protection-pro gram/
65
Mr. HILL. Thank you, Ms. Anderson. We appreciate your testimony.
We will now turn to Mr. Bohn. You are recognized for 5 minutes.
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STATEMENT OF THOMAS BOHN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, ASSOCIATION FOR CORPORATE GROWTH
Mr. BOHN. Well, thank you. Good morning, and thank you for the
invitation to speak today.
Congressman Hill, Commissioner Ramamurti, Congresswoman
Shalala, and Senator Toomey, I appreciate the gravity of the responsibility before you, admire your willingness, and respect your
commitment to ensure that Federal relief programs enacted
through the Coronavirus Aid, Relief, and Economic Security Act
are both accessible and effective.
I am here this morning to provide testimony from the perspective
of middle-market borrowers to help answer the question that you
all are asking of who the Main Street Lending program is helping.
Regrettably, I have no answer to offer you. We could neither borrow from the program nor find someone in our membership who
has received a loan through it.
To help illustrate the current obstacles to securing loans through
MSLP, I would like to share some comments from our members
who completed a survey administered in recent days. I will not
read all of them. These are their words, not mine:
The program is moving too slowly, whereas COVID–19 dramatically and quickly caused an impact.
We actively solicited a MSLP loan for a Minority Business Enterprise, a company whose performance is only 10 to 15 percent lower
during the pandemic as it was beforehand. We approached 15 lenders. Not one was interested.
If the MSLP applies to the lower middle market, it is news to
me. If it does, please send guidelines.
We were excited about the program initially and had two companies that would be perfect for the program, but the banks will not
do it.
We had plenty more comments that address the challenges faced
by both borrowers and lenders which I am happy to provide the
Commission for its review and reporting purposes.
As the CEO and president of the Association for Corporate
Growth, ACG, I come before you today as an employer and the
leader of an association that represents a vitally important segment of the economy which employed some 45 million Americans
prior to the pandemic. Founded in 1954, ACG’s 15,000 members operate, advise, and grow approximately 200,000 middle-market companies.
As a networking organization which hosted more than 1,100 live
events annually, ACG, like many other associations, was devastated by COVID. I lead a staff of nearly 30 people based out of
Chicago, or now all over the country, as well as oversee operations
in 60 chapters, primarily in North America. When the Paycheck
Protection Program was announced, a grant through it would have
served as an $800,000 lifeline for my Chicago team and staff members dispersed throughout the country. However, as a 501(c)(6), we
too were ineligible.
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Consequently, we made more than $600,000 in salary cuts—currently forecasted to continue through December and beyond. Since
March, every conversation with our members finds them in the
same position—with their employees at the forefront of their operations, they managed cash flow, tried to prevent layoffs, and
worked diligently to retain employees and not lose institutional
knowledge.
When PPP was closed to us, like many other associations and a
large percentage of our member companies, we looked in earnest at
the Main Street Lending Program. A loan would allow us to invest
in the digital enhancements to our infrastructure that would ensure we could continue to deliver strong member value and the necessary tools for business development in this new virtual world.
But there, too, we found another closed door, as did our members. Perhaps naively, we thought the Main Street Lending Program would be accessible to organizations and companies excluded
from the PPP. Suffice to say it has not been accessed by many. In
your recent report, you talked about the Goldman Sachs estimating
that some 45 million Americans or 40 percent of private-sector are
employed by companies who are eligible for MSLP, yet very few
had purchased a loan. Further, Chairman Powell recognized the
challenges with the small and medium-sized businesses for which
MSLP is intended. It is new territory for the Federal Reserve and
very complex because these businesses are a ‘‘broad and heterogeneous class of borrowers’’’ with diverse needs.
In our opinion, the challenges with the Main Street Lending Program are twofold and equate to awareness and access.
Our recent survey found 22 percent of the respondents completely unaware of MSLP. And of the respondents who want to
apply for the loans through the program, 81 percent were unable.
When asked what changes could help, they suggested the removal
or the overhaul of the following items, which some of you have
talked about today:
Removal of adherence to the SBA affiliate definition. We talked
about the EBITDA/leverage size based test which excludes many
companies, particularly those early in their life cycle and familyowned businesses; distribution dividends restrictions for 1 year
after loan payoff; employee compensation restrictions for 1 year
after loan payoff; decreasing the minimum loan size.
Look, creating a greater awareness of the MSLP and increasing
accessibility should result in a groundswell of applicants. We believe that. The effect should help companies retain jobs and maintain operations, and consequently preserve health care insurance
for millions of Americans in this increasingly unpredictable economy tethered to COVID 19.
We stand to support you in any way you need and hope to answer any questions you may have today. Thank you.
[The prepared statement of Mr. Bohn follows:]
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ACG®
Association for Corporate Growth
August 7, 2020 Testimony before the CARES Congressional Oversight Commission
Thomas Bohn, President and CEO
Association for Corporate Growth
125 S. Wacker, Suite 3100
Chicago, IL 60606
Good morning.
Thank you for the invitation to speak to you today.
Congressman Hill, Commissioner Ramamurti, Congresswoman Sha la la and Senator
Toomey, 1appreciate the gravity of the responsibility before you, admire your willingness
and respect your commitment to ensure that federal relief programs enacted through the
Coronavirus Aid, Relief, and Economic Security Act are both accessib le and effective.
1am here this morning to provide testimony from the perspective of a borrower. To
answer the question of who the Main Street Lending program is helping? 1have no answer
to offer you. Regrettably, I could neither borrow from the program nor find someone who
has received a loan through it.
To help illustrate the current obstacles to securing loans through the Main Street Lending
Program, I'd like to share comments from our members who completed a survey
administered in recent days. These are their words:
•
•
•
•
•
The program is moving too slowly, whereas COVID -1 9 dramatically and
quickly caused impact.
The government created afire hydrant to get money flowing into the economy.
Commercial banks are tepidly attaching garden hoses to the fire hydrants.
We actively solicited a MSLP loan for a Minority Business Enterprise, a
company whose performance is only 10-15% lower during the pandemic as it
was beforehand. We approached 15 lenders. Not one was in terested.
If the MSLP applies to the lower middle market, it is news to me. /fit does,
please send guidelines.
We were excited about the program initially and had two companies that
would be perfect for the program, but the banks won't do it.
We have talked with 12 national and regional banks who are approved MSLP
lenders but do not want to provide credit to any of our companies under the
program due to the construct and underwriting risks of the program.
Banks are holding back applications using their own very restrictive criteria.
Availability must be able to address firms who are distressed due to COVID.
1have plenty more comments that address the challenges faced by both borrowers and
lenders, which 1am happy to provide to the commission for its review and reporting
purposes.
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125 S. WACKER DR.
68
Bohn testimony to CARES Congressional Oversight Commission
As the CEO and President of the Association for Corporate Growth (ACG), I come before
you today as an employer and the leader of an association that represents a vitally
important segment of the economy which employed some 45 million Americans prior to
the pandemic. Founded in 1954, ACG's 15,000 members operate, advise, and grow
200,000 middle market companies.
As a networking organization which hosted more than 1,100 live events annually, ACG,
like many other associations was devastated by COVID. I lead a staff of 23 people based
out of Chicago, as well as oversee operations in 60 chapters, primarily in North America.
When the Paycheck Protection was announced, a grant through it would have served as an
$800,000 lifeline for my Chicago team and staff members dispersed throughout the
country.
However, as a 501c6, we were ineligible.
Consequently, we made more than $600,000 salary cuts - currently forecasted to continue
through December. Since March, every conversation with our members finds them in the
same position - with their employees at the forefront of their operations, they managed
cash flow, tried to prevent layoffs, and worked diligently to retain employees and not lose
irreplaceable institutional knowledge.
When PPP was closed to us, like many other associations and a large percentage of our
members ' companies, we looked in earnest at the Main Street Lending Program . A loan
would allow us to invest in the digital enhancements to our infrastructure that would
ensure we continue to deliver strong member value, and the necessary tools for business
development in a virtual world.
But there, we found another door closed. Sadly, our experience greatly mirrored ACG's
members.
Perhaps, naively we thought the Main Street Lending Program would be accessible to
organizations and companies excluded from the PPP? Suffice to say it hasn't been accessed
by many. In your most recent report, 1 Goldman Sachs estimated that some 45 million
Americans, or 40% of private sector workers are employed by a company eligible for the
MSLP, yet, a single $12 million loan had been purchased. Further, Chairman Powell
recognized the challenges with the small and medium-sized businesses for which MSLP is
intended; it is new territory for the Federal Reserve and very complex because these
businesses are a "broad and heterogeneous class of borrowers" with diverse needs.
In our opinion, the challenges with the Main Street Lending Program are two-fold and
equate to awareness and access.
1
The Third Report of the Congressional Oversight Commission, https:/fcoc.senate.gov/sites/default/files/202008/20200720 Congressional Oversight Commission 3rd Report.pdf
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69
Bohn testimony to CARES Congressional Oversight Commission
Our recent survey found 22 percent of respondents unaware of the Main Street Lending
program. And, of the respondents who want to apply for loans through the program, 81 %
were unable. Our survey respondents, close to this issue, suggest the removal of the
following requirements, to increase eligibility and accessibility:
•
•
•
•
•
Adherence to the SBA affiliate definition for various tests and restrictions (such as
the employee and revenue-based tests including all affiliates, the maximum loan
amount applies for all participating affiliates, EBITDA/ leverage size based tests
pull in all non-participating affiliates, usage of only one type of MSLP facility for all
participating affiliates, having the compensation restrictions apply to all nonparticipating affiliates, etc.),
The EBIDTA/ leverage size-based test which excludes many companies early in
their life cycle
Distributions/ dividends restrictions for one year after loan payoff (especially as it
applies to structuring an exit)
Employee compensation restrictions for one year after loan payoff
Decrease the minimum loan size
Additionally, streamline the diligence and loan underwriting process and ongoing
reporting requirements and offer an asset-based loan option.
