United States: Main Street Lending Program

The Fed created the MSLP “to help facilitate access to credit so that small and medium-sized businesses are better able to manage the period of dislocations related to the pandemic” (FRB 2020k; FRB 2020l). In particular, the MSLP aimed to provide credit to firms that were too small to participate in the Fed’s capital markets programs, but perhaps too large to benefit sufficiently from the Small Business Administration’s emergency relief (FRB 2020m, 12; Morgan and Clampitt 2021). These firms tend to be especially dependent on banks for credit (Morgan and Clampitt 2021).

The Fed later noted that due to the pandemic, mid-sized nonprofits had “experienced a significant decrease in revenues and increase in expenses, heightening the need . . . to obtain financing in order to manage cash flows and sustain themselves until economic conditions normalize” (FRB 2020n; FRB 2020o).

The Fed intended the MSLP to function as a backstop to private credit markets “should the recovery falter and a larger number of businesses need more access to credit” (FRB 2020p, 12).

The Fed first announced on March 23, 2020, that its pandemic response would include a program for small and medium-sized borrowers (FRB 2020b). The Fed authorized the MSLP on April 8, 2020, and announced it on April 9, alongside several other emergency programs in response to the volatile financial and economic conditions resulting from the pandemic (FRB 2020a; FRB 2020c). These parallel measures responded to disruptions in other pockets of financial markets—those for corporate bonds, municipal bonds, and structured finance (FRB 2020c).

The Federal Reserve Board authorized the MSLP by invoking its authority under Section 13(3) of the Federal Reserve Act (FRB 2020c). Section 13(3) permits the Fed, “in unusual and exigent circumstances,” to “discount for any participant in any program or facility with broad-based eligibility” (FRA n.d.c). The invocation of Section 13(3) allows the Fed to provide liquidity more broadly than its monetary policy and discount window authorities allow.

As noted in an internal Fed legal memo from 2008, the Fed Board “consistently has viewed the term ‘discount’ under section 13(3) as including a Reserve Bank extension of credit . . . as well as a purchase by a Reserve Bank of third-party notes” (FRB 2008, 13). In the case of the MSLP, the Fed was effecting the latter function.

In addition to the Board vote, Section 13(3) authority requires the approval of the Treasury secretary (FRA n.d.c). Extension of the program also requires a Board vote and approval from the Treasury secretary (FRB 2020a); see Key Design Decision 18.

Section 4027 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated funding to the Department of the Treasury that it used to provide first-loss equity protection for the MSLP, helping the Fed meet the Section 13(3) requirements of being secured to its satisfaction and protecting taxpayers from losses (FRB 2020l; FRA n.d.c).

Section 13(3) provides that within seven days of authorizing 13(3) assistance, the Fed must submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives. The report needs to describe “the justification for the exercise of authority to provide such assistance; the identity of the recipients of such assistance; the date and amount of the assistance, and form in which the assistance was provided; and the material terms of the assistance.” Furthermore, the statute requires the Fed to submit an updated report every 30 days on the details of any outstanding credit under 13(3) lending facilities. The law calls for such reports to contain updates on “the value of collateral; the amount of interest, fees, and other revenue or items of value received in exchange for the assistance; and the expected or final cost to the taxpayers of such assistance” (FRA n.d.c).

The Fed chair can elect to keep identifying details of individual liquidity recipients confidential in these reports and only release them up to one year after the closure of the lending program^FIf the Fed chair elects to keep borrowers’ identifying details confidential, Section 13(3) stipulates that “such information shall be made available only to the Chairpersons or Ranking Members of the” Senate Banking Committee and House Financial Services Committee.—the maximum delay permissible under Section 11(s) of the Federal Reserve Act (FRA n.d.b, sec. 11(s)(2)(A); FRA n.d.c, sec. 13(3)(D)). However, the Fed elected not to take this option in the case of the MSLP. This contrasted with some of its other COVID-19 Section 13(3) facilities, where the Fed thought disclosing participant identities would increase financial stress for the intended beneficiaries (Guida 2020; GAO 2020, 19–20). The monthly transaction-specific disclosures thus shared all the same information eventually revealed by the Section 11(s) report (FRB 2021a; FRB n.d.; FRB 2021e).

The CARES Act stipulated that the Fed make these regular reports to the congressional committees available on its website within seven days of submitting them if the program used CARES Act funding, as the MSLP did (CARES Act 2020, sec. 4026(b)(1)(B)).

