[Joint House and Senate Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 116-433
EXAMINATION OF THE MAIN STREET
LENDING PROGRAM
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HEARING
BEFORE THE
CONGRESSIONAL OVERSIGHT COMMISSION
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE MAIN STREET LENDING PROGRAM CREATED BY THE FEDERAL
RESERVE, PURSUANT TO THE CARES ACT
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AUGUST 7, 2020
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Printed for the use of the Congressional Oversight Commission
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Available at: https://www.govinfo.gov/
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U.S. GOVERNMENT PUBLISHING OFFICE
41-488 WASHINGTON : 2021
Congressional Oversight Commission
FRENCH HILL, Representative DONNA E. SHALALA, Representative
BHARAT RAMAMURTI, Commissioner PATRICK J. TOOMEY, Senator
Amber Venzon, Chief Clerk
EXAMINATION OF THE MAIN STREET LENDING PROGRAM ESTABLISHED BY THE
FEDERAL RESERVE PURSUANT TO THE CARES ACT
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FRIDAY, AUGUST 7, 2020
U.S. Congress,
Congressional Oversight Commission,
Washington, DC.
The Commission met by videoconference and in person,
pursuant to notice, at 10:02 a.m., in Room G50, Dirksen Senate
Office Building, the Hon. French Hill, Acting Chairman,
presiding.
Present: Representative Hill, Mr. Ramamurti, Representative
Shalala, and Senator Toomey.
OPENING STATEMENT OF MR. HILL
Mr. Hill. The hearing will come to order.
This is a hearing, a hybrid hearing, meaning that some of
our Commissioners are appearing in person and witnesses will
testify remotely. Before I begin, let me offer a few
videoconferencing reminders.
Once before you start speaking, there will be a slight
delay before you are displayed on the screen. To minimize
background noise, please click the mute button until your turn
to speak or to ask a question. If there is a technology issue,
we will move to the next speaker until it is resolved.
You should all have one box on your screens labeled
``Clock'' to show you how much time is remaining. All members
and witnesses need to be especially mindful of the 5-minute
clock. At 30 seconds remaining, I will gently tap the gavel to
remind members that their time has almost expired.
To simplify the speaking order process, the Commission has
decided to order ourselves alphabetically.
With that, welcome to this virtual hearing convened by the
Congressional Oversight Commission. Pursuant to Section 4020 of
Title IV subtitle of the CARES Act, the Commission must conduct
oversight of the $500 billion authorized for the Exchange
Stabilization Fund. As a part of our oversight work, the
Commission has decided to hold this hearing today which will
examine the Main Street Lending Facilities.
The Federal Reserve established the Main Street Lending
Program to support lending to small and medium-sized businesses
and nonprofit organizations that were in sound financial
condition before the onset of the COVID-19 pandemic. The
program operates through five facilities which we will learn
more about this morning.
The program is being administered by the Federal Reserve
Bank of Boston. Today's hearing will have two panels. President
Eric Rosengren, President and Chief Executive Officer of the
Federal Reserve Bank of Boston will testify during the first
panel, and the second panel will include industry participants.
In the absence of a Chair, the Commissioners have agreed to
each have 1 minute of opening remarks. I will now recognize
myself for an opening statement.
Our Commission is pleased to convene this hearing of the
Main Street Lending Program. Thank you to our witnesses for
lending your expertise today. I believe this is an extremely
timely and important discussion.
I also commend my fellow Commissioners. Together we have
worked in a bipartisan, bicameral way to release three reports
and organize this inaugural hearing.
I would also like to thank our personal staffs for their
diligence in this area, particularly in the absence of a Chair,
and on behalf of all Commissioners, I welcome our new Chief
Clerk, Amber Venzon, and thank you to the U.S. Senator for
these facilities today. Findings from today's hearing will be
reflected in our next report.
The Main Street Lending Program term sheet was released on
April 9th and finally became operational on July 6th. Leading
to its implementation, the program generated significant
interest and engagement. However, in the months since the
program has been available, $95 million of the $600 billion
allocated has been loaned to eligible businesses. I hope we
find answers today that will help explain why it took 3 months
to stand up the program and what, if anything, needs to be done
to alter the program to expand the universe of eligible
borrowers.
I yield back, and I now recognize Commissioner Ramamurti
for 1 minute.
OPENING STATEMENT OF MR. RAMAMURTI
Mr. Ramamurti. Thank you, Mr. Chairman, and thank you to
each of the witnesses appearing today.
Four months ago, Congress gave the Treasury Department half
a trillion dollars to stabilize the economy. The Treasury
quickly pledged $75 billion of those dollars to the Federal
Reserve's Main Street Lending Program for small and mid-sized
companies. After taking 3 months to set up the program, the Fed
has now been operating it for about a month. In that time, it
has supported only 18 loans for a total of $104 million. That
is 0.017 percent of the $600 billion lending capacity that the
Fed touted for the program in April.
While all this money has been sitting on the sidelines,
tens of thousands of businesses have permanently closed, and
millions of Americans have lost their jobs. By any measure the
Main Street Program has been a failure. My goal today is to
figure out why the program has failed and how to fix it quickly
before more Americans lose their jobs and more good businesses
have to shut their doors.
Thank you, Mr. Chairman.
Mr. Hill. Thank you, Commissioner.
I now recognize Congresswoman Shalala for 1 minute.
OPENING STATEMENT OF MS. SHALALA
Ms. Shalala. Thank you. Good morning. I would like to thank
our witnesses for being here today. I represent Florida's 27th
Congressional District, which includes most of Miami-Dade
County.
COVID-19 is out of control in my district. We have a raging
community spread. As a result, we have a financial disaster
with 50 percent of businesses laying off workers and others
going bankrupt.
In South Florida, our economy is heavily reliant on
tourism. Actually, we are reliant on crowds. Unlike big
businesses that can rely on capital markets for funding, small
and mid-sized businesses are more susceptible to being
permanently shut down.
Recognizing this, we approved funding in the CARES Act in
March to support up to $600 billion in lending to these
businesses. However, while some Florida businesses have
benefitted from the Main Street loans, what has been
accomplished to date is simply not enough.
We all agree that these businesses need help to survive the
crisis, and I am here today to understand why the money has not
been deployed and what the impact has been on workers.
I yield back.
Mr. Hill. Thank you, Congresswoman.
I now recognize Senator Toomey for 1 minute.
OPENING STATEMENT OF SENATOR TOOMEY
Senator Toomey. Thank you very much, Mr. Chairman, and I
also want to thank all the witnesses for participating in this
hearing today.
