Member Article

In its attempt to provide relief to corporate America, the Board of Governors of the Federal Reserve System (the “Fed”) did not neglect lenders in all of the commotion. The Fed recently instituted several programs meant to provide liquidity to economic markets through lending directly to financial institutions, altering capital requirements and relaxing Fed examinations of financial institutions.

The program most directly related to the CARES Act is the Paycheck Protection Program Lending Facility, which allows PPP lenders to borrow money using PPP loans as collateral. The Term Asset-Backed Securities Loan Facility was used in 2008 as a response to the housing collapse, and allows financial institutions to take out loans secured by certain asset-backed securities. As of now, there seem to be no restrictions on lenders availing themselves of any number of these facilities.

The other programs listed below most likely won’t affect a wide margin of lenders, but they are certainly worth mentioning. The following is an outline of each of the programs, with links to each of their terms sheets or announcements.

Paycheck Protection Program Lending Facility

• Under this facility, the Fed will lend to eligible borrowers, taking PPP loans as collateral.
• Eligible Borrowers
  • All depository institutions that originate PPP Loans are eligible to borrow under the Facility.
  • The Fed is working to expand eligibility to other lenders that originate PPP Loans in the near future.
• Eligible borrowers participate in the Facility through the Reserve Bank in whose District the eligible borrower is located.
• The maturity date of an extension of credit under the Facility will equal the maturity date of the PPP Loan pledged to secure the extension of credit.
  • Acceleration of extension of credit:
    • 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; or
    • to the extent of any loan forgiveness reimbursement received by the eligible borrower from the SBA.
• PPP Loans pledged as collateral to secure extensions of credit under the Facility will be valued at the principal amount of the PPP Loan.
• The principal amount of an extension of credit under the Facility will be equal to the principal amount of the PPP Loan pledged as collateral to secure the extension of credit.
• Under section 1102 of the CARES Act, a PPP Loan will be assigned a risk weight of zero percent under the risk-based capital rules of the federal banking agencies.
• On April 9, 2020, the Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued an interim final rule to allow banking organizations to neutralize the effect of PPP Loans financed under the Facility on leverage capital ratios.

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