As a recipient of the funds allocated under the CARES Act’s Section 4027, the MSLP was also subject to oversight from the COC, a congressionally appointed oversight panel. The CARES Act created the COC to conduct ongoing oversight of the use, implementation, and effectiveness of these funds, and it was to submit regular reports to Congress (COC 2020a, 5). The COC held a hearing specifically on the MSLP, during which it called several stakeholders as witnesses, including FRBB President Rosengren (COC 2020c; COC 2020d).

In addition to congressional oversight, the MSLP was subject to review by the Special Inspector General for Pandemic Recovery (created by §4018 of the CARES Act), the Fed board’s Office of the Inspector General, and the Government Accountability Office (GAO) (Miller 2020; OIG 2020; GAO 2020).

FRBB built from scratch an infrastructure to process and verify lender registrations and loan documentations. Because, unlike with the Fed’s capital markets programs, MSLP loans did not have an existing secondary market, the FRBB had to create an electronic portal through which banks could register and submit loans for purchase by the MSLP. The Fed’s “lack of an existing blueprint” or infrastructure for the MSLP contributed to its relatively slow rollout, as compared to its other emergency programs and similar loan programs in other countries (Arseneau et al. 2021).

While FRBB staff and vendors reviewed loan submissions, the SPV did not re-underwrite any submitted loans (Arseneau et al. 2021, 14). If submitted loans complied with the MSLP terms, the SPV purchased them (COC 2021a, 22).

MS Facilities LLC did not have any employees itself (FRBB 2021c, 10). The FRBB relied on its staff and third-party vendors to run the program.

The FRBB selected State Street Bank and Trust Company to provide custodial and accounting services for the SPV (FRBB 2021c). FRBB picked State Street after assessing its response to a request for proposals (RFP), considering overall qualifications and operational capabilities needed to support the MSLP (FRBB n.d.).

FRBB also enlisted Guidehouse, Inc., a consulting company, in partnership with PricewaterhouseCoopers (PwC) to provide credit administration. This selection resulted from an RFP process that considered technological and operational capabilities, technical expertise, and control technology (FRBB 2021c; FRBB n.d.).

The FRBB hired FTI Consulting as a workout advisor. This was the result of an RFP that considered FTI’s design and operational capabilities, delivery approach, and broader market presence (FRBB 2021c; FRBB n.d.). FRBB also utilized eight firms to provide legal services to the SPV (FRBB n.d.).

The inspector general of the Fed’s Board of Governors said that, to handle the MSLP’s surge in volume in its final two months, the FRBB “implemented an expedited loan purchase process for certain lenders” and that the Office of Inspector General intended to assess this process (OIG 2021). The Congressional Oversight Commission (COC) wrote that in response to the surge in MSLP submissions in the program’s final weeks, “the FRBB increased staffing by bringing in additional trained legal and risk/compliance professionals from the [Fed] Board, the FRBB, and the [Federal Reserve Bank of New York], and the [MSLP] vendors also expanded the sizes of their teams considerably.” Additionally, both Fed and external staff added hours on weekends and evenings (COC 2021a, 25).

Furthermore, the FRBB streamlined its loan review process during December by deferring review of items “that could be easily addressed on an ex-post basis, such as the completion of certain non-signature fields,” until after the acceptance of a loan. The FRBB initiated the streamlined approach for loans smaller than $5 million, expanding it as submissions increased to loans up to $50 million (excluding MSELF loans) (COC 2021a, 25).

The FRBB said in February 2021 that since the MSLP’s termination, Guidehouse/PwC and FRBB staff had reviewed deferred items and begun working with lenders to make necessary corrections to any errors (COC 2021a, 25). The COC deemed the Fed’s process for buying and managing the MSLP portfolio “sufficient” (COC 2021a, 10).

The Fed made regular press releases accompanying decisions on the terms and operational details of the MSLP (FRB 2020q).

The CARES Act stipulated that the Fed make its monthly reports to the congressional committees on MSLP activity available on its website within seven days of submitting them (CARES Act 2020, sec. 4026(b)(2)(B)). The Fed chair could elect to keep identifying details of individual liquidity recipients confidential in its reports to the congressional committees^FSee supra note 2. and only release them publicly up to one year after the closure of the emergency program—the maximum delay permissible under Section 11(s) of the Federal Reserve Act (FRA n.d.b, sec. 11(s)(2)(A); FRA n.d.c, sec. 13(3)(D)). However, the Fed elected not to take this option in the case of the MSLP. This contrasted with some of its other COVID-19 Section 13(3) facilities, where the Fed thought disclosing participant identities in real time would increase financial stress for the intended beneficiaries (Guida 2020; GAO 2020, 19–20).