Look, I think the big questions that I am looking forward
to learning about is certainly why relatively few borrowers
have participated in this program, why it appears not to have a
tremendous amount of demand. I want to understand whether
through this program banks are likely to originate loans that
they would not otherwise engage in anyway. And at some point,
we need to have a discussion about the fact that we are in a
different place than we were when we first designed these
programs back in March.
We intended, at least I did as one of the negotiators of
this legislation, to provide liquidity so that business could
survive what we hoped would be a very brief, although we knew
would be a severe downturn. Now we have the prospect of
possibly excess capacity in a number of industries that could
persist for some time. That is a new and different challenge.
So I look forward to exploring all of these and, again,
want to thank the witnesses for joining us.
Mr. Hill. Thank you, Senator Toomey.
All Commissioners' statements will be added to the hearing
record. We are fortunate today to have five witnesses appearing
and appreciate their time.
President Rosengren is the President and CEO of the Federal
Reserve Bank of Boston, one of the 12 regional Federal Reserve
banks. Dr. Rosengren is a participant in the Federal Open
Market Committee, the monetary policymaking arm of the United
States. As CEO, he leads the Boston Fed's work, which includes
economic research and analysis, banking supervision and
financial stability efforts, community economic development
activities, and a wide range of payments, technology, and
finance initiative.
Ms. Lauren Anderson serves as the senior vice president and
associate general counsel of the Bank Policy Institute. In this
role, she oversees the BPI's advocacy across a range of
domestic and international issues. She brings with her over a
decade of experience in financial regulation and resolution
oversight, most recently serving as the senior adviser at the
Bank of England and, before joining the Bank of England, served
as Special Adviser to the Deputy of Policy at our FDIC.
Mr. Tom Bohn serves as the chief executive officer of the
Association for Corporate Growth. ACG serves 90,000 investors,
executives, lenders, and advisers to the growing middle-market
set of companies. Prior to joining ACG in December 2019, Mr.
Bohn served as CEO of the North American Veterinary Community
where he oversaw unprecedented growth.
Mr. Vince Foster serves as the executive chairman of the
Main Street Capital Corporation, a position he has held since
November of 2018. Mr. Foster previously served as Main Street's
CEO from 2007 until November of 2018 and served as Main
Street's president from 2012 to 2015. He also has been a member
of the management team's investment committee since its
formation. Main Street Capital offers capital solutions for
lower middle-market companies.
And our final witness, Ms. Gwen Mills, secretary-treasurer
of UNITE HERE. Ms. Mills has been working with UNITE HERE for
20 years. She served as the political director from 2015 to
2017 and was elected secretary-treasurer in 2017. UNITE HERE
has 300,000 members, largely serving the travel and tourism
industry.
We will now proceed to President Rosengren's testimony. He
will testify, and we will move into two rounds of 5-minute
questioning. Immediately following the questioning, I will
recognize the second panel of witnesses for their testimony,
and then we will move into that questioning. Each of the
witnesses' full written testimony will be made a part of the
official hearing record.
President Rosengren, welcome, and you are now recognized
for 5 minutes.
STATEMENT OF ERIC S. ROSENGREN, PH.D., PRESIDENT AND CHIEF
EXECUTIVE OFFICER, FEDERAL RESERVE BANK OF BOSTON
Mr. Rosengren. Representative Hill, Commissioner Ramamurti,
Representative Shalala, and Senator Toomey, thank you for the
opportunity to speak about the Main Street Lending Program,
which the Boston Fed administers for the Federal Reserve
System. My written testimony contains charts and details I hope
will be useful to you, but I will be brief in this overview.
In addition to tragic loss of life, the pandemic poses an
unprecedented shock to our economy. Many entities impacted by
the pandemic rely on bank for loans. The Main Street Program is
designed to facilitate lending to small and medium-sized
businesses and nonprofits that have suffered disruptions. It
provides credit support for entities that have temporary cash
flow problems due to the pandemic and that, given the uncertain
outlook, may have difficulty obtaining credit. It can provide a
bridge as loans have no interest or principal payments in the
first year and no principal payments until year 3.
Unlike facilities that purchase standardized credit
instruments, this program purchases interests in loans that
are, by nature, bespoke agreements often with complex,
borrower-specific terms and conditions. Since our portal opened
for registration on the 15th of June, 509 institutions have
registered, and their assets represent over $14 trillion, about
58 percent of banking assets in the United States.
Main Street relies on lenders to underwrite loans and keep
skin in the game by banks retaining 5 percent of the loan.
Borrowers need to meet the lender's underwriting standards and
the program's terms and conditions and be able to make
certifications and commitments, including those required by the
CARES Act.
The program includes three loan facilities for for-profit
businesses and two for nonprofits that have been announced but
are not yet live. Nonprofits and their lenders can,
nonetheless, use the published terms and documents to begin
discussing program loans. I will describe early results.
As of Tuesday, over $530 million in loans are active in the
portal, 54 loans. Eighteen loans with a combined value of $109
million have our commitment for purchase or have settled. We
opened for purchases on July 6th, and the numbers are
consistent with the gradual pace of the initial activity, more
recently expanding.
The 54 loans submitted represent 29 distinct lenders. The
largest number of loans are by institutions in the $10 to $50
billion range, but relatively small community banks have
participated. To date, there has been limited activity by banks
with over $50 billion in assets.
But the program's modest initial numbers seem to be giving
way to more uptake as participants and banks become more
familiar with the program. Quickly scaling up a program that
purchases participations in loans from diverse borrowers in a
decentralized market that lacks standardization is inherently
difficult and a significant achievement.
The eventual size of the program will be determined by the
path of the pandemic and the economy. Should conditions worsen,
which we hope does not happen, I would expect interest to
expand more rapidly. Credit interruptions prolong recessions
and harm individuals. In administering the program, we will do
all in our power and purview to support the firms, nonprofits,
and workers that make up our Nation's economy.
Thank you for the opportunity to provide this overview. I
would be happy to address any questions.
[The prepared statement of Mr. Rosengren follows:]
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Mr. Hill. Well, thank you, Mr. President, for your
testimony, and I will recognize myself for 5 minutes of
questions.
First, let me say that I was pleased to see the CFO
confidence survey from Duke University recently showing that
business believes that they are doing better than maybe they
thought they would at this stage of business reopening and that
market access is improving. They are concerned mostly about
obviously the demand for their products.
Also, I was encouraged yesterday that 1.8 million jobs were
created and that the unemployment rate fell to 10 percent. We
still have a long way to go, and we are going to be talking
about that today as we still have over 10 million people eager
to go back to work.
