**Date:** August 21, 2020 ## Commission Members - U.S. Representative French Hill - Bharat Ramamurti - U.S. Representative Donna E. Shalala - U.S. Senator Pat Toomey ## Table of Contents - Introduction — 3 - Executive Summary — 8 - Discussion of the Main Street Lending Program — 13 - Treasury and Federal Reserve Recent Developments — 49 - Appendix A: Letter from U.S. Department of the Treasury to Congressional Oversight Commission, dated July 30, 2020 - Appendix B: Letter from Congressional Oversight Commission to Treasury Secretary Steven Mnuchin, dated August 7, 2020 - Appendix C: Letter from Congressional Oversight Commission to Defense Secretary Mark Esper, dated August 7, 2020 - Appendix D: Main Street Lending Program Hearing Follow-up Questions, dated August 14, 2020 --- ## INTRODUCTION This is the fourth report of the Congressional Oversight Commission (Commission) created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).[^1] The Commission's role is to conduct oversight of the implementation of Division A, Title IV, Subtitle A of the CARES Act (Subtitle A) by the U.S. Department of the Treasury (Treasury) and the Board of Governors of the Federal Reserve System (Federal Reserve). Subtitle A provides $500 billion to the Treasury for lending and other investments "to provide liquidity to eligible businesses, States, and municipalities related to losses incurred as a result of coronavirus."[^2] Of this amount, $46 billion is set aside for the Treasury itself to provide loans or loan guarantees to certain types of companies. Up to $25 billion is available for passenger air carriers, eligible businesses certified to perform inspection, repair, replace, or overhaul services, and ticket agents. Up to $4 billion is available for cargo air carriers, and up to $17 billion is available for businesses "critical to maintaining national security."[^3] Any unused portions of this $46 billion, and the remaining $454 billion, may be used to support emergency lending facilities established by the Federal Reserve. The CARES Act charges the Commission with submitting regular reports to Congress on: - The use by the Federal Reserve of authority under Subtitle A, including with respect to the use of contracting authority and administration of the provisions of Subtitle A. - The impact of loans, loan guarantees, and investments made under Subtitle A on the financial well-being of the people of the United States and the U.S. economy, financial markets, and financial institutions. - The extent to which the information made available on transactions under Subtitle A has contributed to market transparency. - The effectiveness of loans, loan guarantees, and investments made under Subtitle A in minimizing long-term costs to the taxpayers and maximizing the benefits for taxpayers.[^4] In its first report to Congress on May 18, 2020, the Commission stated that it is responsible for answering two basic questions: - What are the Treasury and the Federal Reserve doing with $500 billion of taxpayer money? - Who is that money helping?[^5] At this time, the emergency lending facilities established by the Federal Reserve that are receiving CARES Act funds are: - **Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF):** Through a special purpose vehicle (SPV), the PMCCF enables the Federal Reserve to purchase newly issued corporate bonds and portions of syndicated loans, and the SMCCF enables the Federal Reserve to purchase previously issued corporate bonds and exchange-traded funds (ETFs) that invest in corporate bonds.[^6] The Treasury has announced it intends to make a total equity investment of $75 billion in the SPV, which can collectively support up to $750 billion in purchases.[^7] As of August 19, 2020, the Treasury had invested $37.5 billion in the SPV.[^8] The Federal Reserve has not announced that the PMCCF has purchased any bonds or syndicated loans. As of August 19, 2020, the SMCCF had purchased $12.49 billion of bond ETFs and individual corporate bonds.[^9] - **Main Street Lending Program:** The Main Street Lending Program is comprised of five facilities—three dedicated to for-profit businesses and two dedicated to nonprofit organizations. The Federal Reserve, through an SPV, acquires loans issued by lenders to small and medium-sized businesses and nonprofit organizations with up to 15,000 employees or 2019 revenues of $5 billion or less. The Treasury announced it intends to make an equity investment of $75 billion in this program, which can support up to $600 billion in lending.[^10] As of August 19, 2020, the Treasury had invested $37.5 billion in this program.[^11] The for-profit facilities are operational and able to purchase eligible loans submitted by lenders registered to participate in the program. The nonprofit facilities are not yet operational. As of August 10, 2020, there were 522 lenders that had registered to participate in the program,[^12] though only 160 of them had publicized that they were accepting loan applications from new customers.[^13] As of August 19, 2020, $496.8 million in loans had been made under the Main Street Lending Program.[^14] The Federal Reserve's participation amount in these loans is $472 million.[^15] - **Municipal Liquidity Facility (MLF):** The MLF enables the Federal Reserve, through an SPV, to purchase short-term notes issued by state and local governments. The Treasury announced it intends to make an equity investment of $35 billion in the SPV, which can support up to $500 billion in lending.[^16] As of August 19, 2020, the Treasury had invested $17.5 billion in this facility.[^17] To date, the MLF has purchased a $1.2 billion one-year note from the state of Illinois and a $450.7 million three-year note from the Metropolitan Transportation Authority (MTA), which is the mass transit agency for the New York City area.[^18] - **Term Asset-Backed Securities Loan Facility (TALF):** The TALF enables the Federal Reserve, through an SPV, to make loans to U.S. companies secured by consumer or business loans. The Treasury announced it intends to make an equity investment of $10 billion in this facility, which can provide up to $100 billion in lending.[^19] As of August 19, 2020, the Treasury had invested $10 billion in this facility.[^20] The TALF had lent $2.26 billion, as of August 19, 2020.[^21] In this report, we provide an in-depth analysis of the Main Street Lending Program. We also provide updates regarding recent key actions the Treasury and the Federal Reserve have taken regarding all of the lending programs and facilities under Subtitle A. ### The Treasury's National Security Loan to YRC Worldwide Inc. The Commission's third report raised concerns regarding the $700 million loan made by the Treasury to YRC Worldwide Inc. (YRC) under Subtitle A's national security loan program.[^22] In particular, the Commission questioned (1) whether YRC, a trucking service provider utilized domestically by the U.S. Department of Defense (Department of Defense), was appropriately designated by the Treasury and the Department of Defense as "critical to maintaining national security," and (2) whether YRC's precarious financial condition at the time of the loan exposed taxpayers to a significant risk of loss.[^23] On July 30, 2020, the Treasury sent the Commission a letter that provided additional information regarding its loan to YRC.[^24] After reviewing this letter, the Commission sent letters to Treasury Secretary Steven Mnuchin and Defense Secretary Mark Esper requesting additional information regarding the loan to YRC. The Commission requested responses by August 27, 2020.[^25] ### Hearing on the Main Street Lending Program The CARES Act empowers the Commission to hold hearings as part of its oversight work.[^26] The Commission's third report noted its intention to hold a hearing on the Main Street Lending Program.[^27] That hearing was held on August 7, 2020. A video recording of the hearing and the prepared statements of the hearing witnesses are available on the Commission's website at https://coc.senate.gov. When the full hearing record is completed (including a transcript and any supplemental statements for the record) it will also be available on the Commission's website. The following witnesses testified at the hearing on various topics concerning the Main Street Lending Program, including its efficacy, accessibility, and perceived shortcomings: - Eric Rosengren, President & Chief Executive Officer, Federal Reserve Bank of Boston - Lauren Anderson, Senior Vice President & Associate General Counsel, Bank Policy Institute - Thomas Bohn, Chief Executive Officer, Association for Corporate Growth - Vince Foster, Executive Chairman, Main Street Capital Corporation - Gwen Mills, Secretary-Treasurer, UNITE HERE ### Upcoming Hearing on the Municipal Liquidity Facility In the coming weeks, the Commission plans to hold a hearing about the MLF, which supports lending to state and local governments. --- ## EXECUTIVE SUMMARY This fourth report of the Commission principally focuses on the implementation of the Main Street Lending Program by the Federal Reserve and the Treasury. The Main Street Lending Program provides liquidity to small and medium-sized businesses by backing loans to businesses with up to 15,000 employees or less than $5 billion in 2019 revenue. The program also backs loans to certain nonprofit organizations between 10 and 15,000 employees or $5 billion in 2019 revenues.[^28] The Treasury has pledged to invest $75 billion in the program, which is administered by the Federal Reserve Bank of Boston (Boston Federal Reserve).[^29] The Main Street Lending Program currently consists of three facilities for for-profit businesses: the Main Street New Loan Facility (New Loan Facility), the Main Street Priority Loan Facility (Priority Loan Facility), and the Main Street Expanded Loan Facility (Expanded Loan Facility). It also has two facilities for nonprofit organizations: the Nonprofit Organization New Loan Facility (Nonprofit New Loan Facility) and the Nonprofit Organization Expanded Loan Facility (Nonprofit Expanded Loan Facility). The Main Street Lending Program has seen modest initial activity thus far. As of August 19, 2020, eligible lenders had issued loans totaling $496.8 million under the program.[^30] The Federal Reserve's participation amount in these loans is $472 million—about 0.07% of the program's $600 billion lending capacity.[^31] As of August 10, 2020, 522 lenders have registered with the program, although only 160 had publicized that they are accepting loan applications from new customers.[^32] The Commission believes that at least three factors should inform policy discussions about the scope of the Federal Reserve's emergency efforts to provide liquidity to small and medium-sized businesses. ### 1. Current economic conditions. The need for the Main Street Lending Program should decrease as liquidity conditions and the state of the overall economy improve. While the economy shows signs that it may have stopped its precipitous downslide since entering a recession in March 2020, the ongoing COVID-19 crisis means businesses continue to struggle to return to pre-pandemic operations and face considerable uncertainty and economic challenges. Moreover, millions of Americans laid off due to the pandemic and business shutdown orders remain unemployed. ### 2. The critical economic contribution of small and medium-sized businesses. Given the uncertainty facing employers, and the desire to preserve employment when possible, the Commission believes that providing appropriate liquidity to small and medium-sized businesses during the COVID-19 crisis is vital. The Main Street Lending Program targets a critical segment of the economy: businesses that help form the "Main Street" of local communities. According to Goldman Sachs economists, as many as 45 million Americans—nearly 40% of private-sector employees—work for businesses that may qualify for the Main Street Lending Program.[^33] ### 3. The need or desire of small and medium-sized businesses for credit. Given the statutory constraints of section 13(3) of the Federal Reserve Act, the Main Street Lending Program is designed to facilitate lending to companies that are "unable to secure adequate credit accommodations from other banking institutions."[^34] Some of the Main Street Lending Program's modest activity may be because some businesses accessed the Small Business Administration's (SBA) Paycheck Protection Program (PPP), while others are able to rely on existing credit lines or other sources of liquidity. A National Federation of Independent Businesses (NFIB) report from July found that "[h]istorically, loans have never been cheaper,"[^35] and only 3% of surveyed business owners had unmet credit needs.[^36] Further, in the Federal Reserve's Senior Loan Officer Opinion Survey for this year's second quarter, only 22.6% of bank senior loan officers reported a moderate or significant increase in inquiries for credit.