The Fed reported aggregate MSLP lending data on a weekly basis as part of the usual publication of its overall balance sheet (FRBB 2020c; FRBB 2020d). It also published annual, audited financial statements specific to the SPV, MS Facilities LLC; as of this writing, two have been published (FRBB 2021c; FRBB 2022).

The Federal Reserve Bank of Boston (FRBB) established a special purpose vehicle (SPV), MS Facilities LLC, to purchase eligible loans (FRBB 2020h). The Department of the Treasury committed to a $75 billion equity investment in the SPV (FRB 2020k). The FRBB funded the SPV on a recourse basis, charging the interest rate on reserves, secured by all the assets of the SPV (FRB 2020k; FRBB 2020h).

The Fed has viewed use of the SPV structure as providing management, accounting, and legal advantages to an intervention—especially when the Fed operates multiple 13(3) programs in parallel. (See also: Geithner, Bernanke, and Paulson 2020, 156­–158.) Use of an SPV allows the Fed to better tailor a 13(3) program to the goals of the intervention (Baxter 2009, 12–13). Each intervention has its own specific terms, timeline, capital structure, and management team. The management teams may also be in geographically separate reserve banks, depending on which one(s) is administering a given intervention.

The SPV structure simplifies the reporting of income and the management of any sales of assets discounted by the program. As noted in Key Design Decision 8, the Fed provided separate annual financial statements for the MSLP that were independently audited by an outside accounting firm. These statements provided greater detail and transparency than existed for Fed facilities that did not utilize the SPV structure (Bernanke, Geithner, and Paulson 2020, 157; FRB 2022b). Moreover, the degree of corporate separation from both the Fed and other 13(3) interventions provided by an SPV structure may provide those other entities some protection in the event a 13(3) program is sued.

SPVs are also typically easy and inexpensive to set up. The Fed has viewed its creation of the structures as falling under the “incidental powers as shall be necessary to carry on the business of banking within the limitations” of the Federal Reserve Act (FRA n.d.a; Bernanke, Geithner, and Paulson 2020, 156).

The Fed designed the MSLP to reach up to $600 billion outstanding (FRB 2020c). The MSLP peaked at the time of its closure at $16.6 billion outstanding—its participation share in approximately $17.5 billion of lending (FRB 2021d, 33; FRB 2021e).

In crafting the MSLP, Fed staff projected bounds for the SPV’s net income under various credit risk scenarios and design choices, akin to a stress test (Arseneau et al. 2021, 14).

These scenarios utilized historical worst loan charge-off rates; projected loss rates from the Fed’s bank stress tests on non-investment grade, unsecured loans; and a credit rating agency’s default forecasts for the institutional leveraged loan market (see Figure 5 for MSLP loans’ internal credit ratings at year-end 2020 and 2021). The Fed considered multiples of these figures as well, ultimately weighing loss rates from approximately 5% to over 25% (Arseneau et al. 2021, 42–43). Under the less adverse scenarios, including the worst historically observed commercial and industrial loan charge-off rate and the stress testing portfolio-average losses, the stress test projected that income would outweigh losses. The more adverse scenarios, however, were projected to cause losses. This scenario analysis led to the Fed’s decision to set the MSLP’s maximum leverage ratio at eight times Treasury’s first-loss position. With $75 billion committed from Treasury, this ratio “dictated a maximum program size of $600 billion” (Arseneau et al. 2021).

The Treasury Secretary committed to up to $75 billion as an equity investment in the MSLP SPV, with funds provided by the CARES Act (MSNLF 2020a). Authorities designed the equity investment to release in two tranches of $37.5 billion, with Treasury to inject the second tranche when the MSLP SPV fell below its designed 8-to-1 leverage ratio (or at the FRBB and Treasury’s agreed discretion) (FRBB 2020e, 6–7). Due to the low program utilization, officials never injected the second tranche (see Kelly 2020a and Kelly 2020b for a discussion of the unused funds) (FRBB 2020e).