And then in my home State of Arkansas, we had a very
positive week in the sense that tax revenues, particularly
sales tax revenues, were actually over trend and set a record.
Our income taxes were 4 percent over forecast, and our sales
taxes were 16 percent over forecast and 15 percent over 2019.
So, clearly, the economy is reopening, and as Senator Toomey
says, we have to keep that in mind as we think through these
Federal Reserve facilities and what their best structure should
be to accelerate that and get more people back to work in this
country.
I am concerned, Mr. Rosengren, about the affiliation rules.
When I looked at the Main Street term sheets, I am concerned
about two things. One, it took 3 months to get the program up
and running, and I would like you to address that first. And,
secondly, it appears to me in this middle market that these
affiliation rules that the Federal Reserve has adopted in the
Main Street Program really are a significant barrier to more
entrepreneurial middle-size companies that do not have access
to PPP and do not have access to the public markets to have
access. And I wondered why the Fed, in your view, adopted the
SBA 7(a) type limitations on affiliation rules. Could you
handle those two for me, please?
Mr. Rosengren. Certainly. First, why don't I address the
question that you raised in your opening statement and have in
this question about why it took so long for this facility to
get set up.
This facility is very different than some of the other
traditional kinds of facilities that central banks operate
during a time of crisis. So most of our facilities operate
through markets. Market securities, you can purchase them very
easily through the market. They clear usually in a couple days,
depending on the security. So it is relatively easy to quickly
purchase a large number of securities and hold those securities
over time.
This facility is facility we did not have during the
financial crisis and really tries to get to a different segment
of the population, which is those businesses that are bigger
than the PPP program was designed for and smaller than what the
corporate facilities are designed for.
Bank loans are inherently difficult because they are an
agreement between a bank and a borrower. They take a long time
for banks to negotiate with the borrower, and this facility has
a variety of complex elements including the requirements of the
CARES Act and the 13(3) requirements.
So in order to design this program, we first had an initial
term sheet. There were very substantial revisions to that term
sheet. Again, we came out with another term sheet, which was
then again revised. And each of those times where we revised
the term sheet, we were expanding the ability of more
businesses to access the facility.
So the types of changes that were made included lowering
the loan size, changing the repayment terms, and lowering the
Fed participation amount.
The final term sheet for the for-profit businesses started
on June 8th. On June 15th, we had the lender registration, and
on July 6th, we had loan participation intake. I would
highlight as part of this process that it is a highly automated
process. We have to do programming, so we needed the legal
documents to be in order. We needed the final term sheet to be
completed, and we needed to be able to do the programming and
then check and make sure that the programming worked as
expected and met all the security needs of this program.
So that does take some time. It did take time to start up.
And I think that gives you some idea of the complexity of the
program and why it took so longer.
Mr. Hill. Yes. Thank you for that. I think the key thing is
if we want to change the program, you do not anticipate it
taking another 3 months to produce a different kind of Main
Street term sheet if that were necessary.
Mr. Rosengren. It would depend on what the nature of the
term sheet changes were. If the term sheet does not affect the
underlying legal documents, it is much easier to implement. So
there are changes that have been made as we have had changes in
the term sheet. That is true for the nonprofit term sheet as
well. Depending on the nature of what the changes were would
determine how long it took us to actually get set up.
Mr. Hill. Thank you, sir, very much. I yield back and turn
to Commissioner Ramamurti for 5 minutes of questioning.
Mr. Ramamurti. Thank you, Mr. Chairman.
President Rosengren, you admit that the Main Street Program
is off to a slow start, but your testimony is that interest in
the program will likely pick up if ``the pandemic and the
economy worsen.''
But if you look at the data, Main Street companies are
already getting crushed. The latest middle-market indicator and
economic outlook survey of executives of mid-sized companies
shows that, in the second quarter, these companies experienced
the largest decline in employment in the survey's history. They
also had the biggest drop-off in revenue in the survey's
history.
Other surveys like the U.S. Chamber of Commerce's Middle
Market Business Index show the same thing: massive layoffs and
furloughs and widespread revenue declines.
So my question is: How much worse do things have to get
before companies are interested in the Main Street Lending
Program?
Mr. Rosengren. Well, I think we actually have seen
significant pickup recently in the portal. Just as an example,
there were $109 million in loans committed or settled as of
last Tuesday, and 2 days later we now have 29 loans and $189
million. So there is a pickup in volume. It is particularly in
the community and mid-sized banks. Similarly, we had $530
million in loans in the portal 2 days ago. As of last night,
that is $635 million.
And so I think this is early stages of this program, and
the reason is because banks and borrowers have to negotiate the
terms. They had to know what the term sheet was. They had to
understand the characteristics of the program and how the
portal worked. And so it takes some time for the banks and the
borrowers to get familiar with the program and to start
pledging those loans to the facility.
So in the first couple of weeks, the banks have not
completed that process, and the borrowers have not completed
the process, and there was not much volume. And we are slowly
seeing an increase in volume over time that I would expect to
continue.
So one of the challenges with trying to deal with bank
loans as opposed to securities is it does not happen quickly.
If you talk to large firms about a renegotiation of a line of
credit, it can frequently take many, many months before they
get the negotiation completed.
So one of the advantages of a bank loan is that you are
able to tailor it to the needs of the borrower and the bank.
There are conditions that a different bank may put on that same
kind of loan, and there are a lot of differences across both
banks and borrowers and what these loan agreements look like.
So this is----
Mr. Ramamurti. Thank you, President Rosengren. In the
interest of time I will move on, and I will just note that even
$530 million, which you said is in the pipeline right now, that
is still a tiny fraction of the total lending capacity that was
created for this program.
Look, as I said in my opening remarks, I think this program
has been a failure, and the basic reason for that is that the
Fed could only offer loans. The data show that companies, even
distressed companies, are not looking for loans. Just this
week, the Fed released a survey of senior loan officers finding
that, in the second quarter of 2020, demand for loans from
companies of all sizes went down. Similarly, the most recent
National Federation of Independent Business Survey of small
businesses found that only 3 percent of business owners
reported that all their borrowing needs were not satisfied. And
in the testimony they submitted today, the Bank Policy
Institute, which represents some of the biggest banks in the
country, said they have seen ``a lack of demand for Main Street
Program loans from their clients.''
So, President Rosengren, if the Main Street Program can
only offer loans and it is clear that most small and mid-sized
firms are not looking for loans right now, even though they are
already struggling badly, then how is this program going to
stop widespread business closures and job losses?
