CARES Act: Federal Reserve To Provide $2.3 Trillion of Loans to Support the Economy | Practical Law

CARES Act: Federal Reserve To Provide $2.3 Trillion of Loans to Support the Economy | Practical Law

On April 9, 2020, the Federal Reserve Board (Federal Reserve) announced additional actions to provide up to $2.3 trillion of loans to support the Small Business Administration's (SBA) Paycheck Protection Program (PPP), to establish two Main Street lending programs to support lending to small and mid-sized businesses, and to establish a Municipal Liquidity Facility to support lending to state and municipal governments. The Federal Reserve will also expand the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) and the Term Asset-Backed Securities Loan Facility (TALF) in an effort to increase credit to individuals and businesses.

CARES Act: Federal Reserve To Provide $2.3 Trillion of Loans to Support the Economy

Practical Law Legal Update w-024-9676 (Approx. 4 pages)

CARES Act: Federal Reserve To Provide $2.3 Trillion of Loans to Support the Economy

by Practical Law Finance
Published on 09 Apr 2020 • USA (National/Federal)
On April 9, 2020, the Federal Reserve Board (Federal Reserve) announced additional actions to provide up to $2.3 trillion of loans to support the Small Business Administration's (SBA) Paycheck Protection Program (PPP), to establish two Main Street lending programs to support lending to small and mid-sized businesses, and to establish a Municipal Liquidity Facility to support lending to state and municipal governments. The Federal Reserve will also expand the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) and the Term Asset-Backed Securities Loan Facility (TALF) in an effort to increase credit to individuals and businesses.
On March 27, 2020, the US Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. No. 116-136 (H.R. 748)), which President Trump signed into law, effective immediately. The CARES Act was enacted in response to the COVID-19 outbreak in the US and is intended to provide economic relief to individuals and businesses facing economic hardship due to the outbreak.
The CARES Act authorized:
  • The Small Business Administration (SBA) to provide loans to small businesses under the Paycheck Protection Program (PPP)(§§ 1102 and 1106).
  • The Federal Reserve Board (Federal Reserve), working with the Department of the Treasury (Treasury), to establish a "Main Street Lending Program" to support lending to small and mid-sized businesses (§ 4003(c)(3)(D)(ii)).
  • The Federal Reserve Board, working with The Treasury, to establish a program or facility to support lending to state and municipal governments (§ 4003(c)(3)(E)).
On April 9, 2020, the Federal Reserve announced new facilities under each of these programs. It also announced that it will also expand the size and scope of the Primary and Secondary Market Corporate Credit Facilities and the Term Asset-Backed Securities Loan Facility in an effort to increase credit to individuals and businesses.

Paycheck Protection Program Lending Facility

Under the PPP, SBA loans to small businesses are available in amounts up to 2.5 times the borrower's average monthly payroll costs. The PPP loans will be forgiven if the borrower keeps its employees on the payroll and uses the proceeds of the loan for payroll, rent, mortgage interest, or utilities.
The facility announced by the Federal Reserve on April 9, the Paycheck Protection Program Lending Facility, will bolster the effectiveness of the PPP by providing term financing to PPP lenders, backed by PPP loans. Under this facility, the Federal Reserve will extend non-recourse credit to eligible financial institutions that originate PPP loans, taking their loans as collateral at face value.

Main Street Loan Facilities

The Coronavirus Economic Stabilization Act of 2020 (CESA), Title IV, Subtitle A of the CARES Act, among other things, allows the Federal Reserve, consistent with Section 13(3) of the Federal Reserve Act (12 U.S.C. § 343(3)), and with the support of the Treasury, to support lending to small and mid-sized businesses (see Legal Update, CARES Act: $500 Billion Loan Program for US Businesses).
On April 9, the Federal Reserve announced two Main Street lending facilities with a combined size of up to $600 billion, bolstered by a $75 billion equity investment by the Treasury using CESA funds. The Federal Reserve will provide financing to both facilities by lending to a special purpose vehicle, which will in turn purchase 95% participations in eligible loans from eligible lenders. These eligible lenders would retain 5% of each eligible loan. Eligible lenders are US insured depositary institutions, US bank holding companies, and US savings and loan holding companies.
The two new Federal Reserve facilities are:
The terms of eligible loans are identical under both facilities and have a minimum size of $1 million.

Expansion of Primary and Secondary Market Corporate Credit Facilities and TALF

On April 9, the Federal Reserve announced plans to expand the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) and the Term Asset-Backed Securities Loan Facility (TALF) in an effort to increase credit to individuals and businesses (see Legal Update, Federal Reserve Establishes Term Asset-Backed Securities Loan Facility (TALF) and Commercial Paper Funding Facility in Response to COVID-19).
The range of assets that are eligible collateral for TALF will be broadened to include the triple-A rated tranches of both outstanding commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the $100 billion facility will not be increased. TALF supports the issuance of asset-backed securities that fund a wide range of lending such as student loans, auto loans, and credit card loans.
These three programs will now support up to $850 billion in credit backed by $85 billion in credit protection provided by the Treasury.

Municipal Liquidity Facility

CESA also allows the Federal Reserve, with The Treasury support, to establish a program to provide liquidity to the financial system to support lending to municipal governments (see Legal Update, CARES Act: $500 Billion Loan Program for US Businesses).
The Municipal Liquidity Facility, announced by the Federal Reserve on April 9, will support lending to US states and the District of Columbia, US cities with a population exceeding one million residents, and US counties with a population exceeding two million residents.
Treasury will make an equity investment of $35 billion in a special purpose vehicle that is financed by the Federal Reserve and will be able to purchase up to $500 billion of eligible notes issued by eligible municipalities. These notes would be supported by municipalities' tax, bond, and other revenue, and would be priced according to the municipality's rating.