The FRBB funded the SPV on a recourse basis, secured by all the assets of the SPV (FRB 2020k; FRBB 2020h, 17). The Fed expanded its balance sheet to fund the SPV, creating central bank reserves (FRBB 2020h, 16–17; FRBNY 2021; FRB 2021b). FRBB will continue to fund the MSLP SPV until its loans mature or it sells them (FRB n.d.).

On January 8, 2021, the Fed transferred $20.9 billion back to the Treasury, leaving Treasury’s investment at $16.6 billion, just covering the entire amount of loans purchased by the MSLP, and thus still effectively protecting the Fed from any losses (FRBB 2021c, 18–19; FRBB 2021a, 9). As the SPV’s audited financial statements for 2020 said, “this interim distribution reduced the Treasury’s preferred equity to approximately the maximum risk to the FRBB” (FRBB 2021c). On November 17, 2021, the Fed and Treasury agreed to execute similar transfers of excess equity on a semiannual basis (FRBB 2021a). The Fed then transferred $0.9 billion to the Treasury on November 19, 2021 (FRBB 2022, 20).

US-based depository institutions, bank holding companies, bank branches/agencies, and their domestic subsidiaries were eligible to issue MSLP loans (MSELF 2020a; MSNLF 2020b; MSPLF 2020a; NOELF 2020a; NONLF 2020a). This included all US-based:

• Federally insured depository institutions (including banks, savings associations, and credit unions)
• Branches or agencies of a foreign bank
• Bank holding companies
• Savings and loan holding companies
• Intermediate holding companies of a foreign banking organization
• Subsidiaries of any of the above.

Ultimately, 643 banks registered for the MSLP, with just over 300 of those selling loans to the MSLP; the rest ended up not participating (FRBB 2020j; Arseneau et al. 2021; GAO 2021). Most active banks sold just one or two loans to the program (Arseneau et al. 2021, 25). The top 10 lenders in the program accounted for 33% of the credit extended and 34% of the number of loans (COC 2021a).

By contrast, 5,467 lenders participated in the Small Business Administration’s Paycheck Protection Program (PPP) (GAO 2021). Unlike PPP loans, MSLP loans were not guaranteed by the government and continued to carry private credit risk. The list of lenders was thus kept to only federally regulated and supervised banking institutions to ensure lenders’ underwriting standards and anti-money-laundering practices were subject to continued supervisory oversight (Arseneau et al. 2021, 12). Unlike the PPP, the MSLP did not include nonbanks and financial technology firms as eligible lenders (Arseneau et al. 2021). The COC noted that although both Fed Chair Powell and Treasury Secretary Steven Mnuchin stated in their June 24, 2020, meeting with the Commission that they were not aware of “any philosophical or administrative reason” as to why nonbank lenders could not be eligible for MSLP, officials never expanded the program to include these lenders (COC 2020d, 36).

FRBB research showed that registered lenders tended to have lower capital ratios than comparably sized non-registered lenders. Moreover, the ultimate reductions in capital requirements due to sales to the MSLP were particularly material for the smaller banks that participated in the program (Arseneau et al. 2021, 32–33).

The MSLP was a standing purchase program, accessible at the lender’s election (FRBB 2020a).

The MSLP purchased a 95% participation in loans made by private lenders. The Fed relied on private lenders to leverage their existing expertise and infrastructure in issuing the loans (Arseneau et al. 2021). By purchasing most of the loan, the Fed intended to ease loan supply constraints by reducing banks’ risk and capital demands when making MSLP-compliant loans to mid-sized firms (Morgan and Clampitt 2021; COC 2020c, 39).

The Fed did not purchase the entire loan, however. If lenders could offload whole loans to the Fed, they may have had “little incentive to screen and monitor credits or work out problem loans” (Morgan and Clampitt 2021). The Fed and Treasury said they “believe[d] that a 95 percent participation provides an appropriate balance of these considerations” (COC 2020b).

Moreover, FRBB researchers noted the impracticality of quickly onboarding sufficient personnel from the banking sector to issue these loans directly on the Fed’s behalf, which led to the Fed’s use of private lenders. Because the market for loans to mid-sized firms lacks standardization, liquid secondary markets, and external credit ratings, the MSLP was operationally complex and slow to roll out. The rollout was also delayed because “there was no blueprint” at the Fed for purchasing loan participations, especially from mid-sized enterprises (Arseneau et al. 2021).