Mr. Rosengren. So this program is tailored to organizations
that will be helped by loans. So if you are a business that has
had no problem from the pandemic and have a pristine balance
sheet, you are probably going to get better financing than the
Main Street Program provides. If you are a business that is
deeply troubled and is in danger of closing imminently, this
program is not going to solve the problem because debt does not
solve that kind of problem, equity does.
This program is designed for a business that had a
disruption in short-term credit, that was in good shape prior
to the crisis, and who, after the pandemic subsides, would be
able to be a viable business as well. There are businesses that
fit those characteristics. We are seeing some of those
businesses actually coming to the facility. I am expecting over
time that we will see more pickup.
Again, we are seeing some significant activity by some of
the community banks and mid-sized banks, particularly those
located in States like Florida, Texas, and places that have
been badly impacted by the pandemic recently.
Mr. Ramamurti. Okay. Thank you, President Rosengren. Look,
I recognize that you and the Fed staff have done a lot of work
on this, but I think the issue is that the Fed is trying to
solve a problem that does not exist and it is incapable of
solving the problem that does exist. By law, the Fed can only
support loans, and more loans are not the answer here for most
companies. And this is a giant hole in our economic response to
the crisis. Congress helped small businesses through the PPP.
Congress helped large companies that are big enough to issue
bonds by empowering the Fed to purchase corporate bonds and
reduce the cost of borrowing. But the only thing that the
Government has offered all these companies in between is the
Main Street Program, and it is just not working. And these mid-
sized companies employ 45 million people and represent a third
of private-sector GDP.
So, look, I do not think continuing to tweak this program
is going to work. I think Congress needs to act to provide
direct support to mid-sized firms and for that money to come
with real strings attached so the money benefits working
people.
Thank you, Mr. Chairman.
Mr. Hill. The gentleman yields back. Thank you.
Congresswoman Shalala is recognized for 5 minutes.
Ms. Shalala. Thank you. Let me follow up a little on that.
Particular sectors like the hospitality industry have been very
hard hit by the virus, in my district in particular. And as has
been noted, only $109 million of the $600 billion has been
injected into the economy.
I want to know whether there is actually a design flaw, not
the issue that Bharat raised about whether we should have this
program at all, but whether it is designed in a way which is
another way of getting at that. In particular, some have
suggested the terms of the program, such as the leverage ratio
requirements and the loans' priority and security requirements,
are better designed to protect the Government from losses than
the provide liquidity to a broad range of small and mid-sized
businesses.
Could you respond to that?
Mr. Rosengren. Yes. So this program is designed as a cash
flow program. So it is designed for a business that expects to
be able to pay off the debt and pay off the debt with the cash
flow from its normal business operations. So that first for
many businesses. It does not fit for all businesses.
For the smallest type of businesses, I agree that the PPP
program is a much better program for them. It is more of a
grant program than it is a debt program, and debt may not help
them in that situation.
In terms of the underwriting standards, the debt-to-EBITDA
standard follows industry practice. So depending on which of
the facility parts, you either have a debt-to-EBITDA of 4 or a
debt-to-EBITDA of 6. Many fellows expect to have a debt-to-
EBITDA below that, and so I think that this program actually
closely mirrors the kind of coverage that NAB banks themselves
are expecting when they are looking for a loan to be bankable.
So it is a combination of an underwriting standard--there are
not many underwriting standards in this program. It is
basically a debt-to-EBITDA and the fact that the bank is
willing to underwrite the loan themselves and take a 5-percent
stake.
Ms. Shalala. The Federal Reserve recently reported that
banks were actually tightening their credit standards due to
the uncertain economic outlook that has resulted from the
pandemic. The Fed allows banks to use these tighter credit
standards in determining whether or not to make a loan under
the Main Street Lending Program. If the goal is to get money
out to needy borrowers, doesn't the policy of letting the banks
use their tighter credit standards undermine that goal?
Mr. Rosengren. So the challenge is that this is a lending
program, and so loans have to be paid back. And we are asking
banks to voluntarily participate in the program, and we are
asking banks to be sure that when they underwrite the loan, it
is a loan that is to a business that has had their credit
disrupted, but that over time you expect it to be a thriving
business. So that does not qualify all businesses. It qualifies
a particular kind of business that is appropriate for this
program.
So business has been disrupted, and it is likely to be
suffering. That is not attractive for this program, and from
the perspective of the bank, they might not be willing to do
that loan otherwise. Let me just give a simple example: a movie
theater. So if you are a movie theater located in Miami and you
have been closed in the spring, you opened up temporarily, and
now you may have to be closed again because of the restrictions
either imposed at the State level or because people do not want
to be in a movie theater at a time of a pandemic.
The bank may be quite uncertain about when that loan would
actually be paying because they do not know how long the
pandemic will occur; they do not know when there will be a
vaccine or a treatment and might not be willing to take that
loan at this kind of rate given that uncertainty.
So because they are providing 95 percent of the loan to the
Federal Reserve, they might be willing to provide support to
that movie theater because the bulk of the risk is being taken
by the Federal Reserve. So this is a lending program. It is
focused on, in part, getting most of these loans paid. That is
a requirement of the 13(3) procedures.
Ms. Shalala. Ms. Anderson, who is here on behalf of the
Bank Policy Institute, suggested in her written testimony that
if the Fed wants banks to lend to borrowers who do not meet the
bank's current underwriting standards, which have tightened in
response to the economic uncertainty caused by the pandemic,
the Fed must modify the design of the program to provide
downside credit risk protection. In making this observation,
she cites the negative treatment of these loans by regulators
as disincentivizing banks to loosen their underwriting
standards.
Has the Fed considered this issue?
Mr. Rosengren. Yeah, we have spent quite a bit of time
thinking about the supervisory issues related to these loans.
So the pandemic, like other natural disasters, if there was a
hurricane that hit Miami, we then use guidance to make clear
that we want to have a little more leeway given to those loans
because of the nature of the crisis that occurred. The same
thing has been done for this pandemic. So we have asked our
bank examiners to work with bank management in the instances in
which we are making a decision such as a Main Street loan where
the borrower has been disrupted. The other regulators have
agreed to this and are following the same general guidelines.
So I think that in the end the loan has to have the same
classification standards that a standard loan does, but the
regulators now are looking at loans a little bit differently
and asking the banks to work with their borrowers.
Mr. Hill. Thank you.
Mr. Rosengren. And that is what they are doing for the
pandemic. That is what we do during other natural crises.
Mr. Hill. Thank you, Doctor. The gentlewoman's time has
expired.
Senator Toomey.