[^37] The Commission held its first hearing on August 7, 2020, to explore the Main Street Lending Program. The hearing consisted of two panels of witnesses. The President and CEO of the Boston Federal Reserve, Eric Rosengren, was the witness for the first panel. The second panel consisted of the following four witnesses: - Lauren Anderson, Senior Vice President and Associate General Counsel of the Bank Policy Institute - Thomas Bohn, President and Chief Executive Officer, Association for Corporate Growth - Vince Foster, Executive Chairman, Main Street Capital Corporation - Gwen Mills, Secretary-Treasurer, UNITE HERE The hearing explored potential reasons for the program's currently low utilization rate and whether the potential utilization rate would increase in the future. It also explored whether modifications to expand access to the Main Street Lending Program are advisable and whether the Main Street Lending Program adequately encourages banks to make loans that they would not have otherwise made. In this report, the Commission discusses several topics and suggestions relating to the Main Street Lending Program's efforts to help creditworthy small and medium-sized businesses. ### 1. Faster implementation would help improve the Main Street Lending Program for borrowers. It took three months for the Main Street Lending Program to become operational for for-profit businesses, and the facilities for nonprofits have yet to open. The Federal Reserve has cited as the cause of the delay the complexity of implementing a loan buying program that must serve heterogeneous borrowers, along with the fact that the program must rely on private third-party lenders' onboarding of borrowers and those lenders' existing underwriting processes—all time-consuming steps. Any delay in implementing the program constricts the effectiveness of any relief that the program could provide to viable businesses and nonprofits. The Commissioners' views differed regarding whether further modifications to the program's structure and terms would succeed in serving more businesses and their employees, and whether such changes would be prudent, but the Commission does agree that time is of the essence. The Commission recommends that the Federal Reserve and the Treasury expedite their processes for considering (and, if appropriate, implementing) modifications and hasten the rollout of the nonprofit facilities. The Commission also recommends that the Treasury and the Federal Reserve consider the appropriateness of enlisting other Federal Reserve Banks to help expand administrative capacity, as well as to help innovate and experiment with changes or expansions to the Main Street Lending Program. ### 2. Borrowers are unfamiliar with the Main Street Lending Program. Borrowers would benefit from further outreach by the Federal Reserve and banks to raise awareness of the Main Street Lending Program among eligible borrowers and to explain its mechanics. That said, further outreach alone may not yield a significant change in program participation if demand for loans is limited. ### 3. The Commission heard testimony regarding a number of proposals for modifying the Main Street Lending Program. The issues involved are complex and multi-faceted. The Commission heard testimony regarding at least six potential changes to the Main Street Lending Program, including (1) decreasing the Main Street Lending Program's minimum loan size, (2) extending the maturity for Main Street loans from five to seven years and pushing back amortization to year four, (3) raising EBITDA standards (possibly only if a lender will retain a higher portion of loans made to more leveraged companies) and/or creating an asset-based lending facility, (4) relaxing the Main Street Lending Program's affiliation rules, (5) expanding the Main Street Lending Program to nonbank lenders like Business Development Corporations (BDCs), fintech lenders, and Community Development Financial Institutions (CDFIs), and (6) creating enforceable employee retention mandates. The Commissioners' views differed on the wisdom of adopting any or all of these proposals, but this report includes a full discussion of the relative policy merits of each. ### 4. The Federal Reserve and the Treasury should explore the implications of whether banks are using the Main Street Lending Program to make loans they would not have made anyway. The Main Street Lending Program aims to encourage lenders to make loans they might not otherwise make on their own by purchasing 95% of originated loans and allowing banks to retain as high as a 20% origination fee on their retained portion of any loan.[^38] Since federal banking supervisors generally treat Main Street loans like any other loan, banks apply the same strict underwriting standards to Main Street loans as they would any other loan. Thus, borrowers that would not otherwise qualify for regular bank loans may not be able to access credit through the Main Street Lending Program. For the Main Street Lending Program to provide credit to borrowers that do not meet banks' underwriting criteria, the Federal Reserve and the Treasury would need to assume more risk of loss. As a legal matter, the Commission notes that the Treasury does not need new statutory authorization to increase its risk tolerance and potentially incur losses to the $454 billion appropriated to the Treasury's ESF, which backs the Main Street Lending Program. ### 5. The impact of the nonprofit Main Street facilities remains to be seen. The Commission has not yet assessed in-depth the facilities for nonprofits because they are not yet operational. As noted above, the Commission recommends that the Federal Reserve take expedited action to bring them online. The report also details the development of those facilities and certain public comments submitted to the Federal Reserve about the Main Street Lending Program and nonprofit organizations. --- ## DISCUSSION OF THE MAIN STREET LENDING PROGRAM Small and medium-sized businesses are a critical part of the fabric of American society, helping to form the "Main Street" of local communities all across the country. Businesses eligible for the Main Street Lending Program provide work for 45 million Americans and account for nearly 40% of private sector employees, according to Goldman Sachs economists.[^39] A great number of jobs are at risk if these businesses fail, along with possible disruption to nearly one-third of private sector GDP.[^40] The economic slowdown from the virus and stay-at-home and business shutdown orders have unfortunately harmed Main Street businesses across the country. Although real-time data on the number of business closures and bankruptcies is scarce, according to one estimate, from February to June 2020, the number of Black business owners dropped 19%, Hispanic business owners dropped 10%, and Asian business owners dropped 10%, in comparison to a smaller (but still alarming) drop of 5% for white business owners.[^41] At this moment in time, employers face uncertainty about the projected length of the pandemic and the restrictions imposed in response to it. There may be a glimmer of positive news for Americans in that the economy has seemingly stopped a precipitous downward slide since it entered a recession in March 2020.[^42] U.S. retail sales have begun to recover with an 8.4% increase in June 2020 followed by a 1.2% increase in July 2020.[^43] "U.S. employers added nearly 9.3 million jobs the past three months," although that hiring "hasn't yet replaced half of the 22 million jobs lost in March and April,"[^44] which followed a record level of employment and economic activity in February. The number of unemployment applications remains at historic levels, with the latest weekly figure of 1,106,000 almost double "the Great Recession high [of] 665,000 in March 2009."[^45] The 10.2% July 2020 unemployment rate is just above the peak experienced during the 2008 financial crisis and still far from the unemployment rate of 3-4% experienced from 2018 to February 2020. Moreover, the improved economic outlook is largely dependent on the trajectory of the pandemic, which, if worsened, could undo gains made in recent months. This July's employment report showed that the unemployment rate continued to fall for many groups within the workforce. Unemployment among women declined by 1.1%.[^46] Veterans experienced a 0.7% drop in unemployment.[^47] Individuals with less than a high school diploma saw a 1.2% decrease in unemployment, while high school graduates with no college degree saw a 1.3% decline.[^48] The unemployment rate for disabled individuals fell by 2.2%.[^49] Unemployment among workers in the leisure and hospitality sector, which remains the worst hit employment sector of the economy, declined by 3.9%.[^50] The Black unemployment rate decreased by 0.8% and the Hispanic unemployment rate declined by 1.6% in July 2020.[^51] However, the most recent employment report reflected the continued outsized impact of COVID-19 on Black and Hispanic people, with the Black unemployment rate at 14.6% and the Hispanic unemployment rate at 12.9%.[^52] The CARES Act gave 159 million Americans new economic impact payments (i.e., stimulus checks)—most at $1,200 per individual with higher amounts for those claiming children as dependents. Federal Pandemic Unemployment Compensation, also created by the CARES Act, provided a supplemental weekly benefit of $600 on top of a state's base unemployment weekly benefit, which was more than pre-pandemic unemployment benefits.[^53] With this aid, real disposable personal income rose by 11.5% in the second quarter of 2020,[^54] despite record unemployment and business activity slowdowns. However, stimulus checks were a one-time distribution and enhanced unemployment benefits have since been discontinued, while the COVID-19 infection rates and unemployment rates remain high. Of course, these additional government payments are not a substitute for a stable, healthy economy that has fully reopened; many benefits would spring from keeping America's workers employed. Lengthy unemployment leads to long-term economic hardship. Research has shown that the longer workers are unemployed, the harder it is for them to regain employment. Some studies argue that lengthy periods of unemployment make it more difficult to reenter the workforce, with some employees never returning to work and others accepting lower wages than they had previously earned.[^55] Given the uncertainty facing employers, and the desire to preserve employment when possible, the Commission believes that providing appropriate liquidity to small and medium-sized businesses during the COVID-19 crisis is vital. Reduced economic activity—i.e., lower demand for goods and services—means many of these businesses are still struggling. However, business participation in the Main Street Lending Program—which, unlike the widely utilized PPP, provides loans that are not forgivable—has been low. As of August 19, 2020, $472 million of the $600 billion authorized for use in the program had been lent to small and medium-sized businesses.[^56] The modest initial activity of the Main Street Lending Program could be a function of access to credit elsewhere, as "[h]istorically, loans have never been cheaper," according to a quarterly NFIB report on economic data.[^57] That same report found just 3% of business owners reported unmet credit needs and only 1% of business owners stated that their primary concern was financing. Despite the pandemic, 51% of business owners were not seeking a loan and 35% of business owners had "all credit needs met."[^58] Likewise, according to the Federal Reserve's Senior Loan Officer Opinion Survey, the demand for commercial and industrial (C&I) loans from businesses of all sizes declined during the second quarter of 2020. Of the bank senior loan officers polled, 32.9% reported that interest in new credit lines or extensions of existing lines had fallen moderately, and 14.3% reported that it had fallen significantly. Only 22.9% of senior loan officers reported a moderate or significant uptick in inquiries for lines of credit.[^59] Further, SBA programs like the PPP may best serve smaller struggling businesses,[^60] given that PPP loans can be forgiven and businesses may be reluctant to assume more debt that must be paid back in light of ongoing economic uncertainty. For those businesses able to take on more debt, the modest initial Main Street Lending program activity could also be a sign that the current design of the Main Street Lending Program makes the program unattractive or inaccessible for many businesses in need. The Commission believes that these considerations should inform policy discussions about the Main Street Lending Program's modest initial activity and proposed alterations to the program in response. Accordingly, on August 7, 2020, the Commission held a hearing that explored the following aspects of the Main Street Lending Program: - Potential causes of the program's currently low utilization rate, including the lengthy period the Federal Reserve and the Treasury took to launch the program, the longer time for processing loans, borrower awareness and understanding of the program, borrowers' potential access to credit from other sources, and how the fact that Main Street Lending Program loans must be repaid may affect its utilization. The hearing also discussed whether the Main Street Lending Program's utilization rate will significantly increase over the coming months. - Whether some creditworthy small and medium-sized businesses cannot qualify for loans under the Main Street Lending Program's current loan terms and would benefit from modified loan terms, including the extent to which some creditworthy small and medium-sized businesses are excluded by various program requirements and terms, such as affiliation rules, minimum loan sizes, and the use of earnings before interest, taxes, depreciation, and amortization (EBITDA) measures of leverage for loan sizes, instead of other measures like asset-to-value ratio. The hearing explored both the pros and cons of amending such requirements. - The extent to which the Main Street Lending Program results in banks making loans that would not have otherwise occurred. This includes a discussion of the implication of the Main Street Lending Program's utilization of banks' existing underwriting standards.