The FRB and the FHLB can accept pledges of PPP loans as collateral
The Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) guarantees loans from qualified lenders to small businesses affected by the COVID-19 pandemic so those businesses can keep workers employed. In the Third Interim Final Rule released on April 20, 2020 (see 85 Fed. Reg. 21747), the SBA paved the way for members of Federal Reserve Banks (“FRB”) and Federal Mortgage Lending Banks (“FHLB”) ) to engage PPP loans to secure borrowings by excluding FRBs and FHLBs from collateral requirements generally applicable to SBA loan commitments 7 (a). The exclusion of these covenants from otherwise applicable requirements means that the SBA does not have to give its prior consent to these covenants nor to approve the FRB and FHLB loan documents or to require a multi-party agreement between SBA, the lender and others. .
As a result of SBA action, FRB and FHLB members benefit from another source of liquidity for PPP loans in addition to the Paycheck Protection Program (“PPPLF”) loan facility. Through the PPPLF, the Treasury grants credits to financial institutions that grant PPP loans, using the PPP loans as collateral for non-recourse loans. Notably, although the loans of the FRB and the FHLB to its members are full recourse loans, the loans of the members are not subject to the transparency requirements and other restrictions applicable to the PPPLF and other liquidity facilities established by the Federal Reserve under the authority of Section 13 (3) of the Federal Reserve Act.
In a letter of April 23, 2020 from the FHFA to the presidents of the FHLB (link below) responding to requests from the FHLB for an action by the SBA to confirm the pledges of PPP loans, the FHFA specified the conditions (see below). below) in which FHLBs can accept PPP loans as collateral for advances. In the letter, the FHFA acknowledged the limitations of collecting the SBA collateral due to the fact that the FHLBs are not SBA approved lenders. However, the FHFA said it had determined that the SBA should treat FHLBs in the same category as “any federal or state banking regulator or receiver or custodian,” and allow FHLBs to liquidate collateral. PPP loan by selling PPP loans to another SBA lender. , with the agreement of SBA.
The FHFA has specified a number of conditions that must be met for FHLBs to accept PPP loans as collateral, including:
- Members must have a minimum CAMELS credit score of “3” or a minimum credit score in the top 60% or top three quintiles of the FHLB member rating system.
- A demotion of a member will result in an increase in warranty discounts if the PPP warranty is not replaced.
- 10% minimum guarantee remittance of the UPB (capped at 100%).
- The value of collateral for PPP loans cannot exceed 20% of the collateral loaned from members (after application of collateral valuations).
- The FHLB must limit the dollar amount of PPP loans a member can pledge to a maximum of $ 5 billion in loanable collateral.
The Federal Reserve issued a statement on April 23, 2020 indicating that it was working to expand the list of eligible borrowers under the PPPLF to include non-depository lenders, such as certain community development financial institutions. Currently, only deposit-taking institutions are eligible to participate in the PPPLF, and over 1000 have already been approved to access the program.
Members of the Business Emergency Relief Task Force continue to monitor the deployment of federal programs to support the cash and capital needs of businesses, financial institutions and others during the Covid 19 pandemic.
As you know, things change quickly and there is no clear authority and no clear rules. This is not an unequivocal statement of the law, but rather represents our best interpretation of the current situation.
Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume X, Number 116