Loans fitting the MSLP structure (see Figure 1 above) that were originated after April 24, 2020, for the for-profit facilities and after June 15, 2020, for the nonprofit facilities were eligible for the MSLP if they also met the terms described below. Firms that had taken advantage of the PPP, were still eligible to take out MSLP loans (and could typically exclude it from their leverage calculations) (FRB 2020c; FRBB 2020i). As discussed in Key Design Decision 15, authorities considered but did not implement an asset-based lending facility to support highly leveraged firms.

A substantial number of public and private comments submitted to the Fed in April urged the expansion of the MSLP to include nonprofit entities (COC 2020d, 42; Kelly 2021, 774). On April 30, the Fed said that it “recognizes the critical role that nonprofit organizations play throughout the economy and is evaluating a separate approach to meet their unique needs” (FRB 2020d). On June 15, the MSLP began accepting lender registrations, and the Fed solicited feedback on draft terms for the two nonprofit facilities (FRBB 2020k; FRB 2020f). The Fed announced nonprofits’ eligibility for the MSLP on July 17 (FRB 2020g). It began its purchases of for-profit loans on July 6, and of nonprofit loans on September 4 (FRBB 2020l).

While originally announced with a four-year maturity, the Fed extended MSLP loans’ maturity to five years on June 8, 2020, prior to the MSLP becoming operational (FRB 2020e). This change was partly based on public feedback to the previously proposed terms (GAO 2020, 13–14).

The Fed required all MSLP loans to carry a five-year maturity, with interest payments deferred for the first year and principal payments deferred for the first two years. Principal was to be repaid in tranches: 15% at the end of the third and fourth years, and then the final 70% at maturity. According to FRBB President Rosengren, the MSLP utilized the deferral feature as a means to target borrowers facing “disrupted cash flow” but with the ability “over time to actually be able to make payments” (COC 2020c, 40). Prepayment was permitted without penalty (FRBB 2020c; FRBB 2020d).

Rosengren said the five-year maturity was designed to respond to near-term cash-flow disruptions caused by the COVID-19 pandemic and to facilitate medium-term credit provision. He viewed the five-year maturity as balancing the competing considerations that a longer term could both make the program more attractive to borrowers and carry more term risk for the lenders and government (COC 2020c, 31).

MSLP lenders were to underwrite the loans using their existing underwriting practices. The Fed said on April 30, 2020, that “under all of the loan options, lenders will be able to apply their industry-specific expertise and underwriting standards to best measure a borrower's income” (FRB 2020d). The Fed, along with the other federal banking supervisory agencies, clarified and emphasized in September 2020 that the Fed and Treasury expected that MSLP lenders to underwrite the loans by looking “back to the borrower’s pre-pandemic condition and forward to their post-pandemic prospects” (FRB 2020i).

The MSLP also required that when banks calculated borrowers’ adjusted EBITDA/EBIDA^FTaxes were only included in the for-profit facilities’ earnings calculations. Where earnings calculations were needed for the NONLF and NOELF, lenders were to use “EBIDA” (earnings before interest, depreciation, and amortization)., they were to utilize only the adjustments that the bank previously and recently used for that borrower; in the case of a new loan, the bank was to use the adjustments applied to similar borrowers (FRBB 2020c; FRBB 2020d).

Each MSLP loan borrower, whether a for-profit or nonprofit firm, had to meet the following criteria (MSELF 2020b; MSNLF 2020c; MSPLF 2020b; NOELF 2020b; NONLF 2020b):

• Had 15,000 employees or fewer, or 2019 annual revenues of $5 billion or less
• Was created or organized in the US or under the laws of the US with significant operations in, and a majority of its employees based in, the United States
• Did not participate in other MSLP facilities or the Fed’s programs engaging in direct purchases of corporate bonds and municipal bonds: the Primary Market Corporate Credit Facility and the Municipal Liquidity Facility
• Had not already received direct financial support from the provisions of the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act)
• Was generally not a type of firm ineligible to receive a loan from the Small Business Administration^FFirms eligible for MSLP loans could not be of a type listed under 13 CFR 120.110(b)-(j) and (m)-(s) and amended by regulations implementing the Paycheck Protection Program as part of the CARES Act (SBA n.d.). 13 CFR 120.110 (a) and (k) were allowed as they were nonprofit and religious entities; 120.110 (l) is empty (SBA n.d.). See SBA n.d. for the list of types of ineligible firms.
• Had an internal risk rating on any pre-existing debt with the MSLP lender that was equivalent to a “pass” in the Federal Financial Institutions Examination Council’s (FFIEC) supervisory rating system as of December 31, 2019 (FRBB 2020c; FRBB 2020d).