Senator Toomey. Thanks, Mr. Chairman. Dr. Rosengren, thank
you for testifying today.
Let me just start by pointing out, you know, Government
money can never be a replacement for an economy, and we have
spent many hundreds of billions of dollars covering 8 weeks of
payroll for very small companies. This program was never
designed to pick up the tab for the payroll of the American
workforce.
What it was designed to do, as I recall, was to provide
emergency liquidity in the hopes that it would keep viable
companies alive so that workers would have a place to go back
to. Part of the reason that we made unemployment benefits so
much more generous than they have ever been in the history of
the country is because we knew that it was inevitable that in a
very, very severe, hopefully brief recession, there would
unavoidably be people laid off who had no work to do because in
some cases their companies were closed, forbidden from working.
What I would like to understand--and this has come up, and
maybe this is just another way to think about this, but to what
extent do you think that the loans that have been made so far
through this program are loans that would not have been made in
the absence of the program? In other words, is this designed in
such a way that the only loans that are going to take place are
loans that would have happened anyway, especially given the
underwriting requirements on the banks and their required
participation?
Mr. Rosengren. I mean, these loans have a different
characteristic than the traditional bank loan, so it is not
traditional that you have no payment of principal or interest
the first year and no payment of principal the second year.
That really is designed for disrupted cash flow with the
ability of the borrower over time to actually be able to make
payments.
When we have talked to some of the banks that have been
making the loans, they have told us that these are loans that
more than likely they would not have made in the absence of
this program. The reason is because there is a great deal of
uncertainty right now.
Congresswoman Shalala highlighted the uncertainty and the
survey of terms of lending that she cited. Uncertainty is very,
very high right now, and that is a situation where banks become
more reluctant to lend because they do not know what the
condition of the borrowers will be. So I do think that this
plays an important role in reducing the risk, and if the
pandemic gets worse in the fall, as at least some
epidemiologists are saying, this program will probably be more
extensively used.
I completely agree with your observation that a 13(3)
facility does not solve the pandemic problem. It is primarily a
public health problem. But we can certainly mitigate the costs
of that public health problem by trying to help those
businesses that have been disrupted, but were very good
businesses prior to the pandemic and will be very good
businesses after the pandemic.
Senator Toomey. And just a technical question about the fee
structure because it is a little confusing the way it appears
in the term sheets. When a bank makes a loan and 95 percent of
it is taken by the Fed, the fee structure that the bank keeps,
certainly they have the net interest income that they can earn
on the 5 percent that they keep. The fee structure, which if it
is 100 basis points, which I think is contemplated in the term
sheet, does the bank keep 100 basis points on the 5 percent
that it keeps and the balance goes to--how does that fee
structure work out?
Mr. Rosengren. It is on the total loan. This is an
incentive for the banks to participate in the program.
Senator Toomey. So the banks start off with 20 percent of
their credit exposure in fee income. Is that correct?
Mr. Rosengren. That is correct, but there are costs to
doing the underwriting of the loan.
Senator Toomey. Of course there are. But if you do a
large--that is extremely unusual, right? One of the--so that
would appear on the surface to be an inducement and
encouragement and incentive to take more risk. But the banks
are institutionally not oriented towards lowering their
standards because there is an outsized source of revenue. Would
there be other kinds of lending institutions, for instance,
BDCs that might be more inclined by their nature to be able and
willing to take more credit risk because they recognize that
coming out of the block with 20 percent of your credit risk in
fees covers a lot of risk?
Mr. Rosengren. There are other types of organizations that
provide loans in the market other than banks. This program is
designed for depository organizations. In part, we want to be
able to get this facility up and running quickly. In part, we
have to make sure that BSA, AML, and Know Your Customer kinds
of conditions are also met. So that is why this program has
primarily been operated through the banking system.
Senator Toomey. Well, I see I am out of time, but I do want
to follow up on the possibility that this kind of risk-return
structure might be even better suited for other financial
institutions. That is not to say that banks should not
participate, but maybe we should broaden the universe of
institutions that are permitted to participate.
Thanks, Mr. Chairman.
Mr. Hill. Thank you, Senator Toomey. We are going to do a
second round now with Dr. Rosengren, and I will start that with
5 minutes. And as I start my second round, I want to ask
unanimous consent to put two letters in the record: one from
Senator Crapo dated July 31st with comments about the Main
Street Lending Facility, and also a letter dated August 4th
from Senators Loeffler, Cornyn, Braun, and Tillis on the Main
Street. Not hearing any objection, those will be included in
the record.
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Mr. Hill. Dr. Rosengren, you have talked about you limited
to depository institutions to get up and running quickly, and
yet there are only 150 banks or so listed on the Fed's website
thus far as registered lenders. And I cite that because in the
emergency environment, right at the end of March and April, we
were able to stand up the PPP program over in the CARES Act,
and 5,400 banks swung into action in a patriotic way and in 7
days began distributing $520 billion and making 5 million PPP
loans.
Granted, certainly the underwriting was very different. The
mission was very different. I got that. But I am concerned
about the reluctance of banks to participate in the program.
Arkansas has 86 banks and yet only two banks headquartered in
my State that are local banks have agreed to participate. So I
really hope as we have this hearing today we will talk more
about that.
Let me turn and talk about the term sheet. As you have
noted, it is really a cash flow lending exercise based on a
pre-tax, pre-depreciation, amortization multiple and implied
leverage. In other words, it looks like a very traditional bank
loan.
Where is the higher risk component that was contemplated in
the CARES Act section that encourage help for particularly
distressed sectors of the economy? Could you comment on that,
Dr. Rosengren?
Mr. Rosengren. So I think these loans already are going to
be risky. Doing lending in the middle of a pandemic,
particularly if it is a sector of the economy where social
distancing is difficult, so tourism, hotels, retail have all
been badly affected by the pandemic. And some of those, as we
have seen, there have been very large bankruptcies of
retailers, for example. So these loans are not without risk,
and I fully expect that some of the loans that we are going to
do over time will have a loss. So that is why we have a
Treasury backstop.
So I think this program has taken on a fair bit of risk. I
think that over time, as the portfolio grows, we are going to
have some significant losses. Hopefully that does not occur.
Hopefully everybody is able to pay back the loan completely.
But if the economy does not do well, particularly if the
pandemic worsens, it is quite possible that we will experience
significant losses.
Mr. Hill. Thank you----
Mr. Rosengren. So I expect that this program did focus on
trying to get loans to fairly risky borrowers.