Creating greater awareness of the Main Street Lending program and increasing
accessibility should result in a groundswell of applicants. The effect should help
companies retain jobs and maintain operations, and consequently preserve the health care
insurance for millions of Americans in this increasingly unpredictable economy tethered
to the crises created by COVID-19. The Commission should recommend the Federal
Reserve tailor the current program to reflect the "diverse needs" of this "broad and
heterogeneous class of borrowers" and increase eligibility, especially among our lower
middle market and smaller companies, and minority owned business, all of which may not
have existing relationships with large commercial banks.
I appreciate the opportunity to speak on behalf of the 200,000 companies that operate in
the middle market. ACG, and plenty of other business associations, are poised to support
greater awareness of the program and means to increase accessibility. I'm happy to
answer any questions.
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70
Mr. HILL. Thank you, Mr. Bohn.
And now we will hear from Mr. Foster. You are recognized for
5 minutes.
Mr. FOSTER. Okay. Can you hear me.
Mr. HILL. We can.
Mr. FOSTER. Great.
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STATEMENT OF VINCENT D. FOSTER, EXECUTIVE CHAIRMAN,
MAIN STREET CAPITAL CORPORATION
Mr. FOSTER. Members of the Commission, thank you for inviting
me today to testify on the state of the Federal Reserve’s Main
Street Lending Program. I am Vince Foster, executive chairman of
Main Street Capital. Main Street Capital is an active member of
the Small Business Investor Alliance in Washington. We provide
long-term debt and equity financing to lower middle-market U.S.
businesses. We currently have investments in 68 lower middle-market businesses in 26 States, in which our average ownership is 36
percent. These businesses on average each have roughly 200 employees.
The Main Street Lending Program, while enacted to assist businesses like our portfolio companies weather the economic storm
brought on by the pandemic, is not responsive to their needs as
currently structured. The principal structural problems are:
Number one, requiring lenders to undertake full credit underwriting for small to mid-sized borrowers seeking 3.5 percent, four
to six times EBITDA loans results in a risk/reward mismatch.
Lenders are better off expending their time and capital underwriting conventional loans.
Number two, requiring 15 percent amortization in year 3 of the
loans is a non-market and very onerous provision, effectively requiring the loans to be refinanced after 2 years.
Number three, prohibiting contractual subordination (in the case
of the new loan facility) and requiring (in the case of the priority
loan facility) senior or pari passu priority to existing debt is problematic in that most companies will have preexisting senior debt
outstanding, the terms of which will have to be renegotiated.
Number four, testing the maximum number of employees and
revenue utilizing the affiliation rules contained in the Small Business Administration regulations applicable to 7(a) loans, without
the exceptions including the PPP program, dramatically reduces
the number of companies eligible for the Main Street Lending Program.
The lending facilities as currently structured are unattractive to
those borrowers that are reasonably creditworthy as less restrictive
financing is likely to be available from conventional sources. Yet
the facilities remain unavailable due to lender reluctance to accept
balance sheet exposure with respect to less creditworthy borrowers.
The following structural changes would make the program more
attractive to both lenders and borrowers to advance Congress’ objectives:
Number one, the loans should be unsecured and subject to preexisting contractual subordination and rank junior in priority to
other preexisting senior debt.
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Number two, the loans should have a term of 7 years, generally
sufficient to allow them to mature after the maturity dates of preexisting debt. Amortization should not begin until the end of year
4.
Number three, the multiples of 2019 adjusted EBITDA should be
increased from 4 times in the new loan facility and 6 times in the
priority facility to 6 times and 7 1/2 times, respectively. There
should also be elective asset-based criteria (such as a percentage of
loan-to-value and/or a 1.2 times minimum debt service coverage
ratio) instead of using solely leverage multiples for all industries.
Number four, experienced nonbank lenders should be permitted
to participate as eligible lenders (similar to the PPP program); the
loans should have an interest rate of LIBOR plus 400 rather than
300 basis points; and the upfront origination fee payable to the
lenders should be increased to 200 basis points paid by Treasury.
Number five, the affiliation rules should not limit an affiliated
group to a single Main Street facility or a single lending facility’s
size limitation when more than one group member would like to access that or another Main Street lending facility.
And, finally number six, one of our lenders, a highly respected
and conservative regional bank, has elected not to participate in
the Main Street Lending Program. Instead they confirmed that
their primary regulator had no issues with the bank utilizing the
1- and 2-year deferral of interest and principal feature utilized by
the program in the bank’s regular lending program. This will help
provide certain qualified pandemic-affected borrowers the liquidity
they need. Accordingly, it may be helpful to coordinate with the appropriate regulators as to whether this type of regulatory action
might encourage other banks to similarly modify their lending programs to assist affected borrowers.
Thank you again for the opportunity to speak to you today, and
I look forward to your questions.
[The prepared statement of Mr. Foster follows:]
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Title: Congressional Oversight Commission Examination of the Main Street Lending Program
Submitted Statement of Vincent D. Foster
Executive Chairman, Main Street Capital Corporation
Before the Congressional Oversight Commission
August 7, 2020
Members of the Commission:
Thank you for inviting me today to testify on the state of the Federal Reserve's Main Street
Lending Program. I'm Vince Foster, Executive Chairman of Main
Street Capital. Main Street Capital is an active member of the Small Business Investor Alliance
in Washington. We provide "one-stop" capital solutions for lower middle market companies
seeking to grow or transition ownership. Similar to other non-bank lenders in our space, we
offer entrepreneurs, business owners, management and employees a number of advantages to
help each business realize its full potential.
My testimony today will focus primarily on The Main Street New Loan Facility (MSNLF) and
the Main Street Priority Loan Facility (MSPLF). Main Street Capital applauds the Federal
Reserve's efforts to assist our nation's small and mid-sized businesses. Our firm provides longterm debt and equity financing to lower middle market (LMM) U.S. businesses (generally those
with annual revenues between $10 million and $150 million). We currently have investments in
68 LMM business in over 26 states in which our average ownership is 36%. These businesses on
average each have 200 employees.
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73
The Main Street Lending Program, while enacted to assist businesses like our portfolio
companies weather the economic storm brought on by the pandemic, is not responsive to their
needs as currently structured. The principal structural problems are:
1. Requiring lenders to undertake full credit underwriting for small to mid-sized borrowers
seeking 3 ¼%, 4-6X EBITDA loans results in a risk/reward mismatch. Lenders are
better off expending their time and capital underwriting conventional loans.
2. Requiring 15% amortization in year three of the loans is a non-market and very onerous
provision, effectively requiring the loans to be refinanced after two years.
3. Prohibiting contractual subordination (in the case ofMSNLF) and requiring (in the case
of MSPLF) senior or pari-passu priority to other/existing indebtedness is problematic in
that most companies will have preexisting senior secured debt outstanding, the terms of
which will have to be renegotiated.
4. Testing the maximum number of employees and revenue utilizing the affiliation rules
contained in the Small Business Administration (SBA) regulations applicable to SBA
Business Loans ( e.g., 7(a) loans) dramatically reduces the number of companies eligible
for the Main Street Lending Program. For example, if a business with 250 employees is
owned by an entrepreneur who controls another company in an unrelated industry that
also employs 300 employees, then both businesses are considered to employ over 500
employees, and neither business is eligible for an SBA Business Loan. This same concept
is used for determining Main Street facility eligibility. Once affiliation has been
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74
established, the affiliated group of companies (with limited exceptions) must share a
single Main Street facility limitation amount (e.g., the lesser of 4X the company's 2019
adjusted EBITDA or $35 million for MSNLF loans, minus the amount of pre-existing
indebtedness). As larger private companies are more likely to have sister companies that
are under common control with them, this non-statutory test substantially reduces the
number of these companies eligible for Main Street loans. Under the PPP program,
commonly-controlled business entities are able to at least share double the singlecompany loan limitation of$10 million. The PPP loans were largely designed to be
grants to less than 500 employee businesses; the Main Street loans in contrast must be
fully repaid and can be extended to up to 15,000 employee companies, or groups of
companies. Why should two companies under common control that each employ a total
of 200 employees and have $20 million of preexisting debt be able to access up to $20
million in potentially forgivable PPP loans, while two companies each employing 7,000
employees and with preexisting debt of$20 million can only access $15 million (e.g.,
$7.5 million each) ofMSNLF loans that must be repaid?
The lending facilities as currently structured are unattractive to those borrowers that are
reasonably creditworthy as less restrictive financing is likely to be available from conventional
sources. Yet the facilities remain unavailable due to lender reluctance to accept balance sheet
exposure with respect to less creditworthy borrowers. So while the facilities may be acting as a
"backstop" to currently available financing options in case economic conditions deteriorate, they
are not advancing the policy goals of assisting those companies that either did not qualify for
PPP loans (e.g., they had greater than 500 employees on their payroll or by attribution), or did
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qualify and receive PPP assistance, but are in need of a longer term financing solution in order to
maintain their current payroll levels.