[^61] ### I. BACKGROUND OF THE MAIN STREET LENDING PROGRAM To further its statutory mandate to "promote maximum employment [and] stable prices,"[^62] on April 9, 2020, the Federal Reserve announced the creation of the Main Street Lending Program as a vehicle to "support employers of all sizes" by "[providing] powerful support for the flow of credit in the economy."[^63] Per the Federal Reserve, the Main Street Lending Program "is designed to provide support to small and medium-sized businesses and their employees across the United States during the current period of financial strain by supporting the provision of credit to such businesses. The availability of additional credit is intended to help companies that were in sound financial condition prior to the onset of the COVID-19 pandemic maintain their operations and payroll until conditions normalize."[^64] In creating the Main Street Lending Program with funds provided by the CARES Act, the Federal Reserve's authority is governed by both the CARES Act and Section 13(3) of the Federal Reserve Act, which allows Federal Reserve Banks expanded lending powers if authorized by the Federal Reserve and the Treasury during "unusual and exigent circumstances."[^65] The Treasury approved the Main Street Lending Program to "support the flow of credit to American workers . . . [and] [s]mall and medium-sized businesses [who], through no fault of their own, have faced severe financial strain from widespread closures and liquidity pressures in the financial system."[^66] Section 13(3) of the Federal Reserve Act sets forth several requirements for such financing programs. Among other things, the borrower cannot be insolvent, the program must have "broad-based eligibility," the Federal Reserve must have evidence that each "participant in any program or facility with broad-based eligibility is unable to secure adequate credit accommodations from other banking institutions," and the Federal Reserve must ensure that "the security for emergency loans is sufficient to protect taxpayers from losses."[^67] To protect the Federal Reserve from losses, the Treasury has pledged $75 billion in equity for a special purpose vehicle (Main Street SPV) created by the Boston Federal Reserve,[^68] which is administering the Main Street Lending Program for the Federal Reserve System.[^69] This investment will enable the Main Street SPV to purchase up to $600 billion in participations on eligible loans issued by eligible lenders,[^70] via one of the five facilities that currently comprise the Main Street Lending Program—i.e., the New Loan Facility, the Priority Loan Facility, the Expanded Loan Facility, the Nonprofit New Loan Facility and the Nonprofit Expanded Loan Facility. The Federal Reserve does not typically issue loans directly to borrowers. Since its establishment in 1913, the Federal Reserve has primarily been geared toward providing liquidity to financial sector participants. Without the infrastructure to engage in direct lending, the Federal Reserve's Main Street Lending Program relies on the established channels of lenders that issue commercial loans as part of their everyday business.[^71] As such, for a borrower to access the Main Street Lending Program, it must apply through a lender that is registered to participate in the program. The program does not, however, utilize the myriad of other lenders outside of the traditional banking system that some small and medium-sized business use. The eligible lenders in the Main Street Lending Program are U.S. federally insured depository institutions like FDIC-insured banks, thrifts, and NCUA-insured credit unions. Nonbank lenders like BDCs and fintech lenders are currently not eligible to participate as lenders in the program, and some CDFIs may also be ineligible or functionally unable to access the program due to other requirements. Notably, there is no requirement that even eligible lenders participate or offer Main Street loans to their customers and some lenders have chosen not to participate. As of August 7, 2020, 509 financial institutions, representing approximately 58% of the total banking assets in the United States, registered to participate in the Main Street Lending Program.[^72] This represents less than 5% of eligible lenders.[^73] In contrast, over 5,460 lenders participated in the PPP effort.[^74] As of the same date, only 153 of those financial institutions were publicly willing to accept loan applications from new customers that lack a preexisting relationship with the lender.[^75] For example, some of the largest lenders in the country have stated that they will limit loans to existing clients.[^76] Eligible borrowers undergo the bank's standard underwriting process for commercial loans, and each bank evaluates applications according to its underwriting criteria. The lender, which has final say on whether to lend to the borrower, must "apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower."[^77] If a lender approves the applicant for a Main Street loan, then the lender will originate and fund the loan. The lender will then sell a 95% participation in the loan to the Main Street SPV. The lender will retain the remaining 5% interest. The Main Street SPV's purchase of 95% of the lender's loan allows the lender to mitigate the credit risk and capital cost of extending credit to the borrower. Lenders are only at risk of their 5% retention if a borrower defaults and only keep 5% of a loan on their balance sheets, thus freeing up capital to make other investments. Lenders service the entire loan in exchange for a 25 basis points (bps) fee based on the 95% of the loan purchased by the Federal Reserve. Further, lenders will receive a 75-100 bps origination fee on the entire principal amount (i.e., 100%) of a Main Street loan. While lenders must pay the Main Street SPV a fee of 75-100 bps based on the principal amount of any Main Street loan, the lender may pass this fee down to the borrower. Thus, lenders can retain an origination fee of as much as 15%-20% of the retained portion of any Main Street loan. The fee design and shared participation features of the Main Street Lending Program are intended to make lenders more willing to extend credit to more borrowers and thereby support the economy during the pandemic.[^78] The diagram below from the Boston Federal Reserve broadly maps out the interplay among the Boston Federal Reserve, the Treasury, the Main Street SPV, the five Main Street facilities, lenders, and borrowers.[^79] #### Main Street Facilities Serving For-profit Businesses The Main Street Lending Program has three facilities for for-profit businesses—the New Loan Facility, the Priority Loan Facility, and the Expanded Loan Facility. The general design of each facility, including loan term, interest rate, repayment schedule, and participation structure is similar, but the programs differ in certain key ways, including the amount of allowable leverage, debt seniority, and loan size. The three facilities are structured to address the funding needs of different types of businesses. The **New Loan Facility** is aimed primarily at small and medium-sized businesses that do not already have high levels of debt. The New Loan Facility extends five-year term loans between $250,000 and $35 million that, when added to existing debt, cannot exceed four times adjusted 2019 EBITDA. Fifteen percent of the principal on these loans is repaid in each of years 3 and 4, while a balloon payment for the remaining 70% is due in year 5. The interest rate is an adjustable rate of the London Interbank Offered Rate (LIBOR)[^80] plus 3%, and interest payments are deferred (but accruing and capitalized) for one year. Principal payments are deferred for two years. The New Loan Facility requires that loans not be contractually subordinated in priority with the borrower's other debt. Prepayment must be permitted without penalty. Loan proceeds can only be used to repay existing debt if those debt payments are "mandatory and due."[^81] The **Priority Loan Facility** is aimed at small and medium-sized firms that may have larger outstanding debt than those using the New Loan Facility, and the loans can be used to refinance existing credit to another lender as well as to increase borrowing. The Priority Loan Facility loan terms are similar to the New Loan Facility, except that the Priority Loan Facility allows for larger loans (the lesser of $50 million or six times 2019 adjusted EBITDA) and requires the loan to be more senior to or pari passu with the borrower's other debts in terms of priority and security. This higher priority status presumably counterbalances the increased risk of the larger loan amount and higher leverage of the business.[^82] The **Expanded Loan Facility** is aimed at larger firms that may already have significant debt outstanding. The program can allow substantial loans of between $10 million and the lesser of $300 million or six times 2019 adjusted EBITDA to be made to "upsize" existing term loans or revolving credit facilities. Given the relatively high debt levels of such businesses, and similar to the Priority Loan Facility, the Expanded Loan Facility sets the maximum level of leverage at six times adjusted EBITDA and requires loans to be more senior to or pari passu with other debts.[^83] The chart below summarizes the key features of loans offered through the New Loan Facility, the Priority Loan Facility, and the Expanded Loan Facility. | Main Street For-Profit Facilities | New Loan Facility | Priority Loan Facility | Expanded Loan Facility | |---|---|---|---| | **Type of Loan** | New loans to borrowers | New loans to borrowers with greater leverage | Expanded loans to existing borrowers | | **Loan Term** | 5 years | 5 years | 5 years | | **Minimum Loan Size** | $250,000 | $250,000 | $10 million | | **Maximum Loan Size** | The lesser of $35 million, or an amount that, when added to outstanding and undrawn available debt, does not exceed 4 times that borrower's adjusted 2019 EBITDA | The lesser of $50 million, or an amount that, when added to outstanding or undrawn available debt, does not exceed 6 times the borrower's adjusted 2019 EBITDA | The lesser of $300 million, or an amount that, when added to outstanding or undrawn available debt, does not exceed 6 times the borrower's adjusted 2019 EBITDA | | **Loan Proceeds Can Repay Existing Debt** | Only payments that are "mandatory and due" | In addition to "mandatory and due" payments, can be used to refinance loans from other lenders | Only payments that are "mandatory and due" | | **Lender's Retention in Loan** | 5% | 5% | 5% | | **Federal Reserve's Retention in Loan** | 95% | 95% | 95% | | **Relation to Borrower's Other Debt** | Cannot be contractually subordinated in terms of priority | Senior to or pari passu with, in terms of priority and security, other than mortgage debt | Senior to or pari passu with, in terms of priority and security, other than mortgage debt | | **Principal Repayment Schedule** | Principal deferred for 2 years. 15%, 15% and 70% principal repayment due in years 3, 4 and 5, respectively. No prepayment penalty | (same) | (same) | | **Deferral of Interest Payments** | Interest payments deferred (but accruing and capitalized) for one year | (same) | (same) | | **Interest Rate** | Adjustable rate of LIBOR (1 or 3 month) + 3% | (same) | (same) | | **Fees** | Borrower pays lender an origination fee of up to 100 bps. Lender pays Main Street SPV a transaction fee of 100 bps, but lender may have borrower cover fee. | Borrower pays lender an origination fee of up to 75 bps. Lender pays Main Street SPV a 75 bps transaction fee, but lender may have borrower cover fee. | (per facility term sheet) | ### II. ANALYSIS OF THE MAIN STREET LENDING PROGRAM As of August 19, 2020, eligible lenders had issued loans totaling $496.8 million under the Main Street Lending Program.[^84] The Federal Reserve's participation amount in these loans is $472 million.[^85] From July 15, 2020 to August 19, 2020, the amount of loans made under the Main Street Lending Program increased from $12 million to $496.8 million.[^86] The Federal Reserve has disclosed only transaction-specific data about the Main Street Lending Program as of July 31, 2020.[^87] As of that date, the program had purchased participations in 13 loans, ranging in size from $1.5 million to $50 million.[^88] The loans went to businesses in five states: Florida (8 businesses), Pennsylvania (2 businesses), Wisconsin (1 business), Texas (1 business), and Louisiana (1 business). These businesses are from a wide variety of industries, including real estate, interior design, construction, dentistry, and roofing. The chart below lists the names of these businesses and provides details about their loans.