A borrower in the for-profit facilities had the following additional criteria:

• Established prior to March 13, 2020
• Structured as a domestic for-profit firm: either a partnership, limited liability company, corporation, association, trust, cooperative, joint venture with no more than 49 percent participation by foreign business entities, or a tribal business concern.

A borrower in the nonprofit facilities, meanwhile, had this set of additional criteria:

• In continuous operation since at least January 1, 2015
• Structured as a nonprofit firm under section 501(c)(3) of the Internal Revenue Code, or a tax-exempt veterans’ organization described under section 501(c)(19)
• Had at least 10 employees
• Had an endowment of less than $3 billion
• Had total non-donation revenues equal to or greater than 60% of expenses for the period from 2017 through 2019
• Had, at loan origination, a ratio of adjusted 2019 EBIDA to unrestricted 2019 operating revenue greater than or equal to 2%
• Had a ratio of liquid assets to average daily expenses over the previous year, equal to or greater than 60 days

Had, at loan origination, a ratio of unrestricted cash and investments to existing outstanding and undrawn available debt, plus the amount of any loan under the Facility, plus the amount of any Centers for Medicare & Medicaid Services (CMS) Accelerated and Advance Payments, that is greater than 55%.

MSLP facilities faced the following limits on loan amounts and borrower participation limits:

The MSLP purchased 95% participations in eligible loans without applying a haircut.

The Fed followed its Regulation A in setting interest rates for pandemic-era facilities that intervened in primary markets, including the MSLP (GAO 2020, 12). Regulation A details the Fed’s prescribed rules for emergency lending and calls for the Fed to charge a “penalty rate” on all 13(3) lending. The regulation calls for the Fed to set a rate that “(A) Is a premium to the market rate in normal circumstances; (B) Affords liquidity in unusual and exigent circumstances; and (C) Encourages repayment of the credit and discourages use of the program or facility as the unusual and exigent circumstances that motivated the program or facility recede and economic conditions normalize” (Availability and Terms of Credit n.d., sec. 201.4(d)(7)). Fed officials told the GAO that, therefore, “the facilities would experience limited participation when credit is available in the marketplace and increased participation when markets declined and there was a shortage of credit” (GAO 2020). Additionally, by contributing to the MSLP’s earnings, the interest charged was one of several measures intended to reduce the risk of the MSLP to the Federal Reserve and taxpayers (FRB 2020l).

The Fed required all MSLP loans to charge a floating rate of LIBOR plus 300 bps, and the lender could choose either the 1-month or 3-month LIBOR. MSLP loans also deferred interest for the first year of the loans (FRBB 2020c; FRBB 2020d). According to FRBB President Rosengren, the MSLP utilized this deferral feature to target borrowers that faced cash-flow disruptions but would return to being able to make payments (COC 2020c, 40).

In the Fed’s April 30, 2020, update of MSLP terms, the Fed changed the benchmark interest rate from the Secured Overnight Financing Rate (SOFR) to LIBOR after receiving comments from potential MSLP participants. At the time, the Fed and other regulators were encouraging the private sector to transition from LIBOR to SOFR in setting rates on private contracts. Commenters told the Fed that it would be challenging to implement the new SOFR system in the middle of a crisis. The Fed recommended that eligible lenders include fallback language in the MSLP loan contracts in the event LIBOR became unavailable during the loan’s existence (FRBB 2020a, 13).

In assessing the MSLP in retrospect, Fed researchers suggested that the program could have been more efficient if it had allowed lenders some flexibility to adjust interest rates based on the risks of individual borrowers (Arseneau et al. 2021, 36).