The CARES Act as enacted by Congress grants the Federal Reserve and Treasury adequate
flexibility to provide financial assistance to companies having fewer than 15,000 employees or
less than $5 billion in annual revenues. However, the rules developed by the Federal Reserve to
implement the program are too restrictive and burdensome to address the current need.
Understandably, these rules operate to protect the government against credit losses, but credit
losses will have to be incurred in all likelihood if these companies are going to receive the
financial assistance Congress intended. Secretary Mnuchin acknowledged this reality when he
stated that the Treasury Department was "fully prepared" to incur losses on the CARES Act
facilities. The following structural changes would make the program more attractive to both
lenders and borrowers to advance Congress's objectives:
1. The loans should be unsecured and subject to preexisting contractual subordination and
rank junior in priority to other pre-existing senior indebtedness.
2. The loans should have a term of 7 years, generally sufficient to allow them to mature
after the maturity dates of pre-existing indebtedness. Amortization should not begin until
the end of year 4.
3. The multiples of2019 adjusted EBITDA should be increased from 4X (MSNLF) and 6X
(MSPLF) to 6X and 7.SX, respectively. There should also be elective asset-based criteria
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4
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(such as a percentage of loan to value and/or a 1.2X minimum debt service coverage ratio
based on 2019 adjusted operating income) in lieu of using solely leverage multiples for
all industries.
4. Experienced non-bank lenders should be permitted to participate as Eligible Lenders
(similar to the PPP program); the loans should have an interest rate ofLIBOR plus 400
rather than 300 basis points; and the upfront origination fee payable to the lenders should
be increased to 200 basis points and be paid by Treasury (similar to the PPP program).
5. The affiliation rules should not limit an affiliated group to a single Main Street facility or
a single facility's loan limitation if the group as a whole generates less than $5 billion in
revenue and employs fewer than 15,000 employees, and more than one group member
would like to access that or another Main Street facility.
6. One of our lenders, a highly respected and conservative regional bank, has elected not to
participate in the Main Street Lending Program. They instead confirmed that their
primary regulator had no issues with the bank utilizing the 2-year deferral of interest and
principal feature utilized in the MSNLF and MSPLF in the bank's regular lending
program to help provide certain qualified COVID-affected borrowers the extra liquidity
they need to navigate the pandemic. Accordingly, it may be helpful to coordinate with
the appropriate regulators as to whether this type of regulatory action might encourage
other banks to similarly modify their lending programs to assist affected borrowers.
Respectfully Submitted,
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5
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Mr. HILL. Thank you, Mr. Foster.
And now, Ms. Mills, you are recognized for 5 minutes.
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STATEMENT OF GWEN MILLS, SECRETARY TREASURER,
UNITE HERE
Ms. MILLS. Thank you, members of the Commission. My name is
Gwen Mills. I am secretary-treasurer of the hospitality union
UNITE HERE. While I will focus on our members’ experiences, the
recommendations I make are supported by the AFL–CIO, representing 55 national unions and 12 million workers.
Our 300,000 members work primarily in the hotel, casino, food
service, and airline catering industries—all sectors that are heavily
dependent upon travel and tourism.
Before the CARES Act became law, 90 percent of our members
were laid off. Today 85 percent remain unemployed.
A majority of our members are women and people of color. Many
are recent immigrants. Most have lost or will soon lose their health
care—benefits won often after giving up wage increases to secure
family health care.
Hundreds of our members or their family members have died
from coronavirus—22 in Las Vegas alone, where 350 have been
hospitalized.
Our industries are the most severely affected in terms of unemployment, so I believe our story is a cautionary tale of what awaits
American workers across the board if we fail to correct course.
At heart is the question of requiring employers to maintain employment as a condition of Federal assistance. The Main Street
Lending Program requires only commercially reasonable efforts to
maintain employees in spite of clear congressional intent. Treasury
and the Federal Reserve said they will not enforce even that.
We have seen this movie before, and we know how it ends for
working people. We have seen how powerful lobbyists transform
the PPP and Payroll Support Programs into subsidies for real estate investors.
We have identified 200 outlets where we have members that received PPP loans, and they have not protected paychecks or health
care.
One company—Omni Hotels—received 34 PPP loans worth at
least $53 million. Meanwhile, Omni hotels in Boston, Providence,
and New Haven were shut down in March, and it is unclear when
they will reopen. In Providence, the company then cut off medical
benefits in violation of their union agreement, and there are many
similar stories.
What they reveal is how a powerful industry turned a program
designed to keep workers on payroll into one that could keep hotel
owners current on their mortgages.
The Main Street Program will yield even worse results for workers if this mission drift is allowed. Now hotels demand a bailout
of $86 billion worth of CMBS loans using the Main Street Program.
This Commission reported that the Fed has considered establishing
an asset-based lending facility that we fear would do just that.
Who would benefit most from a hotel CMBS bailout? Lobbyists
want you to believe it would mom-and-pop hotels. But the largest
beneficiaries are sophisticated real estate investors.
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Our analysis of loan data finds that: the 11 largest borrowers
had at least $1 billion each in hotel CMBS; those 11 had a combined $30 billion in loan balances or about a third of the total outstanding; four were private equity firms, two were REITs, one a
hedge fund billionaire, and the rest were developers or billionaire
investors. The 12 belong to the Fontainebleau Miami Beach, whose
owner refinanced its debt twice in 2 years, borrowing more to cash
out millions. Now Fontainebleau has stopped health care for hundreds of laid-off employees despite subsidies provided by the Employee Retention Tax Credit.
Lobbyists claim if the Fed does not rescue CMBS borrowers, hotels will default and workers will not have jobs to come back to.
But that is not our experience, and this is not the first time hotel
owners got themselves in trouble using these inflexible loans. After
the financial crisis, there were scores of defaults across the country. But defaults and foreclosures did not lead to closed hotels.
Hotel workers who are used to seeing absentee owners come and
go understand that jobs are driven by occupancy, and only ending
the pandemic can fix that.
Almost half of hotel CMBS mortgages mature within 2 years, before the industry is projected to recover. Should the Fed refinance
the entire hotel lending market while real estate investors lay off
85 percent of hotel workers and end their health care in a pandemic?
There is a second critical lesson here which relates to the Main
Street Program. There is no question that stabilizing credit markets is extremely important in a crisis, and the Fed has done that.
But the real mission should be to protect jobs of American workers.
The exclusive focus on markets and not on jobs means our members, most of whom are brown and black, are thrown off payrolls
while their employers, whose boards and shareholders are predominantly white, can simply tap their credit lines and ride out the crisis.
It is no longer acceptable for the Fed to just stand by and watch
us fall off a fiscal cliff. Millions of American workers are right behind us on the precipice.
Instead, what if program designers at the Fed take the CARES
Act mandate to heart? What if credit terms were loosened so long
as—and here is the important part—so long as there were airtight
requirements, not incentives, not recommendations, but requirements that recipients keep workers on payroll? It is what the PPP
could have done if it had not been hijacked by the real estate industry.
The Fed and Treasury must learn from PPP and reform Main
Street lending so that it actually contributes to the employment of
working Americans. But please do not bail our real estate investors
while they push workers off the cliff.
Thank you for this opportunity, and I welcome your questions.
[The prepared statement of Ms. Mills follows:]
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79
TESTIMONY OF
GWEN MILLS
BEFORE THE
CONGRESSIONAL OVERSIGHT COMMISSION
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AUGUST 7, 2020
80
Members of the Commission, my name is Gwen Mills. I'm Secretary-Treasurer of UNITE
HERE, the North American hospitality union. I appreciate this opportunity to address the
Commission today. While my testimony will focus on our industry and the experience of our
members, the policy recommendations I will make have the support of the AFL-CIO,
representing 55 national unions and 12 million workers.
Our 300,000 members throughout the US and Canada work primarily in the hotel, casino,
institutional food service, airline catering and airport retail industries - all sectors that are heavily
dependent upon the travel and tourism economy.
Our members have been among the most severely affected by the pandemic. Before the CARES
Act became law, 90% of our members had been furloughed or laid off. Today little has changed:
about 85% of our members remain unemployed.
A majority of our members are women and people of color. Many are recent immigrants. Most
of them have lost or will soon lose their health insurance
benefits that they only won after
decades of hard-bargained contracts, often giving up wage increases in order to maintain good
family healthcare.
Hundreds of our members or their family members have died from coronavirus - 22 in Las
Vegas alone, where an additional 350 have been hospitalized.
A Cautionary Tale
The industries in which our members work have been the most severely affected in terms of
unemployment, so I believe our story is a cautionary tale of what awaits American workers
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across the board if we fail to correct course.
81
At the heart of this is the question of requiring employers to maintain employment as a condition
of federal assistance. There is no requirement in the Main Street Lending Program in spite of
clear Congressional intent. This is because the Federal Reserve and Treasury, as part of their
April 30 revisions to the facility term sheets for the Main Street Lending Program, eliminated the
requirement that loan applicants make "reasonable efforts" to maintain payroll and retain
employees during the term of their loan. Under the revised term sheet, firms need only make
"commercially reasonable efforts" to maintain payroll. Not only does that make lawmakers'
vague mandate even vaguer, but Treasury subsequently clarified that it had no intention of
enforcing even that weakened standard. Apparently making "commercially reasonable efforts"
is non-binding advice.
We've seen this movie before. And we know how it ends for working people. Because we have
seen what happened in other CARES Act programs.