[^89] | Date of MSLP's Purchase | Facility | Name of Borrower | Industry of Borrower | State of Borrower | Name of Lender | Principal Amount of Loan | |---|---|---|---|---|---|---| | 7/15/20 | MSPLF | Cherry Tree Dental, LLC | Dentistry | WI | Starion Bank | $12,300,000 | | 7/22/20 | MSNLF | Solesdi US LLC | Interior design | FL | City National Bank of FL | $2,000,000 | | 7/23/20 | MSPLF | Cailis Mechanical Corp | Construction | FL | City National Bank of FL | $5,000,000 | | 7/24/20 | MSNLF | Atlas Apex Roofing, LLC | Roofing | FL | City National Bank of FL | $5,500,000 | | 7/24/20 | MSNLF | O.T. Concrete Services Inc. | Concrete | FL | City National Bank of FL | $2,500,000 | | 7/24/20 | MSPLF | Mount Airy #1, L.L.C. | Casino resort | PA | FNCB Bank | $50,000,000 | | 7/24/20 | MSPLF | RESOF, LLC | Industrial refrigeration repair | FL | City National Bank of FL | $2,100,000 | | 7/24/20 | MSPLF | Pablo Alfaro, P.A. | Real estate | FL | City National Bank of FL | $1,500,000 | | 7/28/20 | MSNLF | Zevuloni & Associates Inc | Insurance adjustment | FL | City National Bank of FL | $1,900,000 | | 7/29/20 | MSNLF | Air-Source Int'l Corp. | Air conditioning | FL | City National Bank of FL | $1,900,000 | | 7/29/20 | MSNLF | Gulf South Energy Services, LLC | Oil and natural gas | LA | B1BANK | $2,000,000 | | 7/30/20 | MSPLF | Este Tux, Inc. | Tuxedo rental | PA | FNCB Bank | $3,250,000 | | 7/30/20 | MSNLF | Ilios Lighting Design, LLC | Event production | TX | Transpecos Banks, SSB | $2,225,000 | The Commission notes that one bank in Florida has originated eight Main Street loans and engaged in an outsized proportion of regional PPP loans.[^90] Further inquiry may be warranted to determine whether there are any lessons to learn from this participant's apparently unusual level of success in onboarding borrowers. Notwithstanding the recent increase in activity in the program, the number and total amount of loans issued under the Main Street Lending Program is still relatively small. When the Commission asked Secretary Mnuchin and Federal Reserve Chair Jerome Powell about the low utilization of the Main Street Lending Program at our June 24, 2020 meeting with them, they noted that low utilization of a program does not necessarily indicate a problem with its design.[^91] For example, they noted that the PMCCF had not been used by any businesses. In their view, the lack of utilization of the PMCCF is not a design flaw, but a result of the fact that the corporate bond market is functioning well and businesses are accessing credit through that market. They added that some businesses may obtain credit through existing credit lines, the PPP program, or from nonbank lenders like BDCs. Finally, they noted that demand for the Main Street Lending Program may increase over time. The Commission notes that unlike with the PMCCF and SMCCF, which provided an immediate boost to the corporate bond markets that serve companies large enough to issue bonds,[^92] the mere announcement of a government loan support program like the Main Street Lending Program may not provide comparable effects in the small-to-medium-sized business loan market.[^93] Banks must apply their standard underwriting criteria to Main Street loans—criteria that have tightened since the program's April 2020 announcement. According to the Federal Reserve's Senior Loan Officer Opinion Survey, during the second quarter of 2020, banks tightened standards for loans to commercial and industrial enterprises of all sizes. The survey found that banks had "increased the use of interest rate floors, collateralization requirements, loan covenants, premiums charged on riskier loans, and loan spreads over the bank's cost of funds, and [many] banks tightened all other lending terms across firms of all sizes."[^94] Bank senior loan officers noted several reasons for these changes, including "a less favorable or more uncertain economic outlook, worsening of industry-specific problems, and reduced tolerance for risk."[^95] Given the Main Street Lending Program's low utilization rate and the possibility that Main Street liquidity could help failing small and medium-sized businesses survive past the COVID-19 crisis, the Commission explores in the remainder of this report potential program modifications, including some suggested by stakeholders. The Commission notes at the outset, however, that Section 4003(d)(3) of the CARES Act expressly prohibits the Federal Reserve from forgiving the principal amount of loans to businesses, states, or municipalities.[^96] The Federal Reserve also interprets Section 13(3) of the Federal Reserve Act to preclude issuing grants or forgivable loans through its emergency lending programs.[^97] #### The Federal Reserve and the Treasury must act as swiftly as is feasible The Commission acknowledges the complexity involved in establishing the Main Street Lending Program, but reiterates that Main Street-eligible entities would benefit from swift action to consider and implement any further improvements to the program. Implementing the Main Street Lending Program has taken months. On March 27, 2020, Congress enacted the CARES Act, which authorized, among other things, $454 billion for use by the Treasury to support emergency lending facilities established by the Federal Reserve. On April 9, 2020, the Treasury and the Federal Reserve announced the creation of the Main Street Lending Program. Over two months later, on June 15, 2020, the Boston Federal Reserve opened its portal for lenders to register to participate in the Main Street Lending Program. The program only began purchasing loan participations on July 6, 2020, more than three months after the CARES Act's passage. Similarly, the Federal Reserve announced that it was exploring the possibility of expanding the Main Street Lending Program to include nonprofit organizations on April 30, 2020.[^98] It has since confirmed that it will establish the Nonprofit New Loan Facility and the Nonprofit Expanded Loan Facility and released the term sheets, documents, and forms for these facilities.[^99] However, as of the date of this report over three months later, those facilities are not yet operational. In his testimony at our August 7, 2020 hearing, Boston Federal Reserve Bank President Eric Rosengren cited the difficulty of "[s]caling up a program that purchases participations in loans from diverse borrowers in a decentralized market that lacks standardization" for why there was a lengthy implementation period.[^100] President Rosengren also noted that loans, unlike market securities, take longer to purchase because they are individually negotiated by borrowers and lenders.[^101] As previously noted, the Main Street Lending Program requires banks to "apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower."[^102] This requires borrowers to provide lenders with significant documentation and the process can take weeks or more. Finally, President Rosengren noted that any program alterations that require modifying underlying legal documents take time (and will continue to do so).[^103] Given the lengthy underwriting process, delaying the implementation of any improvements to the Main Street Lending Program constricts the effectiveness of any relief that the program could provide to viable businesses and nonprofits. The Commission recommends that the Treasury and the Federal Reserve expedite the implementation of the Nonprofit New Loan Facility and the Nonprofit Expanded Loan Facility, noting that some nonprofit organizations have struggled with adverse impacts from the pandemic for just as long as for-profit businesses. In addition to expediting their own internal processes, the Commission recommends that the Federal Reserve and the Treasury investigate whether modifications to the program could shorten the bank's underwriting process for Main Street loans without undermining safety and soundness or unnecessarily eroding the creditworthiness of Main Street loans. Moreover, the Commission recommends that the Treasury and the Federal Reserve consider the appropriateness of enlisting other Federal Reserve Banks to help expand administrative capacity, as well as to help innovate and experiment with changes or expansions to the Main Street Lending Program. #### Improve outreach efforts Despite the Federal Reserve's outreach efforts for the Main Street Lending Program,[^104] some businesses that could benefit from the program are unaware of the program's existence or are confused by the program's terms. In a survey of its members, the Association for Corporate Growth found that 22% of respondents, which were comprised of investors, executives, lenders, and advisers to hundreds of thousands of growing middle-market companies, were unaware of the Main Street Lending Program.[^105] Additionally, the Commission heard testimony that 70% of businesses that inquire with banks about the Main Street Lending Program do not fully understand its terms, and that of these, many lose interest when they learn that Main Street Lending Program loans are dissimilar to forgivable PPP loans.[^106] Accordingly, the Commission believes that borrowers could benefit from further outreach efforts by the Federal Reserve, the Treasury, and banks.[^107] The Commission also believes that eligible nonprofit organizations would benefit from additional outreach prior to the implementation of the Main Street Lending Program's nonprofit facilities. That said, while additional outreach may help, the Commission is skeptical whether outreach alone will significantly increase program participation. #### Proposals to modify the Main Street Lending Program's structure Many small and medium-sized businesses that relied on other sources of funding at the pandemic's outset may have depleted those funds and might need additional liquidity to survive.[^108] The Commission heard testimony that these businesses could benefit from the modifications to the Main Street Lending Program outlined below. In April 2020, a report examining the Federal Reserve System's annual Small Business Credit Survey found that "most firms are ill prepared for a sustained period of revenue loss" and 86% of firms would need to take some action in order to mitigate losses if they missed two months of revenue, such as using an owner's personal funds, taking out debt, or reducing payroll.[^109] A May 2020 report by the JPMorgan Chase Institute presented an even more dire outlook, stating that "[f]ifty percent of small businesses pre-COVID were operating with fewer than 15 cash buffer days—the number of days of typical outflows a business could pay out of its cash balance in the event of a disruption to inflows."[^110] However, as the Commission's last report noted, "there are indications that at least some small businesses do not need credit or they are able to obtain it from sources other than the [Main Street Lending Program]."[^111] The report cited statistics from the NFIB's July 2020 Small Business Economic Trends report, in which only 3% of borrowers reported unsatisfied borrowing needs, 34% reported sufficient credit access, and over half of respondents stated that they had no interest in obtaining a loan.[^112] The latest NFIB data show this trend has continued, with still only 3% of borrowers reporting unmet credit needs, and 35% reporting sufficient credit access, an increase of 1% from June.[^113] Likewise, the recently released Federal Reserve's Senior Loan Officer Opinion Survey for the second quarter of 2020 stated that demand for commercial loans decreased among firms of all sizes, and found that 47.2% of surveyed lenders reported a drop in inquiries regarding extending or opening lines of credit.[^114] That said, at the outset of the pandemic, many small and medium-sized businesses relied on other sources of funding, such as loans or grants through the PPP[^115] or the SBA's Economic Injury Disaster Loan (EIDL) program.[^116] However, the vast majority of small and medium-sized businesses that relied on funds from the PPP have since expended those funds.[^117] Additionally, businesses with bank relationships drew down on existing lines of credit[^118] and some business owners may have used personal funds.[^119] With the foregoing backdrop in mind, the Commission highlights six modifications to the Main Street Lending Program that witnesses at its recent hearing raised: **First,** Thomas Bohn, the President and CEO of the Association for Corporate Growth, a member organization of operators and advisors to middle-market companies, recommended decreasing the minimum loan size of $250,000 to $50,000 for the New Loan Facility and the Priority Loan Facility. To justify the program's current minimum loan amount, President Rosengren testified that "the PPP program was designed to target that segment of the industry," meaning smaller businesses, and that the Main Street Lending Program "was really designed for businesses that did not qualify for the PPP program and, nonetheless, might have a need for credit."[^120] The Federal Reserve has also already reduced the minimum loan size twice, from an initial $1 million. However, a minimum loan size of $250,000 makes accessing the Main Street Lending Program impractical for at least some smaller businesses. The Federal Reserve and Treasury should consider whether to further reduce the minimum loan size. Access to the Priority Loan Facility, in particular, could also help some businesses reduce operating costs by allowing them to refinance their existing debt and take advantage of the deferred principal and interest payments for Priority Loans.[^121] The Commission encourages the Federal Reserve and the Treasury to think creatively and prudently as they evaluate whether a lower minimum loan size than $250,000 would be beneficial or practical. For example, as noted, other Federal Reserve Banks could be enlisted to expand administrative capacity. Additionally, the Treasury and the Federal Reserve could consider creative administrative fee models, such as fees inversely proportional to loan size, so that lenders have better incentives to onboard smaller borrowers. **Second,** Vince Foster, the Executive Chairman of Main Street Capital Corporation, a BDC that provides capital to lower middle-market companies seeking to grow or transition ownership, recommended extending the maturity for Main Street loans from five to seven years, and pushing back amortization to year four.