Federal Reserve Updates Main Street FAQs

On August 24^th, 2020, the Federal Reserve Bank of Boston amended both the for-profit and nonprofit organization Main Street Lending Program through issuance of the updated FAQs. Specifically, the Fed provided additional clarity on the use of collateral as part of Main Street loans. This update describes when Eligible Borrower financial information should be provided by Eligible Lenders to the Main Street Lender Portal. The update also included adding a 5% “safe harbor” relating to one aspect of the ineligible business definition.

The Use of Collateral as Part of the Main Street Loan

FAQ G.27 indicates Eligible Borrowers and Eligible Lenders may agree to include compensating balances, cash collateral or cash escrow accounts at origination or during the life of the Main Street loan, if certain conditions are met. However, the Federal Reserve and Treasury Department do not encourage the practice. Conditions that must be met include:

• Terms are a normal component of the Eligible Lender’s underwriting practices related to similarly situated borrowers
• Compensating balances, cash collateral or cash escrow accounts do not exceed 15% of the outstanding balance of the Main Street loan.

Additionally, Eligible Lenders and Eligible Borrowers may agree to place a portion of the proceeds of a Main Street loan in an account held at the Eligible Lender and delay draw on those funds until certain conditions related to the Eligible Borrower’s operations are met.

As noted above, any restriction must be substantially similar to a condition placed on similarly situated borrowers by the Eligible Lender in the course of its ordinary underwriting.

Required Borrower Financial Information

At the time of origin, the Eligible Borrower is required to provide to its Lender two sets of financial information 1. 2019 financial Information and 2. Most recent quarter available.

1. Certain 2019 financial Information as of December 31 that is required from the lender at the time the loan is submitted to SPV for sale of participation are as follows:
   1. Borrowers 2019 revenues
   2. 2019 Adjusted EBITDA
   3. Borrowers 2019 total assets
   4. Borrowers 2019 current assets
   5. Borrowers 2019 current liabilities
2. Certain quarterly financial information as of the most recent quarter that is required from the lender at time the loan is submitted to SPV for sale of participation are as follows:
   1. Total assets
   2. Total liabilities
   3. Unadjusted EBITDA
   4. Adjusted EBITDA
   5. Net income

TWO IMPORTANT DETAILS:
There is an extensive list of documents that need to be provided by both Eligible Lenders and Borrowers. Please see Appendix C in the FAQ document.

For all Main Street loans, in addition to the above, Eligible Lenders may require other financial information as appropriate under their underwriting practices.

Safe Harbor

For purposes of Main Street only, The Federal Reserve added further clarification to its list of ineligible businesses. It was determined that no borrower can be deemed ineligible based solely on ownership by the Eligible Lender, and its corporate affiliates of equity interests in the borrower can not in the aggregate exceed 5% of the borrower’s total outstanding equity interests.

This five percent “safe harbor” would apply mostly to publicly traded borrowers.

Let Aprio Help

Aprio has established a dedicated Main Street Lending Program team that is continuously monitoring new guidance from the Federal Reserve, as well as the Treasury, Congress and the IRS, to ensure we have the latest information when advising our clients.

If you would like to discuss how to interpret these new requirements may affect your business, contact Aprio’s MSLP team:

• Michael Levy,Partner-in-Charge, Private Equity and Transaction Advisory Services, at (770) 353-7168 or (michael.levy@aprio.com)

• Bill Dupee, Director, Transaction Advisory Services, at (770) 353-2819 (bill.dupee@aprio.com)