We've seen how powerful hospitality and real estate industry lobbyists with access to the halls of
power have been able to transform CARES Act programs like the Paycheck Protection Program
and the Payroll Support Program, which were designed to keep furloughed workers connected to
their jobs by keeping them on payrolls with continuation of benefits, into subsidies for real estate
investors.
We've identified more than 200 hotels or food service outlets where we have members that
received PPP loans, according to data recently released by the SBA I've provided a few case
studies in the appendix, but suffice it say the program hasn't protected paychecks or healthcare
for the vast majority of our members, 85% of whom remain unemployed more than four months
after passage of the CARES Act.
One company - Omni Hotels, received at least thirty-four separate PPP loans with a combined
value between $53 million and $123 million, according to the SBA data. 1 Meanwhile, Omni
hotels in Boston, Providence, and New Haven were shut down in March and our members laid
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1
I! is possible that some of the loans Omni affiliates received were returned, since it is our understanding that not all
returned PPP funds were reflected in the data released by the SBA.
82
off, and it is unclear when the properties will reopen. In Providence the company cut off medical
benefits at the end of May, which we believe is in violation of their collective bargaining
agreement In several other cities where workers get health insurance through ajointlyadministered Taft-Hartley health fund, the company is no longer paying medical insurance
premiums for their laid-off workers.
There are many similar stories I could tell. And I've included a few others in Appendix A.
What they reveal is how a powerful industry lobby largely succeeded in transforming a program
designed to stabilize small businesses and help keep workers on payroll into a program that
could keep hotel owners current on their mortgages for a few more weeks.
Given this mission drift with respect to a program that lawmakers clearly intended to support
payrolls, we have every reason to believe the Main Street program will yield even worse results
for workers. First, we' re unaware of a single one of our employers that has sought or received a
Main Street loan. And even if one did, the Treasury and Fed have been crystal clear that they
have no intention of ensuring that the loan proceeds will be used to keep workers on payroll.
Now hotel industry lobbyists have joined forces with lobbyists representing shopping malls and
other commercial real estate investors to demand a bailout of the commercial mortgage-backed
securities (CMBS) market, especially the $86 billion in CMBS hotel loans. And the vehicle with
which it hopes to accomplish this goal is the Main Street Lending Program.
And that's why we were alarmed to read in this Commission's third report that according to
Secretary Mnuchin, the Federal Reserve has considered establishing an asset-based lending
facility, which we fear would be a major step towards the hotel and shopping center CMBS
bailout the real estate industry seeks.
Who would most benefit from a hotel CMBS bailout? Its proponents would have you believe it
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would primarily be mom and pop small businesses. But the largest beneficiaries would most
83
likely be publicly-traded real estate investment trusts (RElTs) like Monty Bennett's Ashford
companies and giant private equity firms like Tom Barrack's Colony Capital.
We recently reviewed CMBS hotel loan information from data service Trepp and found that:
-
There were 11 borrowers whose affiliates had at least a billion dollars in outstanding
-
Those 11 borrowers had a combined $29.9 billion in outstanding loan balances or about a
hotel CMBS balances.
third of the total amount of outstanding hotel CMBS debt.
Four of them were private equity firms, two were publicly-traded REITs, one was a
hedge fund billionaire, and the remaining four were real estate developers or billionaire
investors.
-
And the 12th belongs to the Fontainebleau Miami Beach resort, which refinanced its
mortgage twice in two years, borrowing more each time for the owner to cash out $191
million late last year. Now in the crisis, Fontainebleau has canceled healthcare for
hundreds oflaid off employees despite the subsidies provided by the CARES Act's
Employee Retention Tax Credit.
These are hardly the small business owners the proponents of this bailout claim to champion.
Hotel lobbyists claim if the Fed doesn't open up the MSLP to CMBS borrowers, hotels will
default and shut down, and workers won't have jobs to come back to. But that is a completely
spurious contention, one not borne out by recent experience. This isn't the first time we've seen
REITs and large hotel corporations get themselves in trouble using low-cost but inflexible
CMBS loans. In the years following the financial crisis, there were scores of defaults across the
country.
In many cases borrowers - including some of the same ones currently clamoring for a bailoutwalked away from their properties and handed over the keys to lenders. But defaults and even
foreclosures did not lead to hotels being shut down. new investors emerged to take ownership
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and kept properties running. Owners don't generally employ hotel workers anyway. They hire
84
operating companies like Marriott, Hilton or Hyatt under long-term management agreements that
frequently outlive multiple changes in ownership. Hotel workers are used to seeing absentee
owners come and go. They understand that defaults, distress sales and even foreclosures don't
generally affect employment levels. What affects employment levels is hotel occupancy and
revenue, which is to say the level of demand for hotel rooms. Only ending the pandemic, and/or
the widespread availability of effective testing and treatments, can start to fix that. Meanwhile,
the Main Street program is doing nothing for hospitality-industry workers, or any workers as far
as we can tell.
Just as a CMBS bailout would have little to no effect on hotel employment, we doubt it would
offer much relief to the thousands of small business hotel owners whose cause the bailout
proponents purport to champion, most of whom bave regular bank loans.
In fact, it could hasten their demise and here's why: many of the primary beneficiaries of a
CMBS bailout would be the very same private equity firms and investors who could end up in
the best position to buy up the highly-discounted or foreclosed non-CMBS hotels from desperate
owners whose 90-day bank forbearances have expired and whose PPP proceeds have been
spent.
Not only would a CMBS bailout allow billionaire and private equity owners to escape the
consequences of their own risk-taking, it would enable the largest hotel owners to acquire
distressed assets with their store of"dry powder" instead of committing some of those funds to
saving their own hotels.
Moreover, once the Fed starts bailing out CMBS borrowers in the hotel industry, it will not be
able to stop. The debt crisis in hotels is not a short-term problem. Hotels are asking for 2 years'
worth of interest payments on CMBS debt, but what they aren't telling the Fed is that $40 billion
of hotel CMBS mortgages mature by 2022. In order to refinance those mortgages and repay Fed
loans or "preferred equity", hotel asset values need to reach pre-COVID levels to borrow at
customary loan to value ratios. Hotel asset values will lag recovery of revenues which analysts
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aren't projecting to happen until late 2023. How will the Fed recoup its investment in hotels if
85
the underlying mortgages default at maturity in the coming years, or is the Fed really being asked
to refinance the entire hotel lending market? The very leverage levels that prevent hotels from
accessing the Main Street Lending Program portend defaults to come even after Fed assistance.
Isn't there a moral hazard in making taxpayers party to the financial engineering which has
brought us to this brink, where real estate investors lay off 85% of hotel workers, end their
healthcare in a pandemic and use federal assistance to pay their banks and bondholders?
In this respect, the bifurcated world of hotel asset owners is no different than the divide between
small and large firms in the larger economy, which is to say large corporations have access to the
credit markets but their smaller competitors, many of them family-owned businesses, usually do
not
There is a second critical lesson here for the Commission in relation to the Main Street Lending
Program. There is no question that stabilizing public and interbank credit markets is extremely
important in a crisis. But when the Fed acts as if its only mission or authority in times of crisis is
to stabilize credit markets - whether that means bond markets, repo markets, or asset-based
markets it is making a choice. It means we should expect wildly disparate and unequal
outcomes. The real core mission in this crisis should be to protect jobs and incomes of America's
working people. And in the case of the CARES Act, the Congress explicitly authorized the
Treasury to capitalize programs like the Main Street Lending Program so that the Fed can take
credit risk in for the purpose of protecting jobs.
But the focus on the solvency of pyramided credit structures rather than on jobs means
the benefits of stabilizing those credit markets are tenuous at best for workers.
It means our members - most of whom are brown and black - are thrown off payrolls and into
unemployment while their large employers - whose executives, boards and shareholders are
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predominantly white
86
The Federal Reserve is now trying to implement the Main Street Lending Program at a moment
when the fate of30 million unemployed and their families is in the hands of a deadlocked and
dysfunctional Congress, where despite the fact that the HEROES Act is sitting on Leader
McConnell's desk, our members are exposed to the full consequences of time-limiting the
pandemic unemployment benefits and then letting them expire for our families lives and health.
It is no longer acceptable for the Fed to just stand by and watch us fall off that cliff. Read the
room. Millions of American workers are right behind us and on the precipice.
In this context, the choice to leave the MSLP dying on the vine seems at best unimaginative, and
at worst destructive. One can certainly argue, as Chairman Powell has, that the reticence of banks
to make the loans and the putative lack of interest by prospective borrowers are signs that private
markets are working and there is no urgent need for the program at the moment.
But what if lawmakers had been clearer in their proscription that the program help businesses
stay connected to their workforces? What if the program designers at the Fed had taken that
mandate to heart? What if credit terms were loosened considerably what if we actually used the
Treasury capital as Congress had intended
some circumstances
requirements
so long as
up to and including making loans forgivable in
and here's the important part - so long as there were air-tight
not incentives, not suggestions, not recommendations
but requirements that
recipients keep workers on payroll?
Short of making direct grants to workers to substitute their lost income and healthcare something presumably only Congress can do
tying credit assistance to payroll in a
reinvigorated MSLP is the one new thing the Fed could do right now to really make a difference
in the lives of millions of American workers and their families.
It is what the PPP could have done if it hadn't been hijacked by the real estate industry.
The Fed and Treasury must learn from the PPP experience. The Fed and Treasury must reform
the MSLP so that it actually contributes to the economic security and employment situation of
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working Americans.