[^122] This extended repayment schedule may provide borrowers with additional flexibility and sufficient time to recover from the long-term effects of a prolonged disruption to their businesses. Meanwhile, borrowers that need less time to recover are able to prepay their loans without penalty under the existing terms of the Main Street Lending Program. The Commission is aware that by statute, the Federal Reserve cannot lend to currently insolvent borrowers, and its emergency lending programs should be "for the purpose of providing liquidity to the financial system, and not to aid a failing financial company."[^123] However, within those constraints, an extended repayment schedule could accommodate businesses that will recover—and avoid insolvency—but that will do so on a longer time horizon. Not every struggling firm will benefit from a loan that increases its total debt burden, but loans could be structured to ensure that additional debt is not overly burdensome. A possible counterargument is that the CARES Act was enacted to resolve the immediate liquidity crunch and economic shock experienced in March 2020, and extending a loan's duration to bring a longer period of time when supply of certain goods and services might greatly exceed demand is a different proposition than the one that confronted lawmakers when the CARES Act was enacted. **Third,** Mr. Foster and Mr. Bohn both recommended raising EBITDA standards and allowing for asset-based criteria for loan sizes. They testified that by using an EBITDA (that is, cashflow) standard to evaluate applicants, the Main Street Lending Program may exclude borrowers that may have limited cash flow but are otherwise viable, such as early-stage growth companies. Likewise, the EBITDA standard may exclude businesses that may have low or weak cash flow but that possess a favorable loan-to-value or loan-to-cost ratio, such as hotels or retail businesses that have high inventory. Regarding the calibration of EBITDA standards, a working paper by William English and Nellie Liang argues that that the Federal Reserve and the Treasury should consider raising EBITDA standards in exchange for requiring that lenders retain a higher portion of loans made to more leveraged companies.[^124] Notably, the Priority Loan Facility originally allowed for loans to more highly levered companies if a lender retained 15% of any loan, not the current 5%. As for whether EBITDA inappropriately excludes some companies that the Federal Reserve and the Treasury could prudently back notwithstanding their limited cash flow, at the Commission's meeting with Secretary Mnuchin and Chair Powell on June 24, 2020, Secretary Mnuchin indicated that the Treasury and the Federal Reserve are looking at options to address this situation, including a possible asset-based lending facility established by the Federal Reserve. Two months later, at the Commission's August 7, 2020 hearing, President Rosengren testified that while he was aware of "discussions about asset-based financing and some of the difficulties experienced . . . there is no term sheet that is imminent."[^125] Some Commissioners believe that the Federal Reserve and the Treasury should continue exploring whether it would be prudent and appropriate to expand the Main Street Lending Program to include asset-based lending and second-lien lending to creditworthy businesses with reasonable cash flow and valued collateral. The Commission acknowledges concerns with such asset-based lending and does not underestimate the complexity of the issues that would need to be worked through. This includes determining the scope of the facility and whether it should benefit larger actors like real estate investment trusts, private equity firms, and hedge funds. For example, at the Commission's hearing, Gwen Mills of the labor union UNITE HERE, which represents over 300,000 hospitality-industry workers, testified that in their view, providing relief to commercial mortgage-backed securities (CMBS) borrowers, and in particular to hotel property owners, would yield an inappropriate "bailout" because the largest beneficiaries of such a facility would be "publicly-traded real estate investment trusts (REITs) . . . and giant private equity firms . . ."[^126] In her view, it would "have little effect to no effect on hotel employment . . . ."[^127] Ms. Mills testified that in UNITE HERE's experience, historically when hotel property owners have gone out of business, that has not affected hotel-worker employment levels because hotel "[o]wners don't generally employ hotel workers anyway." Rather, "operating companies [do] . . . under long-term management agreements that frequently outlive multiple changes in ownership."[^128] Ms. Mills noted that she was authorized to state that the AFL-CIO, which represents an additional 12 million workers, supported the policy recommendations in her testimony.[^129] However, some Commissioners believe an asset-based facility encompassing CMBS could affect hotel employment in the long run by preserving hotels as going concerns, so that workers have jobs to come back to when hotel occupancy increases. One Commissioner also noted at the hearing that "74% of CMBS [are] less than $20 million."[^130] Further, more than 50% of loans are less than $10 million.[^131] Trepp data provides that for just hotel CMBS loans, 88% are less than $20 million and 74% are less than $10 million.[^132] Ms. Mills submitted a supplemental statement for the record providing UNITE HERE's analysis showing that "59% of hotel CMBS loans had outstanding balances of $20 million or more, and 76% were over $10 million."[^133] **Fourth,** Mr. Bohn and Mr. Foster recommended that the Federal Reserve and the Treasury relax the Main Street Lending Program's affiliation rules. The Main Street Lending Program adopted the SBA's affiliation rules, which generally require a potential borrower to aggregate all of its employees or revenues with those of its affiliates when determining eligibility.[^134] This may exclude participation by portfolio companies of private equity or venture capital sponsors where the aggregation of total employees may exceed the maximum of 15,000 or revenues may exceed the maximum of $5 billion.[^135] Furthermore, as Mr. Foster's written testimony explained, affiliated companies "must share a single Main Street facility limitation amount" like maximum loan size, which "substantially reduces the number of these companies eligible for Main Street loans."[^136] This may exclude businesses with fewer than 500 employees who could not access the PPP due to affiliation rules, and other private companies with affiliated sister companies. Some Commissioners believe the Federal Reserve and Treasury should consider revisiting these requirements. In their view, one could argue that these loans already have various safeguards, including those relating to dividends and the ability of borrowers to access funds elsewhere. However, some Commissioners believe the current affiliation restrictions may be necessary to ensure that the Main Street Lending Program's funds flow to businesses that are unable to otherwise secure capital with reasonable terms, and to ensure that large sponsors, such as private equity and venture capital funds, do not transfer loan proceeds out of the borrowing portfolio company at taxpayers' expense. The Commission also received a statement for the record signed by 17 organizations, including labor unions representing over 10 million workers, along with economic policy think tanks, explaining their view that "weakening the affiliation rules could provide inappropriate access to Main Street Lending Facilities for private equity owned companies" leading to "public funds . . . being diverted from their public purpose by the private equity owner."[^137] They explained, among other things, that current rules bar only "dividends denominated as such . . . , [while] other forms of transferring or draining value" out of portfolio companies, such as "monitoring fees" are permitted, and that under current rules affiliates would not be jointly liable for repaying loans if their portfolio companies default.[^138] **Fifth,** Mr. Foster testified that the Federal Reserve and the Treasury should expand the Main Street Lending Program to experienced nonbank lenders, which could include BDCs, CDFIs, fintech lenders, or other private lenders. This could expand the program's reach to companies that would otherwise generally not receive a Main Street loan. For example, BDCs have experience lending to medium-sized companies that banks may not typically serve, and CDFIs could also expand the program's reach. At the end of 2019, BDCs "were holding about $110 billion in [small and medium-sized enterprise] debt."[^139] At the hearing, President Rosengren testified that the Federal Reserve designed the program for depository institutions in order to "get this facility up and running quickly," given the difficulty of swiftly "mak[ing] sure that BSA, AML and know your customer . . . conditions are . . . met."[^140] At the Commission's June 24, 2020 meeting with Chair Powell and Secretary Mnuchin, neither official knew of any philosophical or administrative reason why nonbank lenders could not be made eligible to participate in the Main Street Lending Program. **Sixth,** Ms. Mills testified that in the view of UNITE HERE and the AFL-CIO, which represent millions of workers, the Main Street Lending Program will not benefit workers "even if more companies participate in it" because it does not have "binding requirements that employees be rehired from the first day of the aid."[^141] The Federal Reserve and the Treasury have declined to impose such requirements, and they are not required to under the current statute. Some Commissioners accordingly agree with Ms. Mills' testimony that "Congress . . . need[s] to come up with a new approach" that would "give direct support to workers."[^142] However, other Commissioners think the Main Street Lending Program does benefit workers by enabling businesses to continue operating so they can retain or rehire workers as economic conditions warrant, such as when business shutdown orders are lifted. Those Commissioners note that as Chair Powell observed in his June 24, 2020 meeting with the Commission, it is not beneficial for the health of a business to require it to borrow money to pay workers who cannot work.[^143] In addition, those Commissioners note that Congress understood there inevitably would be layoffs during the pandemic, which is why it established several programs to directly support workers, such as economic impact payments (i.e., stimulus checks), supplemental unemployment benefits, and paid leave. As previously noted, the Treasury and the Federal Reserve should act expediently. The Commission recommends expediting the process of determining whether any of the forgoing modifications should be made to the Main Street Lending Program (and, if so, expeditiously making such modifications while still protecting taxpayers). #### Explore the implications of whether banks are using the Main Street Lending Program to make loans they would have made anyway The Commission's hearing also explored the extent to which the Main Street Lending Program has encouraged banks to make loans under the program (meaning, loans they would not otherwise make), and whether there are responsible ways to encourage more bank lending. As currently designed, the Main Street Lending Program generally is not meant to offer better terms to creditworthy borrowers that can already meet banks' underwriting requirements.[^144] Main Street loans are in many ways more restrictive than other products that can be found in the banking market.[^145] For instance, loans under the Main Street Lending Program will contain restrictions on employee compensation by the borrower as well as on borrowers' ability to make distributions or consummate stock buybacks, in each case, for the life of the loan plus 12 months. The Commission recommends that the Federal Reserve and the Treasury continue to evaluate carefully whether the program actually spurs loans that would not already be made in the ordinary course. The Main Street Lending Program intends to encourage lenders to make loans they might not make on their own by purchasing 95% loan participations through the Main Street SPV while allowing banks to retain up to a 15%-20% origination fee on their retained portion of any loan. Federal banking supervisors will treat Main Street Lending Program loans "in a manner consistent with their supervisory approach to other commercial and industrial loans."[^146] Banks must also apply their standard underwriting processes,[^147] which have tightened in response to the economic uncertainty caused by the pandemic.[^148] According to the Federal Reserve's most recent Senior Loan Officer Opinion Survey, during the second quarter of 2020, banks tightened standards for loans to commercial and industrial enterprises of all sizes. The survey stated that banks had "increased the use of interest rate floors, collateralization requirements, loan covenants, premiums charged on riskier loans, and loan spreads over the bank's cost of funds, and [many] banks tightened all other lending terms across firms of all sizes." Banks noted several reasons for these changes, including "a less favorable or more uncertain economic outlook, worsening of industry-specific problems, and reduced tolerance for risk."