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October 2020 Updates to the Federal Reserve’s Main Street Lending Program

In September, the Fed issued its latest revised FAQs clarifying certain aspects of its MSLP. Below we have summarized key elements of these changes.

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Insights  <  October 2020 Updates to the Main Street Lending Program

In September, the Fed issued its latest revised FAQs clarifying certain aspects of its MSLP. Below we have summarized key elements of these changes.

In September, the Fed issued its latest revised FAQs clarifying certain aspects of its Main Street Lending Program (MSLP). Below we have summarized key elements of these changes.

The most important adjustment to the program may be the Fed’s clarification regarding lender underwriting. FAQ I.2 seems to be an apparent attempt to jump-start the program, with the Fed stating that lenders are expected to conduct assessments of potential borrower’s pre-pandemic financial condition and post-pandemic prospects.

Further, in FAQ K.4, the Fed states that it “…will not criticize Eligible Lenders for originating Main Street loans in accordance with the Program’s requirements, including cases when such loans are considered non-pass at the time of origination, provided these weaknesses stem from the pandemic and are expected to be temporary or if such loans are part of a bank’s prudent risk mitigation strategy for an existing borrower.”

See our overview of the previous Main Street Lending Program FAQs

Another set of FAQs (H.20 – H.22), clarify restrictions on loans between Eligible Borrowers and owners, employees or officers. According to these updates, a loan made by an Eligible Borrower to an owner after the origination of an MSLP loan will be presumed to be a capital distribution unless it is a bona fide loan and repaid according to its terms. Bona fide loans are those loans that are written instruments with market terms and a reasonable expectation of repayment that is enforceable under state law with remedies upon default.

Loans to an Eligible Borrower from its owner that are repaid are subject to the same as described above.

Loans made to an owner before origination of an MSLP loan will be presumed to be capital distributions if it is forgiven or discharged or if the Eligible Borrower does not exercise its rights as a creditor.

Finally, loans made by an Eligible Borrower to an employee or officer are required to be analyzed to consider whether they should be included as compensation according to the federal tax rules. This relates to loans, whole or partial forgiveness or discharge of such loans and loans with below-market interest rates.

Further information about the program can be found in our prior articles issued in May and June.

 

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

Disclaimer:  The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.

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