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That, in our opinion, would be the best thing the Fed could do with its mostly-unused MSLP
authority to help average Americans. And we've already said what we think would be the worst
Thank you on behalf of the working people I represent for the chance to appear before this
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Commission's first hearing. It means a lot to us. And I welcome your questions.
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Appendix A: Case Studies
OTG
OTG is one of the largest operators of airport restaurants in the United States, with significant
presence at key hubs in New York / New Jersey, Philadelphia, Houston, Minneapolis and
Washington , DC . According to the SBA data, the company was approved for 8 separate PPP
loans totaling between $18 million and $50 million. fu March, the company was featured in the
New York Times for abruptly laying off 1,200 workers at the New York-area airports and cutting
those workers off their health insurance effective March 31 st . 2 Most of those workers remain
unemployed and the company to our knowledge has not extended health insurance to those
workers who were laid off.
Payroll Support Program - Where's the Support for Airline Catering Workers?
When lawmakers created the Payroll Support Program for the aviation industry, they included
airline catering contractors. That should have meant continued paychecks for thousands of
airline catering workers from April through September and no layoffs. Yet, Gate Gourmet, which
received $171 million from the program, laid off approximately 5,000 of its 8,000 US
employees in May and hasn ' t recalled them . Another contractor, Flying Food, received $85
million and also laid off thousands of people. At the company' s kitchen serving Dulles Airport,
only 2 out of 168 workers were working in June, after the company reached its agreement to
receive millions in taxpayer funds from the payroll support program.
How did this happen? First, the Treasury issued guidance explicitly allowing employers to spend
funds indefinitely, rather than imposing a deadline for companies to use the funds. A deadline
would ensure workers promptly received money intended for them . Second, the Treasury took
months to implement the agreements that could have prevented layoffs had they been executed
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https://www.nvtimes.com/2020/03 /2 l/nv regio n/coronavirus-a irport-workers-nv-nj .html
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2
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quickly. These firms were allowed to lay off thousands in April and May, take federal funding in
June and July, and hold those funds indefinitely to subsidize their future payroll whenever they
decide to start bringing back workers. In the meantime, they are not required to do anything to
assist their laid off workers. Like the PPP, a program meant to protect paychecks became one
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that instead protects corporate bottom lines.
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Appendix B: The Hijacking of the PPP
An early prototype of what became the PPP was a plan floated in mid-March by the hotel
lobbying group American Hotel and Lodging Association. Their proposal, which they called the
"Hospitality Workforce ReliefFund" 3 called on Congress to provide $100 billion in "grants to
businesses for the purpose of employee retention and rehiring" and an additional $50 billion "to
provide federal funds to cover debt payments" for hotel owners and "to facilitate forbearance" on
the part of hotel lenders. Around that same time, the head of the ARLA and the leading hotel
industry CEOs met in closed door session with President Trump and Vice President Pence to
promote their plan.4
ARLA subsequently took credit for winning an unusual carve-out for their industry in the plan
that emerged in the final package of the CARES Act. That provision singled out hospitality
companies - those with N AJCS codes beginning with 72 - for special treatment, exempting them
from the SBA' s affiliation rules, thus making it possible for large hotel and restaurant
corporations to apply for and receive PPP loans at every one of their locations with fewer than
500 employees. That is how companies like Omni were able to receive so many PPP loans.
Despite this unprecedented carve-out, ARLA was not satisfied. Beginning the day after the
CARES Act became law, the group criticized the new program, calling it " unworkable for
hoteliers" because, they argued, its focus on payroll expenses was too restrictive and would not
enable hotel owners to cover their monthly mortgage payments, particularly those hotel owners
locked-in to an inflexible kind ofloan known as a commercial-mortgage backed security (or
CMBS) loan.
3
https://www.ahla.com/sites/default/files/HospitalityWorkforceReliefProposal.pdf
https://thehill.com/business-a-lobbying/business-a-lobbying/488084-tourism-industry-calls-for-150-billion-inassistance
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4
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Industry efforts to shoehorn the program into a mortgage subsidy culminated in the PPP
Flexibility Act, which went a long way toward transforming a program designed to stabilize
small businesses and help keep workers on payroll into a program that is more likely to keep
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hotel owners current on their mortgages for a few more weeks.
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Supplemental Points for the Record, CARES Act Oversight Commission Hearing, 8/7/20,
Submitted by Gwen Mills, Secretary-Treasurer of UNITE HERE
The following facts elaborate on the summary of large CMBS borrowers provided in my
testimony and respond to the comments made by Commissioner Hill at the hearing that 74% of
CMBS are less than $20 million and owed by small businesses. We believe hospitality CMBS
loans differ from that profile significantly.
We analyzed hospitality CMBS loan data from Trepp, a data service tracking CMBS loans. Our
analysis finds that:
•
•
•
•
S9% of hotel CMBS loans had outstanding balances of $20 million or more, and 76%
were over $10 million.
Of the $86 billion outstanding in lodging CMBS loans, at least $SO billion (S8%) are
affiliated with large, multi-property hotel owners, private equity firms, hedge funds,
REITs, or foreign capital.
The largest 11 borrowers had at least $1 billion each in hotel CMBS, and together
they had $30 billion in loan balances or about a third of the $86 billion outstanding
in the industry.
Four of the top 11 borrowers were private equity firms, two REITs, one a hedge fund
billionaire, and the rest were developers or billionaire investors.
Based on this data, the hotel industry's asset-backed loans are dominated by large,
sophisticated real estate investors, many with access to an array of capital sources.
This analysis leads us to ask what the goal of an asset-based lending facility backed by the
Federal Reserve should be. We firmly believe that the goal of any Federal Reserve rescue plan,
including an asset-based facility, should be to maintain payroll, benefits and recall rights for
workers. If the goal of an asset-based lending facility is narrowly construed as keeping owners
out of default, that is not a policy goal worth spending taxpayer resources on.
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We urge the Federal Reserve to mandate that any relief from an asset-based facility be
conditioned on maintaining pre-COVID payroll and benefits for hospitality workers; prohibit the
use of proceeds to fund distributions or dividends on equity, related-party transactions, and
franchise fees; and cap proceeds of the facility to affiliated companies in order to ensure the
relief is not concentrated in large hotel and real estate owners.
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Mr. HILL. Thank you, Ms. Mills. Appreciate your testimony
today.
We will now have a round of questioning, and I recognize myself
for 5 minutes.
Let us start with Ms. Anderson. You were talking about your
view of the banks taking up of these loans and what modifications
might be made for less than creditworthy borrowers. I understood
that point. But as I said in my earlier questioning, 5,000 banks
jumped on the opportunity to help in the PPP environment under
the CARES Act, and we have got very few banks that are engaging
here.
What is the Bank Policy Institute doing to promote banks participating in the Main Street Program?
Ms. ANDERSON. Thank you for your question. In terms of BPI
member banks, the vast majority of our members are participating
in the program. I cannot speak, obviously, for all banks across the
country, but I think when you think about the complexity of the
program, it is difficult not just for small borrowers but also for
smaller lenders. The program is set up as a participation structure,
which is typically used in the syndicated loan market. Many smaller banks may not actually be active in that space, familiar with it,
and there is quite a lot in terms of going through the legal documentation and setting up the infrastructure to actually lend in that
manner and comply with the terms of the program. So while we
certainly have our members participating, it may be more challenging for smaller banks.
Mr. HILL. Thank you. And do you agree with the testimony on
our panel that it is possible to make a very creditworthy loan that
is not based on the EBITDA multiples and the senior nature of the
term sheet? In other words, that if one were to have sufficient collateral coverage and a 1.25 debt service coverage ratio but a junior
lien, wouldn’t that be considered a creditworthy loan as well?
Ms. ANDERSON. So a number of our members have said that they
would be interested possibly in lending at a junior facility, something that is collateralized. I think it would be up to the Fed and
the Treasury to decide exactly what their risk appetite would be in
such a structure and structure the terms appropriately. So it may
not be 1.2 but something similar. So, yes, I do think banks would
be interested if there was a junior facility available.
Mr. HILL. Do you think the Fed and the Treasury are not setting
the risk parameters appropriately in their existing Main Street
term sheets? In other words, are they too strict? Are they too much
like a traditional senior bank loan with not even a step in the direction towards a slightly distressed—solvent, creditworthy, but
distressed, temporarily distressed borrower?
Ms. ANDERSON. So I think the eligibility criteria that the Fed
and the Treasury established probably fit the program that they
set out to design, as President Rosengren said, in terms of the liquidity program. But there is a key element. So even if you reduced some of the stringency of those terms, you still have the underwriting element. And in this environment, underwriting on today’s information will be difficult for many borrowers in that distressed space. So I am not sure that actually loosening the criteria
is necessarily the right answer.
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But I think also in terms of what President Rosengren said, if
companies really need equity, then a Federal Reserve lending program is not the right solution for them.
Mr. HILL. Understood. Thank you for your response.
Mr. Bohn, let us talk about the affiliation rules. You heard my
conversation with Dr. Rosengren that the Fed here in the Main
Street Facility has adopted those Small Business Administration
7(a) lending affiliation limitations. For this middle market of nonsuper small businesses and certainly those not eligible to raise capital in the public markets, are those affiliation rules a serious impediment? And can you give us an example?