[^149] Banks are likely expecting an increase in loan losses because of the economic slowdown due to the virus and stay-at-home and business shutdown orders. The risks of new loans to borrowers harmed by the virus may correlate with the existing risks on the banks' books. Banks may also be concerned about downside risks to loan quality given the elevated uncertainty about the economic growth trajectory, especially for smaller and riskier firms. At the August 7 hearing, Lauren Anderson, Senior Vice President and Associate General Counsel of the Bank Policy Institute, which represents banks in the U.S., testified that the concern banks have about the riskiness of Main Street loans limits their willingness to issue loans under the program. That is so despite the generous origination fees. Ms. Anderson noted that the portion of a Main Street loan that a bank retains still has the same risk characteristics as the entire loan, and banks would treat the loan as such. Further, any loans would have to meet the bank's tightened underwriting criteria and withstand scrutiny from federal bank supervisors.[^150] This led Ms. Anderson to conclude that "even a 5 percent participation in [a Main Street] loan to a borrower that is anything but creditworthy carries significant disincentives for a bank to participate."[^151] However, Ms. Anderson did not think that supervisory forbearance on loans would be appropriate because it could "transmi[t] risk from the corporate sector to the banking sector . . . ."[^152] Some Commissioners recommend that the Federal Reserve, the Treasury, and other bank regulators carefully evaluate their underwriting and federal banking supervisory guidelines to ensure that they properly reflect the unique structure of Main Street Lending Program loans, includ --- ## FOOTNOTES [^1]: CARES Act, Pub. L. No. 116-136, § 4020, 134 Stat. 281 (2020). [^2]: CARES Act, Pub. L. No. 116-136, § 4003(a), 134 Stat. 281 (2020). [^3]: Id. at § 4003(b). In addition, Division A, Title IV, Subtitle B of the CARES Act (Subtitle B) authorized the Treasury to provide up to $32 billion in financial assistance to passenger air carriers, cargo air carriers, and certain airline industry contractors that must be exclusively used for the continuation of payment of employee wages, salaries, and benefits. Of this amount, up to $25 billion is available for passenger air carriers; up to $4 billion is available for cargo air carriers; and up to $3 billion is available for certain airline industry contractors. Subtitle B is not within the jurisdiction of the Commission. [^4]: CARES Act, Pub. L. No. 116-136, § 4020, 134 Stat. 281 (2020). [^5]: Congressional Oversight Commission, Questions About the CARES Act's $500 Billion Emergency Economic Stabilization Funds, May 18, 2020, at 5, https://coc.senate.gov/sites/default/files/2020-08/20200518_Congressional_Oversight_Committee_1st_Report.pdf. [^6]: Board of Governors of the Federal Reserve System, Primary Market Corporate Credit Facility Term Sheet, July 28, 2020, https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200728a9.pdf; Board of Governors of the Federal Reserve System, Secondary Market Corporate Credit Facility Term Sheet, July 28, 2020, https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200728a1.pdf. [^7]: Board of Governors of the Federal Reserve System, Secondary Market Corporate Credit Facility Term Sheet, July 28, 2020, https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200728a1.pdf. [^8]: Board of Governors of the Federal Reserve System, Statistical Release H.4.1, Factors Affecting Reserve Balances of the Depository Institutions and Condition Statement of Federal Reserve Banks, Aug. 20, 2020, at Table 1 footnote 14, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for Aug. 20, 2020 release). The SPV for the PMCCF and the SMCCF is Corporate Credit Facilities LLC. [^9]: Id. at Table 4, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for Aug. 20, 2020 release). The SPV for the PMCCF and SMCCF is Corporate Credit Facilities LLC. [^10]: Federal Reserve Bank of Boston, Main Street Lending Program For-Profit Businesses Frequently Asked Questions, July 31, 2020, https://www.bostonfed.org/mslp-faqs; Federal Reserve Bank of Boston, Main Street Lending Program for Nonprofit Organizations Frequently Asked Questions, Aug. 6, 2020, https://www.bostonfed.org/-/media/Documents/special-lending-facilities/mslp/legal/frequently-asked-questions-faqs-nonprofit.pdf. [^11]: Board of Governors of the Federal Reserve System, Statistical Release H.4.1, Factors Affecting Reserve Balances of the Depository Institutions and Condition Statement of Federal Reserve Banks, Aug. 20, 2020, at Table 1 footnote 14, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for Aug. 20, 2020 release). The SPV for the Main Street Lending Program is MS Facilities LLC. [^12]: Eric Rosengren, President and CEO, Federal Reserve Bank of Boston, The COVID-19 Pandemic, the Economic Outlook, and the Main Street Lending Program, Remarks to the South Shore Chamber of Congress, Aug. 12, 2020, https://www.bostonfed.org/-/media/Documents/Speeches/PDF/20200812-text.pdf and https://www.bostonfed.org/-/media/Documents/Speeches/PDF/20200812-charts.pdf. [^13]: Id. [^14]: Board of Governors of the Federal Reserve System, Statistical Release H.4.1, Factors Affecting Reserve Balances of the Depository Institutions and Condition Statement of Federal Reserve Banks, at Table 4, Aug. 20, 2020, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for Aug. 20, 2020 release). The SPV for the Main Street Lending Program is MS Facilities LLC. The H.4.1 statistical release discloses the SPV's participation amount in Main Street loans, which is 95% of those loans. The August 20, 2020 release disclosed a participation amount of $472 million, which means $496.8 million in Main Street loans were made by lenders. [^15]: Id. [^16]: Board of Governors of the Federal Reserve System, Municipal Liquidity Facility Term Sheet, Aug. 11, 2020, https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200811a1.pdf; Federal Reserve Bank of New York, FAQs: Municipal Liquidity Facility, Aug. 11, 2020, https://www.newyorkfed.org/markets/municipal-liquidity-facility/municipal-liquidity-facility-faq. [^17]: Board of Governors of the Federal Reserve System, Statistical Release H.4.1, Factors Affecting Reserve Balances of the Depository Institutions and Condition Statement of Federal Reserve Banks, Aug. 20, 2020, at Table 1 footnote 14, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for Aug. 20, 2020 release). The SPV for the MLF is Municipal Liquidity Facility LLC. [^18]: Id. at Table 4; Board of Governors of the Federal Reserve System, Periodic Report: Update on Outstanding Lending Facilities Authorized by the Board under Section 13(3) of the Federal Reserve Act (Transaction-specific Disclosures), Aug. 10, 2020, https://www.federalreserve.gov/publications/files/mlf-transaction-specific-disclosures-8-10-20.xlsx; Karen Pierog & Jonnelle Marte, New York transit agency turns to Fed for $450 million borrowing, Reuters, Aug. 18, 2020, https://www.reuters.com/article/us-usa-newyork-fed-debt/new-york-transit-agency-turns-to-fed-for-450-million-borrowing-idUSKCN25E2R3. [^19]: Board of Governors of the Federal Reserve, Term Asset-Backed Securities Loan Facility Term Sheet, July 28, 2020, https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200728a6.pdf. [^20]: Board of Governors of the Federal Reserve System, Statistical Release H.4.1, Factors Affecting Reserve Balances of the Depository Institutions and Condition Statement of Federal Reserve Banks, Aug. 20, 2020, at Table 1 footnote 14, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for Aug. 20, 2020 release). The SPV for the TALF is TALF II LLC. [^21]: Id. at Table 4, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for Aug. 20, 2020 release). The SPV for the TALF is TALF II LLC. [^22]: Congressional Oversight Commission, The Third Report of the Congressional Oversight Commission, July 20, 2020, at 15-16, 31-34, https://coc.senate.gov/sites/default/files/2020-08/20200720_Congressional_Oversight_Commission_3rd_Report.pdf. [^23]: Id. [^24]: Appendix A of this report contains a copy of the Treasury's letter to the Commission of July 30, 2020. [^25]: Appendix B of this report contains a copy of the Commission's letter to Secretary Mnuchin of August 7, 2020. Appendix C of this report contains a copy of the Commission's letter to Secretary Esper of August 7, 2020. [^26]: CARES Act, Pub. L. No. 116-136, § 4020(e)(1), 134 Stat. 281 (2020). [^27]: Congressional Oversight Commission, The Third Report of the Congressional Oversight Commission, July 20, 2020, at 5, https://coc.senate.gov/sites/default/files/2020-08/20200720_Congressional_Oversight_Commission_3rd_Report.pdf. [^28]: Generally, 501(c)(3) and 501(c)(19) nonprofit organizations. [^29]: The Treasury's investment will be made using funds appropriated to the Economic Stabilization Fund (ESF) under Section 4027 of the CARES Act. Federal Reserve Bank of Boston, Main Street Lending Program For-Profit Businesses Frequently Asked Questions, July 31, 2020, at 9, https://www.bostonfed.org/mslp-faqs. [^30]: Board of Governors of the Federal Reserve System, Statistical Release H.4.1, Factors Affecting Reserve Balances of the Depository Institutions and Condition Statement of Federal Reserve Banks, at Table 4, Aug. 20, 2020, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for Aug. 20, 2020 release). The SPV for the Main Street Lending Program is MS Facilities LLC. The H.4.1 statistical release discloses the SPV's participation amount in Main Street loans, which is 95% of those loans. The August 20, 2020 release disclosed a participation amount of $472 million, which means $496.8 million in Main Street loans were made by lenders. [^31]: Id. [^32]: Eric Rosengren, President and CEO, Federal Reserve Bank of Boston, The COVID-19 Pandemic, the Economic Outlook, and the Main Street Lending Program, Remarks to the South Shore Chamber of Congress, Aug. 12, 2020, https://www.bostonfed.org/-/media/Documents/Speeches/PDF/20200812-text.pdf and https://www.bostonfed.org/-/media/Documents/Speeches/PDF/20200812-charts.pdf. [^33]: Nick Timiaraos & Kate Davidson, Fed, Treasury Disagreements Slowed Start of Main Street Lending Program, Wall Street Journal, July 12, 2020, https://www.wsj.com/articles/fed-treasury-disagreements-slowed-start-of-main-street-lending-program-11594558800. [^34]: 12 U.S.C. § 343(3) (Section 13(3) of the Federal Reserve Act). [^35]: William C. Dunkelberg & Holly Wade, NFIB Small Business Economic Trends, National Federation of Independent Businesses, Aug. 11, 2020, at 2, https://assets.nfib.com/nfibcom/SBET-July-2020.pdf. [^36]: Id. [^37]: Board of Governors of the Federal Reserve System, Senior Loan Officer Opinion Survey on Bank Lending Practices, Aug. 3, 2020, https://www.federalreserve.gov/data/sloos/sloos-202007.htm. [^38]: Lenders may receive a 0.75% to 1% origination fee on the full principal amount of any loan and only retain 5% of the principal amount of that loan. That amounts to an origination fee of 15%-20% on any Main Street loan. While lenders must pay the Main Street Lending Program a fee of 75-100 bps based on the principal amount of any Main Street loan, the lender may pass this fee down to the borrower. [^39]: Nick Timiaraos & Kate Davidson, Fed, Treasury Disagreements Slowed Start of Main Street Lending Program, Wall Street Journal, July 12, 2020, https://www.wsj.com/articles/fed-treasury-disagreements-slowed-start-of-main-street-lending-program-11594558800. [^40]: This number refers to the economic contribution of middle market companies. See National Center for the Middle Market, Q2 2020 Middle Market Indicator: In Unprecedented Times, the Middle Market Strikes a Cautious Path Forward, at 2, https://www.middlemarketcenter.org/Media/Documents/MiddleMarketIndicators/2020-Q2/FullReport/NCMM_MMI_Q2_2020.pdf (last visited Aug. 13, 2020). [^41]: Robert W. Fairlie, Working Paper: The Impact of COVID-19 on Small Business Owners: The First Three Months after Social Distancing Restrictions, July 24, 2020, at Table 2, https://people.ucsc.edu/~rfairlie/papers/smallbusiness%20three%20months_v1.docx. [^42]: National Bureau of Economic Research, Determination of the February 2020 Peak in US Economic Activity, June 8, 2020, https://www.nber.org/cycles/june2020.html. [^43]: U.S. Census Bureau, Advance Monthly Sales for Retail and Food Services, July 2020, https://www.census.gov/retail/marts/www/marts_current.pdf. See monthly figures compared to previous month. July 2020 year over year up 2.7% and June 2020 year over year up 0.8%. [^44]: Eric Morath, U.S. Jobless Claims Rise to 1.1 Million in Latest Week, Wall Street Journal, Aug. 20, 2020, https://www.wsj.com/articles/unemployment-benefits-jobless-claims-08-20-2020-11597873460. [^45]: U.S. Bureau of Labor Statistics, Unemployment Insurance Weekly Claims, Aug. 20, 2020, https://www.dol.gov/ui/data.pdf; Jeff Cox, US Weekly jobless claims double to 6.6 million, CNBC, Apr. 2, 2020, https://www.cnbc.com/2020/04/02/weekly-jobless-claims.html. [^46]: U.S. Bureau of Labor Statistics, The Employment Situation—July 2020, Aug. 7, 2020, at Table A-1, https://www.bls.gov/news.release/archives/empsit_08072020.pdf. [^47]: Id. at Table A-5; Leo Shane III, Veterans unemployment down for third month in a row, but still double pre-pandemic levels, Military Times, Aug. 7, 2020, https://www.militarytimes.com/news/2020/08/07/veterans-unemployment-down-for-third-month-in-a-row-but-still-double-pre-pandemic-levels/. [^48]: U.S. Bureau of Labor Statistics, The Employment Situation—July 2020, Aug. 7, 2020, at A-4, https://www.bls.gov/news.release/archives/empsit_08072020.pdf. [^49]: Id. at Table A-6; Unemployment Rate - With a Disability, 16 Years and Over, retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/LNU04074597 (last visited Aug. 18, 2020). [^50]: U.S. Bureau of Labor Statistics, The Employment Situation—July 2020, Aug. 7, 2020, at Table A-14, https://www.bls.gov/news.release/archives/empsit_08072020.pdf.; Unemployment Rate - Leisure and Hospitality, Private Wage and Salary Workers, retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/LNU04032241 (last visited Aug. 18, 2020). [^51]: U.S. Bureau of Labor Statistics, The Employment Situation—July 2020, Aug. 7, 2020, at Tables A-2, A-3, https://www.bls.gov/news.release/archives/empsit_08072020.pdf. [^52]: Id. at Tables A-2, A-3. [^53]: When the supplemental benefit was in effect, more than two-thirds of eligible individuals saw higher take-home pay via unemployment than at work with a median wage replacement rate for all unemployed persons of 134%. Peter Ganong, Pascal Noel, & Joseph Vavra, US Unemployment Insurance Replacement Rates During the Pandemic, Becker Friedman Institute for Economics at the University of Chicago, May 15, 2020 https://bfi.uchicago.edu/wp-content/uploads/BFI_WP_202062-1.pdf. [^54]: U.S. Bureau of Economic Analysis, Real Disposable Personal Income, retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/DSPIC96#0 (last visited Aug. 17, 2020). [^55]: Eric Morath & Danny Dougherty, Covid-19 Pandemic Triggers Wave of Long-Term Unemployment, Wall Street Journal, Aug. 7, 2020, https://www.wsj.com/articles/covid-19-pandemic-triggers-wave-of-long-term-unemployment-11596817137. [^56]: $472 million represents the amount the Federal Reserve has purchased under the program. Banks have lent $496.8 million under the Main Street Lending Program in total. See Board of Governors of the Federal Reserve System, Statistical Release H.4.1, Factors Affecting Reserve Balances of the Depository Institutions and Condition Statement of Federal Reserve Banks, at Table 4, Aug. 20, 2020, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for Aug. 20, 2020 release). The SPV for the Main Street Lending Program is MS Facilities LLC. The H.4.1 statistical release discloses the SPV's participation amount in Main Street loans, which is 95% of those loans. The August 20, 2020 release disclosed a participation amount of $472 million, which means $496.8 million in Main Street loans were made by lenders. [^57]: William C. Dunkelberg & Holly Wade, NFIB Small Business Economic Trends, National Federation of Independent Businesses, Aug. 11, 2020, at 2, https://assets.nfib.com/nfibcom/SBET-July-2020.pdf. [^58]: Id. [^59]: Board of Governors of the Federal Reserve System, Senior Loan Officer Opinion Survey on Bank Lending Practices, Aug. 3, 2020, https://www.federalreserve.gov/data/sloos/sloos-202007.htm. [^60]: For this reason, Congress continues to evaluate bipartisan and bicameral legislative proposals that extend and enhance the PPP program and other small business loan programs. [^61]: Currently, only the three for-profit facilities of the Main Street Lending Program (i.e., the New Loan Facility, the Priority Loan Facility and the Expanded Loan Facility) are operational. As such, this report largely focuses on an evaluation of those facilities. The Commission will continue to monitor the implementation of the nonprofit facilities (i.e., the Nonprofit New Loan Facility and the Nonprofit Expanded Loan Facility) and report on the efficacy of those facilities once they get underway. [^62]: 12 U.S.C. § 225a. [^63]: Board of Governors of the Federal Reserve System, Federal Reserve takes additional actions to provide up to $2.3 trillion in loans to support the economy, Apr. 9, 2020, https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm. [^64]: Federal Reserve Bank of Boston, Main Street Lending Program For-Profit Businesses Frequently Asked Questions, July 31, 2020, at 9, https://www.bostonfed.org/mslp-faqs. [^65]: 12 U.S.C. § 343(3) (Section 13(3) of the Federal Reserve Act). [^66]: U.S. Department of the Treasury, Treasury and Federal Reserve Board Announce New and Expanded Lending Programs to Provide up to $2.3 Trillion in Financing, Apr. 9, 2020, https://home.treasury.gov/news/press-releases/sm968. [^67]: 12 U.S.C. § 343(3). Additionally, Section 13(3)(C) of the Federal Reserve Act provides that the Federal Reserve is to provide certain information to Congress relating to credit extended under Section 13(3) on a periodic basis. This information includes borrower identities and the material terms of the assistance provided to each borrower. [^68]: Section 13(3) limits the Federal Reserve's ability to take credit risk in connection with emergency lending programs. Treasury's equity investment in the Main Street Lending Program will absorb any initial losses suffered by the program, which will mitigate credit risk to the Federal Reserve and help satisfy the statutory conditions for the Federal Reserve's use of emergency lending authority under Section 13(3). The Treasury's investment will be made using funds appropriated to the ESF under Section 4027 of the CARES Act. Federal Reserve Bank of Boston, Main Street Lending Program For-Profit Businesses Frequently Asked Questions, July 31, 2020, at 9, https://www.bostonfed.org/mslp-faqs. [^69]: Federal Reserve Bank of Boston, Federal Reserve Bank of Boston releases additional information for potential lenders and borrowers in the Main Street Lending Program, May 27, 2020, https://www.bostonfed.org/news-and-events/press-releases/2020/main-street-lending-program-additional-information-potential-lenders-borrowers.aspx. [^70]: Federal Reserve Bank of Boston, Main Street Lending Program For-Profit Businesses Frequently Asked Questions, July 31, 2020, at 9, https://www.bostonfed.org/mslp-faqs. Per the Main Street Lending Program's FAQs, the Federal Reserve and the Treasury determined that $600 billion was "appropriate in light of the current financial strains" facing small and medium-sized borrowers targeted by the program. However, they will continue to assess the situation and needs of those borrowers and may adjust the Main Street Lending Program's size in the future. Id. at 10-11. [^71]: Letter from Treasury Secretary Steven Mnuchin and Federal Reserve Chair Jerome Powell to Congressional Oversight Commission, June 29, 2020, at 10 (attached as Appendix C to The Third Report of the Congressional Oversight Commission, July 20, 2020, https://coc.senate.gov/sites/default/files/2020-08/20200720_Congressional_Oversight_Commission_3rd_Report.pdf) (stating that with respect to the Main Street Lending Program, the Federal Reserve and the Treasury "will leverage existing channels of bank lending by acquiring participations in loans extended to borrowers by financial institutions . . . . Relying on bank intermediation as a central element of the Main Street Lending Program allows the agencies to take advantage not only of lending institutions' existing customer relationships but also their underwriting expertise to reach a broad and heterogeneous class of borrowers that generally lack the external ratings or public credit standing necessary to access the securities markets."). [^72]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (prepared statement of Eric Rosengren, President and CEO, Federal Reserve Bank of Boston), https://coc.senate.gov/sites/default/files/2020-08/ROSENGREN%20Testimony%20COC%20Hearing%208-7.pdf. [^73]: In June 2020 there were 5,354 credit unions. Credit Union National Association, Monthly Credit Union Estimates, Aug. 3, 2020, https://www.cuna.org/uploadedFiles/Global/About_Credit_Unions/CUMonthEst_Jun20.pdf. As of August 15, 2020, there were 5,069 active FDIC-insured depository institutions. Federal Deposit Insurance Corporation, Institution Directory, https://www7.fdic.gov/idasp/advSearchLanding.asp (last visited Aug. 15, 2020). [^74]: U.S. Small Business Administration, Paycheck Protection Program - Participating Lenders, June 25, 2020, https://www.sba.gov/sites/default/files/2020-06/PPP_Lender_List_200625.pdf. [^75]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (prepared statement of Eric Rosengren, President and CEO, Federal Reserve Bank of Boston), https://coc.senate.gov/sites/default/files/2020-08/ROSENGREN%20Testimony%20COC%20Hearing%208-7.pdf; see also Federal Reserve Bank of Boston, Program Overview for Borrowers, https://www.bostonfed.org/supervision-and-regulation/supervision/special-facilities/main-street-lending-program/information-for-borrowers.aspx (last visited Aug. 19, 2020). [^76]: Rachel Siegel, Fed's Main Street Lending Program Doesn't Have Many Large Banks Making Loans To New Customers, Washington Post, July 8, 2020, https://www.washingtonpost.com/business/2020/07/08/fed-main-street/. [^77]: Federal Reserve Bank of Boston, Main Street Lending Program For-Profit Businesses Frequently Asked Questions, July 31, 2020, at 31, https://www.bostonfed.org/mslp-faqs. [^78]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (prepared statement of Eric Rosengren, President and CEO, Federal Reserve Bank of Boston), https://coc.senate.gov/sites/default/files/2020-08/ROSENGREN%20Testimony%20COC%20Hearing%208-7.pdf ("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 100 percent of the loan. Main Street can provide a loan to bridge the borrower over this current challenge."). [^79]: Federal Reserve Bank of Boston, The Federal Reserve's Main Street Lending Program, https://www.bostonfed.org/supervision-and-regulation/supervision/special-facilities/main-street-lending-program/main-street-lending-program-overview.aspx (last visited Aug. 18, 2020). [^80]: One or three month LIBOR. [^81]: Board of Governors of the Federal Reserve System, Main Street New Loan Facility Term Sheet, July 28, 2020, https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200728a3.pdf. [^82]: Board of Governors of the Federal Reserve System, Main Street Priority Loan Facility Term Sheet, July 28, 2020, https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200728a2.pdf. [^83]: Board of Governors of the Federal Reserve System, Main Street Expanded Loan Facility Term Sheet, July 28, 2020, https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200728a5.pdf. [^84]: Board of Governors of the Federal Reserve System, Statistical Release H.4.1, Factors Affecting Reserve Balances of the Depository Institutions and Condition Statement of Federal Reserve Banks, at Table 4, Aug. 20, 2020, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for Aug. 20, 2020 release). The SPV for the Main Street Lending Program is MS Facilities LLC. The H.4.1 statistical release discloses the SPV's participation amount in Main Street loans, which is 95% of those loans. The August 20, 2020 release disclosed a participation amount of $472 million, which means $496.8 million in Main Street loans were made by lenders. [^85]: Id. [^86]: Id.; Board of Governors of the Federal Reserve System, Statistical Release H.4.1, Factors Affecting Reserve Balances of the Depository Institutions and Condition Statement of Federal Reserve Banks, July 16, 2020, https://www.federalreserve.gov/releases/h41/ (to access click on hyperlink for July 16, 2020 release). The SPV for the Main Street Lending Program is MS Facilities LLC. [^87]: Board of Governors of the Federal Reserve System, Periodic Report: Update on Outstanding Lending Facilities Authorized by the Board under Section 13(3) of the Federal Reserve Act (Transaction-specific Disclosures), Aug. 10, 2020, https://www.federalreserve.gov/publications/files/msplf-msnlf-transaction-specific-disclosures-8-10-20.xlsx. [^88]: Id. [^89]: Id. [^90]: Ashley Portero, In study of Florida's top retail banks, this Miami company ranked high for PPP lending, South Florida Business Journal, July 13, 2020, https://www.bizjournals.com/southflorida/news/2020/07/13/city-national-bank-ranks-high-for-ppp-lending.html. [^91]: Congressional Oversight Commission, The Third Report of the Congressional Oversight Commission, July 20, 2020, at 8-9, https://coc.senate.gov/sites/default/files/2020-08/20200720_Congressional_Oversight_Commission_3rd_Report.pdf. [^92]: Congressional Oversight Commission, The Second Report of the Congressional Oversight Commission, June 18, 2020, at 6, https://coc.senate.gov/sites/default/files/2020-08/20200618_Congressional_Oversight_Commission_2nd_Report.pdf ("The announcement of these plans has had a significant effect on the functioning of credit markets and the ability of businesses to access capital. In February and March, the corporate bond market saw a widening gap between bid and ask prices for bonds . . . since the Federal Reserve's March 23 announcement about the creation of the PMCCF and SMCCF, the gap between bid and ask prices has narrowed sharply, improving liquidity for both the investment grade and non-investment grade bond markets."). [^93]: See, e.g., William B. English & J. Nellie Liang, Designing the Main Street Lending Program: Challenges and Options, Brookings Institute, June 18, 2020, at 2, https://www.brookings.edu/wp-content/uploads/2020/06/WP64_Liang-English_FINAL.pdf ("The mere announcement that Main Street loans are available does not provide the same support to the loan market as the Commercial Paper Funding Facility (CPFF) does for the commercial paper market and the Primary Market Corporate Credit Facility (PMCCF) does for the corporate bond market."). [^94]: Board of Governors of the Federal Reserve System, Senior Loan Officer Opinion Survey on Bank Lending Practices, Aug. 3, 2020, https://www.federalreserve.gov/data/sloos/sloos-202007.htm. [^95]: Id. [^96]: CARES