April 9, 2020

Fed Unveils $2.3 Trillion More In Lending Capacity, Details ‘Main Street’ Program

The Federal Reserve is deploying its emergency lending powers to “an unprecedented extent,” Federal Reserve Chairman Jerome Powell said in a speech this morning. Powell’s remarks came shortly after the announcement a new round of lending facilities that would add $2.3 trillion in the Fed’s capacity to support the economy during the pandemic using its authority under Section 13(3) of the Federal Reserve Act.

These new facilities included the following.

• Main Street Lending Program — Initially announced March 23, two Fed facilities will purchase up to $600 billion in loans for companies with up to 10,000 employees or revenues of less than $2.5 billion. The Fed will purchase 95% participations in eligible loans of at least $1 million from U.S. depository institutions, bank holding companies and S&L holding companies. To be eligible, a loan must be originated starting April 8 and have a four-year term with interest deferred for a year; loan caps vary based on the facility purchasing the loan. Firms taking out Paycheck Protection Program loans also may take out Main Street loans.
• PPP Lending Facility — As previously reported, the Fed will lend to PPP lenders on a nonrecourse basis, with Small Business Administration PPP loans as collateral at face value. To help banks make use of the new facility, the federal banking agencies are issuing an interim final rule that will allow institutions to neutralize the regulatory capital effects, with respect to leverage and risk-based ratios, of loans pledged to the PPPL facility. The relief is consistent with the treatment the agencies are applying to banks using the Fed’s money market mutual fund liquidity facility. 
• Municipal Liquidity Facility — The Fed will purchase up to $500 billion in notes issued by eligible states, counties and cities.

The Fed also announced it will broaden the range of assets eligible for purchase by three existing Fed facilities. The Term Asset-Backed Securities Loan Facility will now purchase triple-A-rated tranches of outstanding commercial mortgage-backed securities and newly issued collateralized loan obligations. The Fed expanded the scale of two facilities to support large employers — the Primary Market Corporate Credit Facility and the Secondary Market Corporate Credit Facility — to support up to $850 billion in credit.

“Our emergency measures are reserved for truly rare circumstances, such as those we face today,” Powell said, adding that “when the economy is well on its way back to recovery, and private markets and institutions are once again able to perform their vital functions of channeling credit and supporting economic growth, we will put these emergency tools away.”

American Bankers Association President and CEO Rob Nichols welcomed this unprecedented action by the Fed to help ease the economic strain caused by the coronavirus. While ABA is reviewing the details of these new programs, “we already know that the Fed’s actions will allow more banks to help more small businesses by providing additional liquidity to the thousands of institutions participating in the Paycheck Protection Program,” Nichols said. He added that “America’s banks are again being asked to play a critical role in [the launch of the Main Street Lending Program], and I have no doubt they will step up to do so at this critical time for the nation.”

Fannie, Freddie Revise Coronavirus Servicing Guidance To Reflect CARES Act Changes

Fannie Mae and Freddie Mac have issued updates to their servicing guidelines for servicers working with borrowers affected by the coronavirus pandemic. The updates reflect changes from the recently enacted CARES Act.
Among other things, the new guidelines:

• eliminate the requirement that servicers determine the occupancy status of a property
• require servicers to suspend credit reporting when the hardship is related to COVID-19
• require that borrowers be provided an initial forbearance plan for a period of up to 180 days that may be extended for up to an additional 180 days at the borrower’s request

FOMC Members: Coronavirus Pandemic ‘Not Directly Comparable’ With 2008 Financial Crisis

The near-term U.S. economic outlook “deteriorated sharply” and became “profoundly uncertain,” prompting the Federal Open Market Committee to drop interest rates to near zero over the course of two unscheduled policy actions in early and mid-March. Minutes that reflect a March 2 conference call and a March 15 committee meeting showed unanimous consensus about a decline in economic activity in the second quarter and a significant increase in downside risk, given the unpredictable nature of the coronavirus.

Several participants acknowledged the difference between the present situation and the 2008 financial crisis, noting that “that the temporary nature of the shock to economic activity, the fact that the shock arose in the nonfinancial sector, and the healthy state of the U.S. banking system all implied that the current situation was not directly comparable with the previous decade’s financial crisis and it need not be followed by negative effects on economic activity as long-lasting as those associated with that crisis,” the minutes noted.

“Participants stressed that measures taken in the areas of health care policy and fiscal policy, together with actions by the private sector, would be important in shaping the timing and speed of the U.S. economy’s return to normal conditions,” the minutes added.

Fed Survey: Most Small Businesses Not Equipped To Cover Long-Term Revenue Loss