Mr. BOHN. Thank you, Congressman. I think that what we are
seeing and hearing and what was evident in the survey that we
had is that these businesses were originally excluded from the
PPP, and there was hope initially that in the Main Street lending
provision that there would be opportunities for them to utilize benefits and lending from Main Street in order to not only keep jobs
but also invest in some of the changes that they need to do as people start to pivot based on the economy and whether that is setting
up plexiglass and rearranging their buildings or whether or not
that is related to simply doing business in a much different way.
But we have heard from them loud and clear that their inability
to access them has had a significant impact on their business.
When we first went out there and talked to our members——
Mr. HILL. Thank you. Let me—thank you for that. We will have
another round, but my time has expired.
Let me turn to Mr. Ramamurti for 5 minutes.
Mr. RAMAMURTI. Thank you, Mr. Chairman. And thank you, Ms.
Mills, for your testimony today. You noted in your written testimony that hundreds of your union’s members and family members
have died from COVID, and many more have been hospitalized. I
just want to extend my condolences to them and their families and
to you, and I think it is a powerful reminder that this is first and
foremost a health crisis, and that front-line workers like the people
that you represent are bearing the brunt of it.
You represent a lot of people who work in hospitality and in tourism as front-line service workers, hotel housekeeping, bellmen, wait
staff, cooks, bartenders, casino workers. You mentioned in your
opening statement that a majority of your members are people of
color and that a majority are women.
When the companies who employ your members struggle, who
are the first people to suffer via layoffs or furloughs?
Ms. MILLS. Yeah, thank you for your question. Across the board
it is the front-line workers first, our members, who are laid off.
Mr. RAMAMURTI. Right.
Ms. MILLS. And our experience is that the white middle management are able to keep their jobs.
Mr. RAMAMURTI. And when they are laid off or furloughed, it is
not just lost income, right? In many cases they are losing access
to health care, to retirement contributions, and to other benefits?
Ms. MILLS. Absolutely, yes.
Mr. RAMAMURTI. And so among the hundreds of thousands of
travel and tourism industry workers that you represent, 4 months
into this crisis are you aware of a single job that has been saved
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by the Main Street Program or even a single hours cut or furlough
that the Main Street Program has stopped?
Ms. MILLS. No.
Mr. RAMAMURTI. And as the Main Street Program is currently
designed, do you think it will help workers in the future, even if
more companies participate in it?
Ms. MILLS. No. As I said in my testimony, not without binding
requirements that employees be rehired from the first day of the
aid.
Mr. RAMAMURTI. Right. So, in other words, even if a lot of companies end up getting loans through this program, you do not think
that the benefits of those loans will flow through to workers?
Ms. MILLS. No, not without binding requirements.
Mr. RAMAMURTI. So 45 million people work at companies that are
eligible for the Main Street Program. If the goal is to help those
millions of workers, do you think the Fed can just make tweaks to
the Main Street Program to achieve that? Or do you think Congress needs to come up with a brand-new approach?
Ms. MILLS. In this case I do not think tweaks will work. I think
Congress does need to come up with a new approach.
Mr. RAMAMURTI. So let us talk about that a little bit. In your experience, what kind of new approach do you think would be helpful
to your workers? In your experience and the experience of your
members, does providing financial support to businesses help workers without express and enforceable requirements that businesses
actually use that aid to support workers?
Ms. MILLS. No. Time and again in many different programs,
without enforceable requirements, support to businesses does not
help workers.
Mr. RAMAMURTI. So of the $500 billion that Congress gave to the
Treasury in the CARES Act in March, there is currently more than
$200 billion sitting unused and uncommitted. If you were to use
that money to develop a program that would be most helpful to
your members, what would you do with it?
Ms. MILLS. The two things that matter are health care and
wages, so we would fund COBRA payments so that we could continue health care, and then give direct support to workers.
Mr. RAMAMURTI. Thank you. And one final question about this.
Did the Treasury Department ever reach out to your union as it
was designing this lending program that was ostensibly about helping workers?
Ms. MILLS. No.
Mr. RAMAMURTI. Thank you, Ms. Mills. Look, I share your views
and, frankly, I think it is time we started to listen to working people, not executives and investors and their lobbyists, when we design these programs that are supposed to be ultimately about helping workers.
Thank you, Mr. Chairman. I yield back.
Ms. MILLS. Thank you.
Mr. HILL. Thank you, Mr. Ramamurti.
Congresswoman Shalala is recognized for 5 minutes.
Ms. SHALALA. Thank you. Let me follow up with Ms. Mills since
I represent a district that has a huge number of workers that work
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in the tourism industry, particularly in the hotels, including the
Fontainebleau, which you mentioned.
We had a debate with the Fed over whether their term ‘‘commercially reasonable’’ was better than ‘‘reasonable,’’ but it sounds to me
from what you said that either one does not mandate that these
programs keep people employed or even furloughed workers keeping their health care so that they can get on unemployment and
keep their health care. I take it that we would have to really finetune that requirement in these programs to make a difference for
not only the workers that UNITE represents, but the thousands of
workers that work in this industry.
Ms. MILLS. Yes, thank you, Congresswoman, for your question.
I mean, our great concern about the Main Street Lending Program
is that the hotel industry is seeking changes so that they can use
the program to pay their CMBS mortgages, like there is a $975
million loan at the Fontainebleau Miami Beach that is in your district. As I mentioned, the Fontainebleau stopped paying health care
for hundreds of our laid-off members. We believe it is a violation
of our contract, and so it would be wrong for taxpayers to fund a
year or two worth of Fontainebleau’s debt payments of $39 million
a year while laid-off workers lose their health insurance and rely
on the public hospital system. So fine-tuning absolutely requirements would be necessary, and I really appreciate your question
today because one of the Fontainebleau workers died this morning
of COVID in the hospital without his medical or life insurance.
Ms. SHALALA. I heard that, and I am so sorry. I want to point
out that those workers are also taxpayers, because we are talking
about their money being used for the mortgage payments.
So you do not see anything in the Main Street Program that
could be significantly improved unless it was totally restructured in
terms of helping workers in this country?
Ms. MILLS. I think that is right. It would need to be restructured
with requirements off the bat for bringing workers back as soon as
any assistance was issued, yes.
Ms. SHALALA. Well, thank you very much.
Let me ask Ms. Anderson a question. The Main Street Lending
Program allows banks to employ their own underwriting standards
to loan applications. Does that mean that banks are making loans
under the program that they would have made anyway absent the
Fed program? And if so, is the Main Street Lending Program providing any benefit to borrowers at all?
Ms. ANDERSON. Thank you for your question. In terms of the
loans that are being made, I think they are quite specific in terms
of the circumstances, because you are absolutely right, a borrower
who can meet a bank’s basic underwriting standards is typically
finding out that there is a product that is more suited to them
given their credit needs. So, for example, maybe a term loan really
is not what they need and they really need something more like a
flexible working capital facility. So our banks are actually many
times finding better solutions for these borrowers when they inquire about the program.
In terms of the live cases that look like they might go through,
one example is a travel company that basically came to one of our
banks as a new lender—a new borrower, sorry, and the bank would
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be comfortable possibly lending the 5 percent. And in a normal circumstance they would go out and syndicate that loan to the market. But given the timing that it takes to do that and the need to
actually get finances to these borrowers, that is one where they
think it makes sense to use Main Street because the Government
is there ready and waiting, so they do not have to go through a
syndication process. But, you know, whether there are lots of borrowers in those specific circumstances I think is questionable.
Ms. SHALALA. One more quick question. Many of the small to
mid-sized businesses that were able to get by in the first few
months, they used the PPP program, are now at the end of their
ropes. Goldman Sachs reported that more than 80 percent will be
out of PPP money. If that is the case, where are they turning for
funding? Are your banks seeing an uptick in loan requests?
Ms. ANDERSON. I would not say we are seeing a huge uptick in
loan requests, but something that is interesting is that the vast
majority, so probably over 70 percent, of new borrower inquiries
that our banks are getting are actually borrowers who think Main
Street is a PPP program. So they think it is a loan forgiveness program or a grant program. And once they hear the details, then they
realize it is actually not for them. So they are looking for something that is equivalent to a PPP type structure.
Mr. HILL. Thank you.
Ms. SHALALA. I yield back.
Mr. HILL. Yes, thank you, Congresswoman Shalala. Your time
has expired.
Now we will turn to Senator Toomey for 5 minutes.
Senator TOOMEY. Thank you, Mr. Chairman.
I just want to go back and review very briefly a little bit of the
history about how these programs came together, because we debated the extent to which we should have mandates to retain a
workforce and how best to do that. And for small businesses, we
thought that it might be possible for businesses, even businesses
that are essentially closed, have no business, it might be possible
to maintain the payroll if we pay for it, if we had the taxpayers
pay for it. And so that is what the PPP program was designed to
do, take a finite period of time and have the taxpayer just pick up
the tab for the payroll. And to a very significant degree, I think it
has worked, and it was probably necessary.
With the Main Street Lending Program, the idea was that these
would be loans. And while obviously everybody wants to maximize
employment opportunities, maximize jobs, we are all celebrating
record-low unemployment, record-high job opportunities for everybody in America, most especially the African American community,
the Hispanic community, people who have historically have higher
rates of unemployment. We are seeing tremendous gains. This was
all great.
But the idea that we would require companies to borrow money
for the purpose of maintaining a payroll for people who they did
not have work for because the business was closed, that did not
seem to make sense, which is why we made unemployment benefits
more generous; we did direct payments of $1,200 to everyone to offset the lost income that was notable.
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So let me try to illustrate this another way with a question, and
maybe Mr. Bohn or Mr. Foster would want to take a shot at this.