1. Transaction fees from the Lender to the SPV (paid at time of transaction): For the new and priority loan facilities, the Fed required lenders to pay the MSLP a transaction fee of 100 bps of the original principal amount for loans of $250,000 or more; they paid no fee on smaller loans (MSNLF 2020b; MSPLF 2020a; NONLF 2020a). For the expanded loan facilities, the Fed required lenders to pay the MSLP a transaction fee of 75 bps of the principal amount of the upsized tranche. The lender could pass this cost on to the borrower. Transaction fees, by contributing to the MSLP’s earnings, were one of several measures intended to reduce the risk of the MSLP to the Federal Reserve and taxpayers (FRB 2020l).
2. Loan Servicing Fees from the SPV to the Lender (annual): There were also annual loan servicing fees that flowed in the opposite direction, paid by the SPV to the lender. In the new and priority loan facilities, loans of less than $250,000 carried an annual loan servicing fee of 50 bps of the principal amount; loans of at least $250,000 paid 25 bps (MSNLF 2020b; MSPLF 2020a; NONLF 2020a). MSLP loans from the expanded loan facilities borrower paid lenders an annual loan servicing fee of 25 bps of the upsized tranche (MSELF 2020a; NOELF 2020a).
3. Origination/Upsizing Fees from the Borrower to the Lender (lender’s discretion): MSLP loans from the new and priority loan facilities also carried borrower fees paid to the lender. Borrowers of less than $250,000 could pay a loan origination fee of up to 200 bps. For loans of at least $250,000, the Fed capped this fee at 100 bps (MSNLF 2020b; MSPLF 2020a; NONLF 2020a). For MSLP loans from the expanded loan facilities, borrowers could pay a loan upsizing fee of up to 75 bps (MSELF 2020a; NOELF 2020a). Lenders had discretion over the existence and size of the loan origination and upsizing fees (subject to the maximums) (FRBB 2020a, 14; FRBB 2020b, 28–29). It is unclear if lenders also had discretion over the timing of this fee.^FThe MSLP’s term sheets suggest it was an up-front charge, while the FRBB’s Frequently Asked Questions documents suggest lenders could choose when to charge these fees (MSELF 2020b; MSNLF 2020c; MSPLF 2020b; NOELF 2020b; NONLF 2020b; FRBB 2020c; FRBB 2020d).

The Fed added the more favorable fee structure for loans of under $250,000 on October 30, 2020, to encourage the provision of smaller loans (FRB 2020j).

Despite the MSLP purchasing 95% of the loan, all fee payments remained based on the whole principal (or upsized) amount. This program feature was intended to incentivize lenders to issue MSLP loans (COC 2020c, 41).

The MSLP purchased assets off eligible lenders’ balance sheets; there was no maturity to the credit extension. MSLP purchases were structured as true sales (FRBB 2020c; FRBB 2020d).

Section 13(3) of the Federal Reserve Act stipulates that recipients of liquidity under such programs cannot be insolvent (FRA n.d.c). The Fed required MSLP borrowers to attest to such, and said the borrower may comply with the solvency requirement by certifying that it was not (1) “in bankruptcy, resolution under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or any other Federal or State insolvency proceeding” (as required by Section 13(3)), and that it was not (2) “‘generally failing to pay undisputed debts as they become due’ during the 90 days preceding the borrowing” (as prescribed by Regulation A) (FRA n.d.c; FRBB 2020f; FRBB 2020g). However, the Fed carved out an exception for any failure to pay debts that was attributable to COVID-19-related economic or market disruptions (FRBB 2020f, 8; FRBB 2020g, 10).

Prior to extending credit under Section 13(3), the Fed must also “obtain evidence” that a recipient “is unable to secure adequate credit accommodations from other banking institutions” (FRA n.d.c). The Fed required each MSLP borrower to certify that it lacked such adequate credit. The Fed said the borrower did not need to lack credit access altogether, but instead could certify that “the amount, price, or terms of credit available from other sources are inadequate for the Borrower’s needs during the current unusual and exigent circumstances” (FRBB 2020f; FRBB 2020g).

The Fed also mandated that an MSLP borrower (MSELF 2020b; MSNLF 2020c; MSPLF 2020b; NOELF 2020b; NONLF 2020b):

