On Thursday April 30, 2020, the Board of Governors of the Federal Reserve Board released a new revised term sheet for the Paycheck Protection Program Liquidity Facility (“PPPLF”). Under the facility, the Federal Reserve Banks will lend to eligible borrowers on a nonrecourse basis, taking loans to small businesses guaranteed by the Small Business Administration (“SBA”) under the Paycheck Protection Program (“PPP Loans”) as collateral.
Notably, the PPPLF has been expanded so the categories of eligible borrowers now includes banks, credit unions, community development banks, small business lending companies licensed by the SBA and fintech firms approved by the SBA to originate PPP Loans. The most recent term sheet also specifies the Reserve Banks that will act as lender to each category of eligible borrower.
The PPPLF has also been expanded to include PPP Loans originated or purchased by an eligible borrower as eligible collateral. An “eligible borrower” pledging a purchased PPP Loan will need to provide the Reserve Bank with documentation from the SBA demonstrating that the pledging eligible borrower is the beneficiary of the SBA guarantee for the loan.
The SBA provided important guidance on transferring PPP Loans without SBA consent on May 1, 2020 (SBA Procedural Notice – Guidance on Whole Loan Sales of Paycheck Protection Program Loans). In it, the SBA specified a number of requirements to be met to ensure PPP Loan transfers includes the SBA Guaranty. Highlights of the guidance include (i) PPP lenders may sell all of their interest in PPP Loans to another “participating lender” in accordance with 13 CFR §120.432(a) of the SBA, (ii) the acquiring lender must be operating under a current Loan Guarantee Agreement, which agreement will be applicable to the purchased PPP Loans, (iii) SBA consent is not required, and (iv) the acquiring lender takes the PPP loan subject to SBA’s existing rights, including its right to deny liability on its guarantee.
Other Terms of the PPPLF:
- The maturity date of the loan under PPPLF will be the same as the maturity date of the PPP Loan pledged as collateral. The maturity of the loan under PPPLF will be accelerated if the underlying PPP Loan goes into default and the eligible borrower sells the PPP Loan to the SBA to realize on the SBA guarantee. The maturity of the loan under the PPPLF will also be accelerated to the extent of any loan forgiveness reimbursement by the SBA or payment received from the borrower under the PPP Loan, in which case the loan under the PPPLF will be adjusted accordingly.
- PPP Loans pledged as collateral under PPPLF will be valued at the principal amount of the PPP Loan.
- The principal amount of the loan under PPPLF will be equal to the principal amount of the PPP Loan.
- Interest will accrue on the PPPLF loans at 35 bps.
- The PPPLF is nonrecourse to the borrower and there are no applicable fees.
- PPP Loans benefit from a zero percent risk weight for purposes of Federal banking agencies risk-based capital rules. In addition, depository institutions that pledge PPP Loans under the PPPLF may exclude the loans from leverage ratio calculations.
- Loans will be available under PPPLF until September 30, 2020, unless extended by the Federal Reserve Board and the Department of Treasury.
More information regarding the PPPLF can be found here: https://www.frbdiscountwindow.org/pages/general-information/faq.
The term sheet can be accessed here: Paycheck Protection Program Liquidity Facility (PDF).
As you are aware, things are changing quickly and there is no clear-cut authority or bright line rules. This is not an unequivocal statement of the law, but instead represents our best interpretation of where things currently stand.