If a business is losing money, probably massively, as it collapses in
sales, has no orders coming in because of this contraction that was
underway, and hopefully is in the process of getting behind us, and,
therefore, has no work for its workers, if that business goes out and
borrows a lot of money to pay those workers anyway, does that
make that business more viable, more likely to succeed, more likely
to be there at the end of this contraction to be able to bring workers back?
Mr. BOHN. Well, Senator Toomey, thank you. If I could, I will
take a stab at that. I think what we are talking about here is really two separate things. I think, yes, PPP was definitely designed
to save jobs in the immediate term and as quickly as possible.
What we are hearing and seeing from middle-market organizations,
though, is that the loans, if they were able to get them, would go
to investment in opportunities that would create jobs or bring back
jobs within their company. So if you even use the example of ACG
as an organization, there is a lot we have to do and do not have
the finances to be able to really exist well equipped in this new virtual environment. We are seeing that time and time again, whether it is for our restaurants and how they are having to handle how
they prepare for orders and utilize technology, so there are opportunities. But at the end of the day, it is a moot point because there
is such a large number of them who are not able to access the program overall.
Senator TOOMEY. Thank you.
Mr. Foster, do you have a comment on this?
Mr. FOSTER. Yes, I mean, I think that the main thing right now
is for the type of business that you illustrated is to keep the business, because the business is in survival mode. And you need to let
the business owner do what is necessary with the capital to keep
the business alive. Certainly payroll is a part of it, but frequently
they are behind on lease payments, and they could lose their facility. They have stretched their suppliers. You know, you just have
to leave it up to the business owner because they really need—they
are in survival mode.
Senator TOOMEY. Let me ask a question of Ms. Anderson. My understanding is that the Federal bank supervisors have made it
clear that they will treat the Main Street Lending loans in a manner consistent with their supervisory approach to other commercial
and industrial loans. So here is my question: If they were to change
that and they were to take, say, a less restrictive view in their supervisory capacity, would bank behavior be likely to change? Or is
bank behavior so driven by the existing set of internal rules that
they would be unlikely to change?
Ms. ANDERSON. Thank you. So some bank behavior might
change, but it may not be actually the behavior that is desirable
overall. I think one thing to be clear is we do not think it is appropriate to have supervisory forbearance. The transmission of risk
from the corporate sector to the banking sector is really not in the
best interest of anyone, and certainly if you ask banks to go and
make riskier loans right now, it might be okay for 12 months. But
the credit problem will still be there just down the road.
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So I think banks basically are looking at that, and even where
supervisory requirements were relaxed somewhat, I think they can
see that it is not worthwhile to rack up bad loans on their balance
sheet that they will have to basically work out at some point in the
future.
Mr. HILL. Thank you, Ms. Anderson. Senator Toomey, your time
has expired.
Senator TOOMEY. Thank you.
Mr. HILL. The gentleman yields back.
We now have a second round of questioning for this panel, and
I will yield myself 5 minutes to start that.
Some of these questions we are faced with today and that the
Fed and the Treasury are faced with are not new questions. I
would like to read a quote: ‘‘If it is a pawnshop in which necessitous borrowers are compelled to hock assets worth two to three
times the amount of the loan, we are opposed, and we think most
business people will be as well. We see no reason why the Government should be engaged in a careful pawnbrokering enterprise,
niggling over security, haggling over interest, and competing with
other lenders.’’
That was written back in 1933 as the Reconstruction Finance
Corporation and the Fed struggled with how to get credit out to the
American marketplace in a very tough economic recession of the
1930s, and I think we are dealing with that issue now in this middle-market segment that we are talking about today.
Mr. Foster, you offered some very good, constructive comments
on specific loan term changes, but can you also address the affiliation question that I posed earlier?
Mr. FOSTER. Sure. Let me try to do that by giving you an example, and I want to compare and contrast with PPP. So when PPP,
which used the same 7(a) program affiliation rules with relaxation
for companies with an SBIC investment, the hospitality industry,
et cetera, so you do not even have that in Main Street. So in PPP,
if you had two commonly owned businesses that had 200 employees
each, and they each had, you know, say $20 million in preexisting
debt, they could each access up to $10 million of PPP for a total
of 20. They needed to have the requisite cost structure that would
do that.
You switch over to Main Street, two companies under common
control, 7,000 employees each, each with $20 million in preexisting
debt, 14,000 total employees, they have to share—if one of them
wants to do the new loan facility, they have to share $15 million
in total assistance under that program, and it really does not make
any sense from an employee perspective, that 14,000 employees
have access in total to a $15 million loan versus under PPP you
had 400 employees that had access to up to $20 million.
So it really is poorly designed, and it does not make any sense
for these kind of companies to have to run through really complicated and really severe 7(a) regulations that are really focused
on making sure companies with more than 500 employees do not
have access to a 7(a) loan.
Mr. HILL. Thank you. That is helpful. I appreciate that example.
Ms. Mills, let me turn to you and first echo the comments of our
fellow Commissioners about condolences. So many of our families
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across the country have really suffered in this pandemic. We have
to remember when we are doing our oversight work that, first and
foremost, this is a public health crisis that has led to an extraordinary economic crisis. And so I appreciate the comments you made
and the care you have for all of your members and your advocacy
today.
And I also agree with Senator Toomey that the Main Street Program is not the solution to all challenges in this pandemic either,
and that is why we have the unemployment compensation, the direct payments to our families, the forbearance in mortgage and
rental payments, the payment for leave, the payment for testing,
the flexible furlough program in the States so that people can be
furloughed and maintain some benefits and get unemployment
compensation, and obviously the aforementioned PPP. So all these
Federal policies work together to try to minimize the impact on our
families and help them get through the pandemic and also help get
our economy back to full capacity.
In looking at your testimony, though, 74 percent of CMBS are
less than $20 million, and in my district Asian American hotel
owners are the classic small business entrepreneurs. And as I understand it, over 50 percent of hotel rooms are owned by these
kinds of classic small business entrepreneurs across the country.
And they are worried about getting October property tax payments
in Arkansas, is, I know, one of their concerns, because they want
to bring their staff back. They want to bring their staff back commensurate with the economy reopening. And, also, owners of
CMBS securities are mostly pension funds and people’s retirement
accounts, and so they are all benefitted by trying to get capital into
the industry and get people hired back and reopen.
So I am empathetic to your testimony. I thank you for being here
very much and for your comments. But I think that the Main
Street Program’s mission is to try to get our hotel and hospitality
open, and I hope we can find a such that does that.
Let me yield back and turn to my friend Mr. Ramamurti for 5
minutes.
Mr. RAMAMURTI. Thank you, Mr. Chairman.
Mr. Bohn, thank you for your testimony as well. I want to ask
you the same type of questions that I asked Ms. Mills earlier. You
come at this from a different perspective. You run a mid-sized company. Your organization represents a lot of such companies. But
you seem to agree with Ms. Mills that this program has not been
helpful so far. In fact, not a single one of your member companies
has actually been helped by the Main Street Program so far. Is
that right?
Mr. BOHN. That is correct.
Mr. RAMAMURTI. And it is in your testimony that the program
needs to be changed. Can you describe the kinds of ideas you have
in mind for that?
Mr. BOHN. Yeah, we list a couple of ideas in there that start with
the removal of the affiliate exclusion, reducing the EBITDA requirements to make it more appealing to a broader class, particularly in the lower middle market, and we also talk specifically
about the loan size and bringing the loan size down even further.
Those are just some of them that we think—and, again, this is not
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only, you know, our team internally talking. These are is the direct
comments we received back in the survey we just did.
Mr. RAMAMURTI. You also mentioned eliminating the restrictions
on shareholder payouts and on executive compensation. Is that
right?
Mr. BOHN. Correct.
Mr. RAMAMURTI. So, look, I agree with you on the diagnosis here,
which is that the Main Street Program has not really helped anybody so far very much, and it is also unlikely to help a lot more
companies without significant changes. But I am concerned about
the proposed solution that you are offering. You propose changing
the rules so that every company can get a loan even if before the
crisis they had a lot more debt than they had earnings, you know,
in other words, no matter how much risk there is that the public
is going to end up holding the bag at the end of this. And at the
same time, you propose eliminating restrictions on companies
spending the loan money on payments to their shareholders and
eliminating restrictions on executive pay. So I guess my question
is: Why should the American people be willing to give billions of
dollars to potentially failing companies that can just use that
money to pay shareholders and executives while firing workers?
Mr. BOHN. Well, I think, Commissioner Ramamurti, when we
talk about things like EBITDA and whether or not the company
was at a higher risk prior, if you consider a large part of the lower
middle market, which are oftentimes family-owned businesses,
EBITDA in that case can be a misleading indicator because a lot
of the costs and expenses roll through salaries and other types of
things, and at the end of the day the EBITDA is not something significant. We see this a lot of times when purchases and acquisitions
are made where there is a lot of debate and discussion over
EBITDA and what is published through their regular financials.
So I think when we are looking at that, we tend to eliminate the
opportunity for companies, particularly family-owned companies
who are in that lower middle market, who at the end of the day
their margins, their EBITDA are very, very limited and small, but
yet they have been very successful for years, employ a number of
different people.
Mr. RAMAMURTI. Can I ask just a follow-up question on that? On,
let us say, the executive compensation restriction specifically, if a
company exists that is not interested in the Main Street Program
because of the executive compensation restriction, isn’t it a fair
guess to say that the reason that they are not interested is because
they want to use some of that money to increase executive compensation? Otherwise, why is it a deterrent to them?