Mr. Hill. Thank you for that. But when you do look at the
terms, I mean, you really are--I agree, companies at the margin
are certainly middle-market companies that could not access the
public markets or were not eligible for PPP, many would qualify
here. But as I noted earlier, I think the affiliation rules
make that more difficult. And I think the very traditional
lending profile that is contained in this term sheet also could
be a detriment to companies.
Let me give you an example, and this was talked about with
Secretary Mnuchin and Chairman Powell at our meeting of a few
weeks ago, and that is, someone who does not have good EBITDA
in 2019, they certainly do not have it in 2020. But at the end
of the year in 2019, they had very good collateral valuation.
They had a low loan-to-cost potentially. They had a low loan-
to-value potentially. They have room to lend, but they cannot
meet the EBITDA standards. And both Jay Powell and Steve
Mnuchin said they were ``interested in looking at a collateral-
dependent or asset-based loan.''
Can you tell us what the status of that look is?
Mr. Rosengren. So the Main Street Program is a cash flow
program. As a base financing----
Mr. Hill. But there are a lot of Main Street firms, Mr.
President, that do not have cash flow in 2019, but they are
absolutely a small middle-market type company. And so I know
the Main Street term sheet is currently a cash flow. I am
asking, is there current discussion underway to expand a
different Main Street Facility that would be more of an asset-
based loan rather than a cash flow loan?
Mr. Rosengren. I know there are discussions about asset-
based financing and some of the difficulties experienced, for
example, in commercial real estate. So there have been ongoing
discussions about this, but there is no term sheet that is
imminent.
Mr. Hill. Thank you for that.
Also, startup companies, truly people in the startup space
have a disproportionate amount of costs. Are you looking at
startups and what they might need in the Main Street arena?
Mr. Rosengren. Many times startups need equity more than
they need debt, so I think frequently a true startup is going
to find other types of financing vehicles more attractive. This
is more of a program for established businesses that have
experienced a disruption of cash flow.
Mr. Hill. Thank you, Mr. President.
Let me yield to my friend Mr. Ramamurti for 5 minutes.
Mr. Ramamurti. Thank you, Mr. Chairman.
In early April, the Fed announced the first version of the
Main Street Lending Program. That announcement described
certain basic features of the program like the maximum loan
amount and the rates and terms for loans.
A few weeks later, the Fed announced major changes to the
program. Many of those changes lined up exactly with what
members of the oil and gas industry had requested. That did not
appear to be a coincidence. Shortly before the changes were
announced, President Trump publicly promised that oil and gas
companies would be taken care of. And then shortly after the
changes were announced, the Energy Secretary went on TV and
bragged about how he and Treasury Secretary Mnuchin had
succeeded in getting the Fed to make changes that the oil and
gas industry wanted.
But when asked by reporters, a spokesperson for the Fed
denied that the Fed had made any adjustments out of
consideration for the oil and gas industry. Instead, the Fed
said that the April changes reflected the more than 2,000
public comments that the Fed had received about the initial
design of the program.
So, President Rosengren, as the Regional Fed President
responsible for the Main Street Program, do you stand by the
Fed's earlier statement that certain adjustments were not made
specifically to help oil and gas companies?
Mr. Rosengren. I do. This is a broad-based program. It has
been a broad-based program from the start. 13(3) facilities
require broad-based kinds of terms, and so it is not targeted
at specific firms or specific industries. 13(3) facilities are
not available for that kind of lending.
Mr. Ramamurti. Thank you. And, look, I want to focus
specifically on the changes that were made to the facility in
April. Let us look at one of them. According to Reuters, in
mid-April one of the key changes the Energy Secretary and
Treasury Secretary were pushing for to help the oil and gas
industry was increasing the maximum loan amount to at least
$200 million. A couple of weeks later, when the Fed announced
its changes to the Main Street Program, the maximum loan amount
had gone up to exactly $200 million.
President Rosengren, out of the more than 2,000 public
comments that were submitted to the Fed on the Main Street
Program, are you aware of a single one that requested
increasing the maximum loan amount to $200 million?
Mr. Rosengren. We got many comments from both banks and
businesses that if the loan amount was larger, that it would be
a more attractive facility for them. Remember, a lot of this
discussion was occurring in March and April. The economic
conditions and the pandemic conditions were very different at
that time, and there was a lot of concern that some fairly
large businesses would have difficulty getting financing.
Fortunately, the pandemic subsided, at least for a couple
months, and as a result, many of those large borrowers that
thought that they were going to need the financing at least to
date have not actually accessed the program. I would
highlight--
Mr. Ramamurti. Thank you. Just in the interest of time, I
want to move on because, look, I reviewed each and every one of
those 2,000-plus comments, and there was not a single one that
requested specifically a $200 million maximum loan amount. The
only people making that request were the Energy Secretary and
the Treasury Secretary after meetings with the oil and gas
industry.
Here is another change. The first version of the Main
Street Program required companies to say in writing that they
needed the loan ``due to the exigent circumstances presented by
the COVID-19 pandemic.'' Advocates for the oil and gas industry
pushed to eliminate that requirement, presumably because many
oil and gas firms were struggling before COVID and could not
satisfy the requirement. And, again, in the final version, the
Fed eliminated that requirement.
President Rosengren, again, out of the more than 2,000
public comments that the Fed received, are you aware of a
single one outside the oil and gas industry that requested that
the Fed remove this important requirement?
Mr. Rosengren. In the discussions I have been involved in,
we do not discuss specific industries. We discuss how we can
provide a broad-based financing scheme.
Mr. Ramamurti. Okay. I appreciate that. But, again, I
reviewed the public comments, and there was not a single one
that requested this change. Only the oil and gas lobby had
requested it.
So I just want to ask one more time. Despite evidence that
President Trump wanted oil and gas companies to get Federal
relief, that the Energy Secretary and the Treasury Secretary
pushed the Fed for specific changes to accommodate the oil and
gas industry, and that the Fed made changes that the oil and
gas industry requested but no other industry or group
requested, is it still your position that the Fed did not make
certain changes to accommodate the oil and gas industry?
Mr. Rosengren. It is my position that the focus has been a
broad-based lending program, not focused on any particular
industry.
Mr. Ramamurti. Okay. Look, I think that, again, my focus is
on specifically the changes that were made, not the overall
scope of the program. And I think the evidence here is strong
and deeply concerning. This is just not how the Fed is supposed
to operate. The Fed is not supposed to be changing the rules of
these programs so that the President's favorite companies can
get access to billions of dollars in public money. In fact, it
is illegal for the Fed to structure these lending programs to
help specific companies avoid bankruptcy.
