Non-bank lenders providing struggling small businesses a lifeline through forgivable Paycheck Protection Program (“PPP”) loans may soon have access to the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) to support their lending operations. The Federal Reserve issued a term sheet for the PPPLF on April 9, 2020, indicating its intention to provide capital to lenders participating in the flagship small business relief program established by the Coronavirus Aid, Relief, and Economic Stability (“CARES”) Act by extending credit secured by PPP loans on a short-term basis at favorable economic terms. The PPPLF is only available to finance PPP loans originated by the PPP lender. While the PPPLF is currently only available to depository institutions, the Federal Reserve has now announced that it is working to provide access to other PPP lenders “as soon as possible.”
Under the PPP, lenders approved by the Small Business Administration (“SBA”), either as traditional SBA 7(a) lenders or under limited authority to act as PPP “additional lenders,” may obtain 100% SBA guarantees for loans up to $10 million made to qualified small business borrowers to fund expenses such as payroll costs, mortgage interest, rent, utilities, interest on certain prior debt obligations, and refinancing of certain prior SBA Economic Injury Disaster Loans. The loans are issued for 2-year terms at an interest rate of 1%, are deferred for six months, and may be forgiven (up to the full amount of the original principal balance, plus accrued interest) if the borrower spends proceeds on certain eligible expenses and maintains employee headcount and salaries at pre-COVID-19 emergency levels.
The CARES Act initially provided $349 billion in funding for PPP loans. After the CARES Act appropriations were exhausted in less than two weeks, Congress authorized an additional $310 billion in PPP funding through the “Paycheck Protection Program and Health Care Enhancement Act” and the SBA reopened for PPP guarantee application window on April 27, 2020. The first round of PPP funding was unrestricted among approved SBA lenders, though it was more readily accessible for existing SBA 7(a) lenders and federally insured depository lenders. The second wave of PPP funding will be allocated in a manner intended to diversify lender participation in the program, with $30 billion allocated to loans made by mid-sized depositories and credit unions having consolidated assets not less than $10 billion and less than $50 billion, and another $30 billion allocated to smaller depositories and credit unions having consolidated assets less than $10 billion and certain “community financial institutions” (including community development financial institutions, minority depository institutions, small business “development companies,” and small business “intermediaries”). The remaining $250 billion in the second wave of PPP funding will be unrestricted as to the originating lender.
While depository institutions have been significant participants in the PPP, non-bank SBA 7(a) lenders and PPP “additional lenders” have also risen to the challenge of supporting small businesses in dire straits during the COVID-19 emergency. The allocation of $30 billion to small depositories and certain non-depository community financial institutions in the second wave of PPP funding suggests a heightened role for non-depositories going forward.
At the same time, finding funds with which to originate PPP loans has been a daunting task for some non-bank PPP lenders. Unlike depository institutions, these non-bank lenders do not have deposits or other sources of liquidity to fund PPP loans. Furthermore, they do not have access to the Federal Reserve’s discount window as a source of liquidity for loans held on their balance sheets. Ambiguity over the extent to which normal-course SBA restrictions on selling loans or participation interests therein, or pledging loans to secured financing facilities, and limited economic returns on PPP lending have hindered some lenders’ ability to raise funding to meet applicant demand. That may change with non-bank lenders access to the PPPLF.
If non-bank PPP lenders are able to access the PPPLF, they will be able to pledge PPP loans they have originated in exchange for short-term financing from the Federal Reserve. Federal Reserve Banks will lend to eligible borrowers on a non-recourse basis in amounts equal to the outstanding principal balance of PPP loans and take the underlying PPP loans as collateral. The cost of credit under the PPPLF will be 35 basis points, and there will be no additional fees. The maturity date of credit extended under the PPPLF will be the same as the maturity date of the underlying PPP loan, but the borrower may be required to prepay all or part of the PPPLF loan if it sells a PPP loan in the secondary market, sells a PPP loan to the SBA (to realize on the SBA guarantee), or is reimbursed by the SBA for loan forgiveness granted in connection with a PPP loan. The Federal Reserve intends to publicly disclose, on a monthly basis, participants in all of its liquidity facilities, including the PPPLF. It will report names and details of borrowers, amounts borrowed and interest rates charged, and overall costs, revenues, and fees for each facility.
The Federal Reserve’s April 23 announcement provides non-bank PPP lenders a basis for optimism about access to liquidity for PPP lending activity. Until the Federal Reserve finalizes its process and conditions for non-bank access to the PPPLF, however, such lenders will continue to face funding challenges as they attempt to continue providing necessary assistance to US small businesses during the COVID-19 crisis.