Mr. BOHN. Well, again, so that particular comment comes directly from some of our members of why they are not interested.
What their particular reason for not being interested, I cannot go
to that intent. But I will say that if there is anything that limits
their ability to eventually sell the company upon paying the loan
or to derive the benefits that they have built for building a company over time, I think that that is going to absolutely preclude
them from wanting to utilize the funds that could otherwise be
available to them.
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Mr. RAMAMURTI. Thanks. Look, just to sum up quickly, I think
we have actually seen a remarkable consensus emerge at this hearing, which is that the Main Street Program as currently designed
is failing. The representative of the banking industry told us that
we are not seeing meaningful demand for loans right now from
their clients. The representative of small and mid-sized businesses
told us that the program would not help its members as currently
designed. And Ms. Mills, representing hundreds of thousands of
workers, told us that the Main Street Program has not helped a
single worker and is not likely to.
I do not question the hard work of President Rosengren and the
Fed staff, but more loans are not going to solve this crisis. Struggling small and mid-sized companies cannot take on more debt
right now, so the only tool in the Fed’s belt is the wrong one. This
program was given $75 billion and months to succeed. It did not
and it cannot. It is time to stop tinkering around the edges with
adjustments to loan eligibility and loan terms when the fundamental problem is with the nature of the loans themselves.
It is time for Congress to step back in so that we can actually
save small and mid-sized businesses, and when it does, it needs to
tie the assistance to meaningful, enforceable protections for workers, and not just hand money to executives and trust them to take
care of workers’ interests.
Thank you, Mr. Chairman.
Mr. HILL. The gentleman yields back, and we now turn to Congresswoman Shalala for 5 minutes.
Ms. SHALALA. Thank you very much.
Ms. Mills, one of the problems with the loan program, it seems
to me, including this program, which clearly has flaws in it, is that
loans protect the health care of executives but not of workers.
Nothing that we have done—unemployment insurance to support
workers—protects their health care, unless these hotels, for example, furlough people and keep their health care.
So, fundamentally, what the Fed has done will protect the health
care of a lot of executives, but there is nothing that we have done,
particularly in the unemployment insurance system, that protects
the workers’ health care. I think that was one of your points.
Ms. MILLS. Yes, thank you. That is correct that the extension of
the wages that the Congressman mentioned has been appreciated,
although it is now ending. That is problematic. But there has not
been an extension of health care. And even in a case where we
have some health care negotiated, companies like the Fontainebleau, you know, are not abiding by that. So that is absolutely correct.
Ms. SHALALA. Thank you.
Ms. Anderson, three of the five facilities require that Main Street
loans be senior or pari passu with, in terms of priority and security, the borrower’s other loans or debt instruments other than
mortgage debt. Are lenders willing to subordinate or dilute their
priority and security? What impact does this provision have on an
applicant’s ability to borrow under the Main Street Lending Program?
Ms. ANDERSON. Thank you for your question. This is a true issue
in the sense that many mid-sized companies have existing debt
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structures and having senior credit come in at this point basically
has to be negotiated with those existing lenders, many of whom are
not bank lenders, and that then becomes a complex process in
terms of an inter-creditor agreement. And I know that has certainly put off some borrowers in terms of trying to go through that
process when you may not receive the consent from the other lenders who may just not have the same incentives as the originating
bank. So it is a problem, and it is complex.
Ms. SHALALA. Thank you.
I have a question for Mr. Bohn. In your written testimony, you
stated that the challenges with the Main Street Lending Program
have a lot to do with whether people actually understand it. Do you
have some specific recommendations in that regard?
Mr. BOHN. Thank you, Congresswoman Shalala, and as I am sitting here in Orlando, Florida, thank you for representing our great
State here on the Commission and in general.
So, yes, I think that one of the things we heard back from our
survey was that there was—unlike the PPP, where there was significant awareness about the various provisions and tenets of it,
there was a lot more ambiguity and misunderstanding. Some of
that related to how long it is taking for the program to come together, some of that because there was a little bit of misunderstanding thinking that it would be different than PPP because it
was loans and not carve-out 501(c)(6)’s or affiliated groups.
So I think that there is an opportunity here, regardless of where
the changes are made, to make sure that the program is much
more clearly communicated on a wider basis, and we are willing
and able to help with that in any way we can.
Ms. SHALALA. Do you have a specific recommendation on the loan
size?
Mr. BOHN. Well, I have a specific recommendation on the loan
size that it should come down to closer to $50,000, and here is
what makes me say that. There were a number of smaller familyowned businesses in the middle market that I have spoken to recently right here in Orlando who have said, look, we do not need
$250,000 but we do need $50,000 or $75,000 in order to prepare
what we think is going to be a longer haul to deal with the fallout
from COVID, whether that is safety equipment or how we run our
operation. But $250,000 is too large of a haul for them, and, again,
do not want to get out over their skis financially. So, yes, a specific
recommendation on that, yes, ma’am.
Ms. SHALALA. Thank you. I yield back.
Mr. HILL. Thank you, Congresswoman, and now we will yield to
Senator Toomey for 5 minutes.
Senator TOOMEY. Thank you very much, Mr. Chairman. This has
been very, very helpful and informative, and I really appreciate the
testimony of all of the participants.
My own view is it is way premature to come to the conclusion
that this has all been a failure. Okay, I think there are definitely
some improvements we ought to be looking at, and there might be
entire new versions of Main Street Programs that we ought to contemplate. We talked about affiliation rules, which I think need to
be changed. There may be terms that ought to be modified. I am
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interested in something that would be more asset-based rather
than just income-based.
But let us keep in mind it took a long time to get this up and
running. That was always going to be the case because of the nature of the complexity of doing this kind of funding. There has been
a recent acceleration in use. If the acceleration continues, we may
see significant pickup.
Mr. Bohn makes the argument that there is a high level of
unawareness or low level of awareness about this. There is a lot
we could do to remedy that which could result in more participation.
And then, finally, this leads to my question. You know, I would
argue that the corporate bond programs, which are not the ones we
are here to talk about today, but the 13(3) facilities that set up the
corporate bond-buying programs have been enormously successful
despite the fact that the Fed has purchased very, very few bonds.
It was the standing up of the program, the existence of the program, that allowed the private market to operate, to operate actually at an all-time record volume, after having been frozen. That
is a remarkable success story, despite the fact that there was not
a lot of history.
So that gets me to my question, and maybe I should have asked
this at the beginning, and, Ms. Anderson or Mr. Bohn or Mr. Foster, any of you might have a thought on this. But how should we
best determine objectively the extent to which credit needs are
being met or not being met? I have heard anecdotally from Pennsylvania companies and Pennsylvania banks that when this pandemic resulted in a shutdown, there was a massive drawdown on
existing credit lines. People piled up as much liquidity as they possibly could. Then after a little time passed, they started to pay
down some of those balances. But, you know, we can certainly seek
bankruptcy filings; at that point it is kind of too late.
What should we be looking at on a day-to-day basis, what metric
should we be using to determine how significant the unmet credit
demands are in this space? And, Ms. Anderson, maybe you could
lead it off.
Ms. ANDERSON. Sure. Thank you. So I think you make a good
point in that, by and large, credit demands for many companies are
being met. We saw record lending from banks early on in the pandemic, so $700 billion plus was lent over the course of 3 months.
Since then, we have seen about $200 billion in that C&I lending
space be repaid, so I think you are right, businesses are, you know,
paying down some of that liquidity that they took in in the early
days of the crisis.
And speaking to our banks, the demand for credit has lessened.
They are not getting millions of inquiries from their customers,
new or existing. And I think that really says something, and they
have all been segmenting their books trying to see who needs credit
or other solutions, and I think really is a temporary liquidity credit
need, then the banks by and large are providing that. If it is a solvency need, that is not something that banks provide to companies.
Mr. FOSTER. Senator, I think one simple way to figure out if
there is unmet credit needs is to ask the banks how many Main
Street loans have been requested by borrowers that the banks have
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rejected. If you could capture that data, you would get a real good
idea, because I am aware of probably a hundred. And it is not the
banks’ fault. You know, we have a restaurant group in Florida and
the bank who signed up for the program said, ‘‘I cannot take any
more restaurant exposure in my portfolio,’’ because they are approaching it like a bank. They are not approaching it differently.
They are not relaxing underwriting standards. If you are a restaurant group, you are not getting a bank loan. And if we do not
capture that data, you figure it out.
Senator TOOMEY. I think that is a very interesting point.
Ms. Anderson, is there a way that that data is being collected
systematically so that we could access that? Or does that not exist
in a centralized place?
Ms. ANDERSON. So it is not being collected systematically at this
point in time. Certainly we could work with our members to get
you additional data on that in terms of our members who are active in the program. They are receiving between 500 to maybe
2,000 inquiries in relation to the Main Street Loan Program, and
as I said before, you know, upwards of three-quarters of those actually do not understand the program and think it is a grant program. So it is really not a high level of inquiries even.
Senator TOOMEY. Thanks very much. Mr. Chairman, I see my
time has expired.
Mr. HILL. I want to thank our witnesses again, both panels. Excellent discussion. I want to thank our Commissioners for their
participation today and for their thoughtful questions. And on behalf of the Commission, in addition to thanking the witnesses, let
us thank the staff as well for their preparation in putting the hearing together.
This hearing is adjourned.
[Whereupon, at 12:04 p.m., the Commission was adjourned.]
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