I urge this Commission to further investigate this issue,
including by requesting all communications on this topic
between the Fed and the Energy Secretary, the Treasury
Secretary, and any representatives of the oil and gas industry.
Thank you, Mr. Chairman.
Mr. Hill. Thank you. The gentleman yields back.
Congresswoman Shalala is recognized for 5 minutes.
Ms. Shalala. Thank you. My colleague is appropriately
asking why the loan is as big as it is. I am actually
interested in why it is not smaller.
Commentators have speculated the minimum loan amount of
$250,000 is too large and precludes participation by many small
and mid-sized businesses. I am aware that the Fed has already
reduced the minimum loan amount down from $1 million to
$250,000, which may still be too high. For instance, the
American Bankers Association and the Marketplace Lending
Association have separately suggested that $50,000 may be a
more appropriate amount.
Has the Fed conducted studies on whether the $250,000 loan
minimum excludes parts of the market that this program is
supposed to help? What changes can be made to make the program
more broadly acceptable and accessible?
Mr. Rosengren. So for many of those smaller businesses, the
PPP program was designed to target that segment of the
industry. The PPP program is much more attractive to a small
business because it has the ability to be a grant. So this
program was really designed for businesses that did not qualify
for the PPP program and, nonetheless, might have a need for
credit.
So if you look at the actual loans that are in our portal,
just the loans that are actually in the portal is $1 to $5
million. That is, the type of loan that we are seeing is dental
companies, construction companies, design companies, retailers.
These are businesses that frequently are going to have a $1 to
$5 million loan, and it is not surprising that that is what we
are actually seeing.
Now, we have seen some loans that are much bigger. We have
seen some loans that are much smaller. But I would say that so
far has been where we have seen the bulk of the activity.
Ms. Shalala. So you are not considering going below
$250,000?
Mr. Rosengren. I think there are probably other programs
that are better designed, so a real question is whether a cash
flow lending program such as Main Street is appropriate for
very small businesses and whether there might be better
targeted tools that can address that.
In particular, will more debt help that small business, or
might it push it towards bankruptcy and closure? So we want to
make sure that we provide debt to businesses that can use it
and actually pay it back. We do not want to give businesses so
much debt that they are not able to survive.
Ms. Shalala. Thank you. Let me talk about the nonprofit
organizations. A few weeks ago, you expanded the Main Street
Lending Program to nonprofit organizations. Although these
facilities are not yet live, I am concerned that the program
requirements are too rigorous and will preclude participation
by many of the nonprofits that need credit to survive the
pandemic.
For example, the minimum loan size is $250,000, which may
be too large for many smaller organizations. Borrowers are also
required to have at least 60 percent of their expenses covered
by non-donation revenue, which can be very hard for many
nonprofits to achieve.
Can you talk about why the program was designed this way? I
am very familiar with nonprofits, and that 60-percent
requirement seems to me will block many nonprofits. I would
appreciate hearing about any analysis that the Fed has done
regarding the nonprofit interest and eligibility in the
program. Have you considered changing any of the eligibility
requirements? And, lastly, when do you expect the program to be
launched?
Mr. Rosengren. So in terms of the nonprofit term sheet,
when the first term sheet came out, we got extensive comments
from a wide variety of nonprofits and a wide variety of banks.
Many banks actually do not lend to nonprofits because it is a
very different nature. Many of the large nonprofits--the
University of Wisconsin, which you used to be associated with,
probably goes to debt markets rather than relying primarily on
bank markets. That is true for many hospitals as well.
So this is a market that has not been extensively tapped by
many banks, and I think it is a new market for many banks. I
think there is an opportunity for more nonprofits to be able to
access bank financing through this program. We did make
significant adjustments in the term sheet. When we were
thinking about the term sheet and the adjustments we made
between the first and the second term sheet, we spent an
extensive amount of outreach understanding how banks underwrote
these loans and how rating agencies underwrote these loans.
These criteria broadly match what many of the banks told us the
criteria was that they used. And between the first and second
term sheet, we did relax it in response to the comment that it
was being too restrictive.
In terms of when this facility is going to be up, we just
got the legal documents up. The term sheet is now finished. We
are in the process of doing the programming now. It is going to
probably take us another several weeks before it is up and
running. But I would highlight that now that the legal--bank
loans do not get made quickly. So now that the legal documents
are up and running, now that the term sheet is widely
available, banks can start the negotiation with nonprofits
about what facility is available. They are able to quickly
submit it to the facility and get it funded.
So because of the long lags in making these kinds of
agreements----
Mr. Hill. Thank you, Doctor.
Mr. Rosengren [continuing]. I think that this will be about
the time that if a bank was going to do a nonprofit loan, that
we will probably be up and running around the time that they
complete the agreement with the borrower.
Mr. Hill. Thank you, Dr. Rosengren. The gentlewoman's time
has expired.
Senator Toomey.
Senator Toomey. Thanks, Mr. Chairman.
Dr. Rosengren, I would like just to have final clarity on
this. Just answer this, if you would. Is there any Main Street
Lending Program that is available only to the oil and gas
sector?
Mr. Rosengren. No.
Senator Toomey. And is there any program the terms of which
are suitable only to the oil and gas sector?
Mr. Ramamurti. No.
Senator Toomey. Thank you.
I want to underscore a point that Congressman Hill raised,
which is some real challenges with the affiliation rule, firms
that, when we were drafting this legislation, we did not think
would be automatically excluded from financing. I also want to
underscore his point about considering asset-based facilities.
I think you are very well aware there are some real challenges
in the commercial mortgage-backed security market right now. In
particular, the hotel subset of the commercial mortgage-backed
sector is experiencing some real difficulties. And because they
generally do not qualify for the EBITDA criteria, there is no
access to this. As you know, the problem is exacerbated by the
obligation of the servicers to go on and make payments, you
know, irrespective of the ability of the borrower to do so.
So I would like to encourage you, as I have encouraged
Secretary Mnuchin and Chairman Powell, to consider whether
there should not be an asset-based category if there is an
appropriate loan-to-value, that maybe that is a criteria that
we ought to consider. Do you have any thoughts on whether we
ought to stand up a facility specifically designed--it would be
designed generally for the broad category of real estate, I
think, and other categories that would be more suitable for an
asset-based lending than they are for an EBITDA constraint?
Mr. Ramamurti. Yes, so an asset-based program would differ
from what we have for Main Street, so it would be a different
facility if it was done through a facility. Most of that type
of lending has a much longer maturity than 5 years, so as you
know, these are 5-year loans with a balloon payment at the end
of the 5 years. That is probably not appropriate, for example,
for retail or commercial real estate such as hotels.