• Refrain from repaying other debt “unless the debt or interest payment is mandatory and due”^FThe Fed granted MSPLF borrowers an exception to this term: at the time of origination, they could refinance existing debt owed to a lender other than their MSLP lender (MSPLF 2020b). If a borrower was using an MSLPF loan to refinance, the amount being refinanced could be excluded from the borrower’s debt for purposes of calculating its leverage (FRBB 2020c, 19). Timiraos (2022, 241–242) reports that the lack of broadly allowed refinancing was driven by Treasury’s desire to avoid bailing out lenders and taking additional risk of losses.
• Not seek to cancel or reduce any of its committed credit lines with any lender
• Certify that it believes “it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period”
• Follow the “compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act”^FGenerally, this stipulation prohibited until 12 months after an MSLP loan was outstanding that the borrower not repurchase shares, pay dividends, or make other common stock capital distributions. For the same timeframe, it also placed restrictions on compensation increases for employees who, in 2019, made over $425,000, and it provided for reductions in compensation for employees making over $3 million (CARES Act 2020, secs. 4003 and 4004).
• Certify its MSLP eligibility, “including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act,” which restricted the involvement of firms affiliated with high-level executive branch officials and members of Congress (CARES Act 2020, sec. 4019)
• Make “commercially reasonable efforts” to maintain its employment and payroll throughout the life of the MSLP loan
• The Fed and Treasury said this standard meant borrowing businesses were to make “good-faith efforts to maintain payroll and retain employees in light of their respective capacities, economic environment, available resources, and business need for labor."
• They also said they would not assess compliance with this standard on a borrower-by-borrower basis, but by evaluating “the program’s impact on the economic recovery and employment broadly” (COC 2020b, 55).

MSLP lenders were required to engage in their normal underwriting process before extending an MSLP loan and retain 5% of the loans they sold to the MSLP. Lenders were required to retain this portion of the loan (and its interest in the underlying loan, in the case of a loan upsizing) until it matured or the MSLP sold off the entirety of its 95% share of the loan (FRBB 2020c; FRBB 2020d; FRB 2020i).

Lenders in the MSLP facilities also faced conditions on their participation. Many of the restrictions mirrored those to which the borrower was subject.

The Fed mandated that an MSLP lender (MSELF 2020b; MSNLF 2020c; MSPLF 2020b; NOELF 2020b; NONLF 2020b):

• Refrain from requesting that the borrower repay other debt “unless the debt or interest payment is mandatory and due” during the life of the loan, except in the event of default and acceleration^FThe MSLPF carried an exception. See supra note 8.
• Not cancel or reduce any of its committed credit lines with the borrower except in an event of default.
• Certify that the methodology used for calculating the borrower’s adjusted 2019 EBITDA and operating revenue of the borrower was the methodology it previously used when originating or amending them before April 24, 2020, in the case of the for-profit facilities and June 15, 2020, in the case of the nonprofit facilities
• Certify its MSLP eligibility, “including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act,” which restricted the involvement of firms affiliated with high-level executive branch officials and members of Congress (CARES Act 2020, sec. 4019).

The Fed and Treasury did not issue any regulatory relief with respect to the MSLP. However, the Fed suggested MSLP lenders experienced some supervisory relief. In his appearance at the COC hearing in August 2020, FRBB President Rosengren described the Fed as treating the pandemic like it would disruption to a given geography following a natural disaster, where the Fed issues guidance to provide “a little more leeway” in the supervisory assessment of the affected loans (COC 2020c). As noted in Key Design Decision 14, the Fed and Treasury (along with other federal banking agencies) sought to clarify in September 2020 that MSLP lenders were to underwrite loans based on borrowers’ pre- and post-pandemic prospects (FRB 2020i).

The Fed and Treasury did not appear to engage in any international coordination with respect to the MSLP.

As announced on April 9, 2020, the MSLP was to be open until September 30, 2020, absent an extension from the Fed and Treasury (MSNLF 2020a). On July 28, 2020, the Fed announced that it extended the termination date to December 31, 2020, to “provide certainty that the facilities will continue to be available to help the economy recover from the COVID-19 pandemic” (FRB 2020h).

The Consolidated Appropriations Act, 2021, effective December 27, 2020, stipulated that the Section 13(3) facilities the MSLP could not be extended or reinstated (Consolidated Appropriations Act 2020, sec. 1005). The legislation did make an exception for the MSLP to purchase loans through January 8, 2021, if the loan had been submitted to the Fed for purchase on or before December 14, 2020 (Consolidated Appropriations Act 2020, sec. 1005(c)(1)).

The mandated closure of the MSLP, alongside that of the other Section 13(3) facilities that had received CARES Act funding, was contrary to the preference of the Fed, which, in November 2020, expressed that it “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy” (Smialek and Rappeport 2020; Kelly 2020b). As noted above, participation in the MSLP was accelerating when the program closed (Morgan and Clampitt 2021).