Act, Pub. L. No. 116-136, § 4003(d)(3), 134 Stat. 281 (2020). [^97]: U.S. Senate Banking, Housing, and Urban Affairs Committee hearing on the Quarterly CARES Act Report to Congress, 116th Cong. (June 16, 2020) (testimony of Jerome Powell, Chair, Board of Governors of the Federal Reserve System). [^98]: Board of Governors of the Federal Reserve System, Federal Reserve Board Announces It Is Expanding The Scope And Eligibility For The Main Street Lending Program, Apr. 30, 2020, https://www.federalreserve.gov/newsevents/pressreleases/monetary20200430a.htm. [^99]: Board of Governors of the Federal Reserve System, Federal Reserve Board Modifies Main Street Lending Program To Provide Greater Access To Credit For Nonprofit Organizations Such As Educational Institutions, Hospitals, And Social Service Organizations, July 17, 2020, https://www.federalreserve.gov/newsevents/pressreleases/monetary20200717a.htm; see also Federal Reserve Bank of Boston, Main Street Lending Program Forms and Agreements, https://www.bostonfed.org/supervision-and-regulation/supervision/special-facilities/main-street-lending-program/information-for-lenders/docs.aspx. [^100]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (testimony of Eric Rosengren, President and CEO, Federal Reserve Bank of Boston); see also Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (prepared statement of Eric Rosengren, President and CEO, Federal Reserve Bank of Boston), https://coc.senate.gov/sites/default/files/2020-08/ROSENGREN%20Testimony%20COC%20Hearing%208-7.pdf ("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."). [^101]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (testimony of Eric Rosengren, President and CEO, Federal Reserve Bank of Boston). [^102]: Federal Reserve Bank of Boston, Main Street Lending Program For-Profit Businesses Frequently Asked Questions, July 31, 2020, at 31, https://www.bostonfed.org/mslp-faqs. [^103]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (testimony of Eric Rosengren, President and CEO, Federal Reserve Bank of Boston) (testifying that changes to terms sheets that require changes to underlying legal documents take longer to implement than other changes). [^104]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (prepared statement of Eric Rosengren, President and CEO, Federal Reserve Bank of Boston), https://coc.senate.gov/sites/default/files/2020-08/ROSENGREN%20Testimony%20COC%20Hearing%208-7.pdf (stating that the Boston Federal Reserve has conducted outreach calls, 14 webinars and posted informational materials to its website). [^105]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (prepared statement of Thomas Bohn, President and CEO, Association for Corporate Growth), https://coc.senate.gov/sites/default/files/2020-08/BOHN%20Testimony%20COC%20Hearing%208-7.pdf. [^106]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (testimony of Lauren Anderson, Senior Vice President & Associate General Counsel, Bank Policy Institute) (testifying 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."). [^107]: For example, the Federal Reserve does not require participating lenders to be listed on the Main Street Lending Program's website. The Main Street Lending Program's website only includes an interactive state-by-state map of participating lenders that are accepting new customers (rather than all participating lenders). Consequently, a borrower does not have access to the full list of participating lenders in its area. [^108]: For this reason, Congress continues to evaluate bipartisan and bicameral legislative proposals that extend and enhance the PPP program and other small business loan programs. [^109]: Federal Reserve Banks of Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, St. Louis, and San Francisco, 2020 Small Business Credit Survey, Apr. 7, 2020, at 4, https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2020/2020-sbcs-employer-firms-report. [^110]: JPMorgan Chase Institute, Data Dialogue: The Economic Impacts of COVID-19 on Small Business, May 13, 2020, https://institute.jpmorganchase.com/institute/research/small-business/the-economic-impacts-of-covid-19-on-small-business. [^111]: Congressional Oversight Commission, The Third Report of the Congressional Oversight Commission, July 20, 2020, at 9, https://coc.senate.gov/sites/default/files/2020-08/20200720_Congressional_Oversight_Commission_3rd_Report.pdf. [^112]: Id. [^113]: William C. Dunkelberg & Holly Wade, NFIB Small Business Economic Trends, National Federation of Independent Business, July 11, 2020, at 2, https://assets.nfib.com/nfibcom/SBET-July-2020.pdf. [^114]: Board of Governors of the Federal Reserve System, July 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices, Aug. 3, 2020, https://www.federalreserve.gov/data/documents/sloos-202007-fullreport.pdf. [^115]: Goldman Sachs, Survey: If Congress CARES, Round Two Must Go Through, July 14, 2020, https://www.goldmansachs.com/citizenship/10000-small-businesses/US/infographic-round-two/ ("91% have been approved and received loan funding"). [^116]: National Federation of Independent Business, Covid-19 Small Business Survey, July 7, 2020, at 2, https://assets.nfib.com/nfibcom/Covid-19-9-Write-up-and-Questionnaire-7-7-2020-FINAL.pdf (reporting that 34% of small business respondents applied for an EIDL loan, of which 67% were approved at the time of reporting). [^117]: When approved by Congress in March, the Paycheck Protection Program was only designed to provide businesses with 8 weeks of assistance. U.S. Department of the Treasury, Paycheck Protection Program (PPP) Information Sheet: Borrowers, Mar. 31, 2020, https://home.treasury.gov/system/files/136/PPP--Fact-Sheet.pdf. [^118]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (prepared statement of Lauren Anderson, Senior Vice President and Associate General Counsel, Bank Policy Institute), https://coc.senate.gov/sites/default/files/2020-08/ANDERSON%20Testimony%20COC%20Hearing%208-7.pdf ("[A]s 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 cash."). [^119]: Federal Reserve Banks of Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, St. Louis, and San Francisco, 2020 Small Business Credit Survey, Apr. 7, 2020, at 8, https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2020/2020-sbcs-employer-firms-report (reporting that "88% of employer firms rely on an owner's personal credit score to obtain financing, similar to 2018" and "56% of firms have relied on personal savings, friends, or family to fund their business in the last five years"). [^120]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (testimony of Eric Rosengren, President and CEO, Federal Reserve Bank of Boston). [^121]: The Commission notes that altering the minimum loan size alone may not result in smaller loans being originated under the program because the costs associated with Main Street lending make obtaining such a loan too difficult. The program was designed for companies that were not eligible for PPP and large enough that a $250,000 loan would not be unusual. As of July 31, 2020, the smallest Main Street Loan was $1.5 million. Board of Governors of the Federal Reserve System, Periodic Report: Update on Outstanding Lending Facilities Authorized by the Board under Section 13(3) of the Federal Reserve Act (Transaction-specific Disclosures), Aug. 8, 2020, https://www.federalreserve.gov/publications/files/msplf-msnlf-transaction-specific-disclosures-8-10-20.xlsx. [^122]: Currently, principal payments begin in year 3, with 15% due at the end of years 3 and 4, and a 70% balloon payment at the end of year 5. This balloon payment, in particular, may be untenable for many businesses. See U.S. Chamber of Commerce, U.S. Chamber Letter to Federal Reserve and Treasury on Main Street Lending Program, Apr. 16, 2020, https://www.uschamber.com/letters-congress/us-chamber-letter-federal-reserve-and-treasury-main-street-lending-program ("Lenders should be able to provide flexibility on loan maturities for a period of up to six years"); see also U.S. Small Businesses Administration, Types of 7(a) Loans, https://www.sba.gov/partners/lenders/7a-loan-program/types-7a-loans (last visited Aug. 18, 2020) (providing that certain SBA 7(a) loans can be extended for up to ten years). [^123]: 12 U.S.C. § 343(3)(B)(i)-(ii) (Section 13(3) of the Federal Reserve Act). [^124]: William English & Nellie Liang, Designing the Main Street Lending Program: Challenges and Options, June 18, 2020, https://www.brookings.edu/wp-content/uploads/2020/06/WP64_Liang-English_FINAL.pdf ("The bank participation share is 5 percent for all loans, regardless of borrower credit quality. We recommend that banks in some cases be allowed to extend program loans to riskier borrowers if they retain a larger share of the loan to demonstrate their confidence in the credit. The Federal Reserve recently eliminated such a trade-off in the Priority Loan facility, but we believe it should be reintroduced, creating greater flexibility in the program."). [^125]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (testimony of Eric Rosengren, President and CEO, Federal Reserve Bank of Boston). [^126]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (prepared statement of Gwen Mills, Secretary-Treasurer, UNITE HERE), https://coc.senate.gov/sites/default/files/2020-08/MILLS%20Testimony%20COC%20Hearing%208-7.pdf. [^127]: Id. [^128]: Id. [^129]: Id. [^130]: See Trepp data (last accessed June 16, 2020). Trepp, LLC provides a commercially available database of securitized mortgages. [^131]: Id. [^132]: Id. [^133]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (supplemental statement for the record of Gwen Mills, Secretary-Treasurer, UNITE HERE). [^134]: Federal Reserve Bank of Boston, Main Street Lending Program For-Profit Businesses Frequently Asked Questions, July 31, 2020, at 28-29, https://www.bostonfed.org/mslp-faqs. [^135]: Private equity companies were specifically precluded from direct participation in the Main Street Lending Program when the Fed and Treasury adopted 13 C.F.R. § 120.110 to determine eligible businesses, as modified and clarified by SBA regulations for purposes of the PPP. Federal Reserve Bank of Boston, Main Street Lending Program For-Profit Businesses Frequently Asked Questions, July 31, 2020, at 29, https://www.bostonfed.org/mslp-faqs. [^136]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (prepared statement of Vince Foster, Executive Chairman, Main Street Capital Corporation), https://coc.senate.gov/sites/default/files/2020-08/FOSTER%20Testimony%20COC%20Hearing%208-7.pdf. [^137]: Letter to Jerome Powell, Chair, Board of Governors of the Federal Reserve System and Eric Rosengren, President and CEO, Federal Reserve Bank of Boston on behalf of 17 organizations, Aug. 12, 2020, https://ourfinancialsecurity.org/wp-content/uploads/2020/08/Letter-to-Federal-Reserve-on-Affiliation-Rules-FINAL.pdf. [^138]: Id. [^139]: Mike Harmon & Victoria Ivashina, Managing the Liquidity Crisis, Harvard Business Review, Apr. 9, 2020, https://hbr.org/2020/04/managing-the-liquidity-crisis. [^140]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (testimony of Eric Rosengren, President and CEO, Federal Reserve Bank of Boston). [^141]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (testimony of Gwen Mills, Secretary–Treasurer, UNITE HERE). [^142]: Id. [^143]: Congressional Oversight Commission, The Third Report of the Congressional Oversight Commission, July 20, 2020, at 10, https://coc.senate.gov/sites/default/files/2020-08/20200720_Congressional_Oversight_Commission_3rd_Report.pdf. The Commission's third report also noted that former Federal Reserve officials have also made this same point. Jeremy Stein, chairman of the Harvard University economics department and a former Federal Reserve governor, stated, "You can't expect companies to borrow to pay employees." Similarly, Mark Carey, a former Federal Reserve staff member, has stated, "To go to great lengths to make companies keep employees that they don't need, in light of new expectations that economic activity will remain below pre-Covid levels for a long while, doesn't make sense." Bob Ivry, et al., Fed Vow Boosts Debt Binge as Borrowers Cut Thousands of Jobs, Bloomberg, June 5, 2020, https://www.bloomberg.com/news/articles/2020-06-05/fed-vow-boosts-debt-binge-while-borrowers-cut-thousands-of-jobs. [^144]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (testimony of Eric Rosengren, President and CEO, Federal Reserve Bank of Boston) (stating "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."). [^145]: Id. (stating "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."). [^146]: Federal Reserve Bank of Boston, Main Street Lending Program For-Profit Businesses Frequently Asked Questions, July 31, 2020, at 62, https://www.bostonfed.org/mslp-faqs. [^147]: Id. at 51. [^148]: Board of Governors of the Federal Reserve System, July 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices, Aug. 3, 2020, at 2, https://www.federalreserve.gov/data/documents/sloos-202007-fullreport.pdf ("Over the second quarter, major net shares of banks reported having tightened standards for C&I loans to both large and middle-market firms and to small firms."). [^149]: Board of Governors of the Federal Reserve System, Senior Loan Officer Opinion Survey on Bank Lending Practices, Aug. 3, 2020, https://www.federalreserve.gov/data/sloos/sloos-202007.htm. [^150]: Congressional Oversight Commission hearing on the Main Street Lending Program, 116th Cong. (Aug. 7, 2020) (testimony of Lauren Anderson, Senior Vice President and Associate General Counsel, Bank Policy Institute). [^151]: Id. [^152]: Id.