So the nature of that program would be quite different. I
know there is work being done thinking about how asset-based
can be addressed, including through the SBA. So I think there
are a number of proposals that are being considered. I am
certainly aware that there are many concerns in the commercial
real estate industry, and those concerns will get even worse if
the pandemic gets worse.
Senator Toomey. Okay. So I want to go back to that. On page
11 of your testimony, you indicated that you believe that
should the pandemic and the economic circumstances worsen, we
might very well see greater interest in the Main Street Lending
Programs. And I can certainly understand that leading to
greater demand on the corporate borrower side. But could you
address why you believe that that would not be offset by
greater reluctance on the part of banks to take on the exposure
in that scenario in which the environment worsens?
Mr. Rosengren. So there are many borrowers who could take 2
or 3 months of disrupted cash flow, and if it was only 2 or 3
months, those may be bankable loans right now, and they might
be able to get a rate that is better than LIBOR plus 300 basis
points.
However, if we go through another 3 months so that in 1
year's time they have experienced 6 months of badly disrupted
cash flow, some of those loans that might have been attractive
to get direct financing from the bank through the standard
bank-borrower relationship may no longer be possible, and the
bank may only be willing to do it if the Federal Reserve takes
the 95-percent stake that is part of this Main Street Program.
So I agree with you that risk aversion by banks may
increase if the pandemic gets worse, and there already is very
substantial uncertainty. But many borrowers that cannot get
access from their banks are going to be looking to the Main
Street Program to provide that type of financing.
Senator Toomey. Thank you very much.
Thank you, Mr. Chairman.
Mr. Hill. The gentleman yields back. Thank you, Mr. Toomey.
And now we will hear from Ms. Anderson on our second--well,
first let me thank Dr. Rosengren from his testimony today. We
very much appreciate your written testimony and the interaction
with our Commissioners.
And now let us turn to our second panel. We are going to
hear from Ms. Anderson with the Bank Policy Institute first.
Ms. Anderson, you are recognized for 5 minutes.
STATEMENT OF LAUREN ANDERSON, SENIOR VICE PRESIDENT AND
ASSOCIATE GENERAL COUNSEL, BANK POLICY INSTITUTE
Ms. Anderson. Thank you. Members of the Commission, my name
is Lauren Anderson, and I am a senior vice president and
associate general counsel at the Bank Policy Institute. I thank
you for the opportunity to be a witness at today's hearing
regarding the Main Street Lending Program. BPI is a nonpartisan
public policy, research, and advocacy group, representing the
Nation's leading banks. Our members employ nearly 2 million
Americans, make 72 percent of all loans and nearly half of the
Nation's small business loans. BPI strongly supports the
efforts to date as well as ongoing efforts by Congress, the
Treasury, and the Federal Reserve to tackle the COVID crisis
and provide much needed relief to households and businesses.
At the outset, it is worth noting how unique the Main
Street Program is in relation to emergency lending programs
established during the pandemic--or even in 2008 and 2009. It
is not a loan forgiveness or grant program like the PPP, and it
is not a market liquidity program for debt of investment grade
borrowers. Main Street requires credit underwriting decisions
on a heterogeneous set of individual nonbank borrowers, which
is challenging and not something the Federal Reserve has done
before. With the expansion of Main Street to nonprofit
organizations, which themselves are very different across
different sectors, the Federal Reserve ventured even further
into unchartered territory. BPI, working with commercial
lending experts from our member banks, has been actively
engaged in commenting on the program since the initial term
sheets were published in early April and through subsequent
iterations.
The focus of our comments has largely been on ensuring the
terms of the program are consistent with market practices and
ensuring prudent risk management to safeguard taxpayer funds.
We commend the Federal Reserve for seeking public comment on
the terms of the program and engaging in an iterative process
to try to improve the end result.
We are very pleased that the program began accepting lender
registration in June and officially became operational on July
6. Since then, lenders continue to register, and loans, albeit
a small amount, are being made. Many BPI member banks have
registered and are in the process of reviewing borrower
inquiries. While the limited number of loans made thus far has
been a concern to some, it must be assessed in the context of a
larger commercial credit ecosystem.
First, for many small businesses, Main Street may not be
the right fit given the complexity of the program and the
compliance requirements. However, BPI member banks helped to
provide over 1.6 million PPP loans totaling over $188 billion
to help small businesses meet payroll needs.
Second, larger corporates retain access to capital markets,
which remain extremely active with the support of numerous
Federal Reserve programs. Investment grade debt and corporate
debt has been issued at record levels, with U.S. companies
raising over $1 trillion year to date.
Third, and perhaps most significantly, over the course of
March and April, both small and large businesses drew down on
existing credit lines. Between February 12 and April 1, bank
loans increased by approximately $700 billion. Thus, the lack
of demand for Main Street loans likely indicates that many
other eligible businesses are finding credit through other
market channels.
A second reason why there is limited demand for Main
Street, the fact that the program not only requires borrowers
to meet certain eligibility criteria, but also to satisfy bank
underwriting standards. And if a borrower can meet bank
underwriting standards, it is not surprising that they are
finding credit solutions through traditional market channels.
Where the Main Street Program may become more useful is if
banks become balance sheet constrained and cannot lend the full
amount needed by a creditworthy borrower. If there were to
occur, Main Street may provide the solution. But so far bank
balance sheets are robust in weathering the crisis. If,
however, Congress, the Treasury, or the Federal Reserve desires
to provide further relief to small and mid-sized businesses
experiencing acute stress due to the pandemic, including less
creditworthy borrowers who would not currently pass bank
underwriting standards, the design of the program would need to
be modified. At the moment the program is not designed to
provide loans to less than creditworthy borrowers. If banks are
to provide loans to borrowers who cannot meet current bank
underwriting standards, the Government would need to provide
downside credit risk protection that would allow Main Street
loans to be considered lower risk.
I thank you again for the opportunity to be a witness for
the Commission, and I look forward to answering your questions.
Thank you very much.
[The prepared statement of Ms. Anderson follows:]
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Mr. Hill. Thank you, Ms. Anderson. We appreciate your
testimony.
We will now turn to Mr. Bohn. You are recognized for 5
minutes.
STATEMENT OF THOMAS BOHN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, ASSOCIATION FOR CORPORATE GROWTH
Mr. Bohn. Well, thank you. Good morning, and thank you for
the invitation to speak today.
Congressman Hill, Commissioner Ramamurti, Congresswoman
Shalala, and Senator Toomey, I appreciate the gravity of the
responsibility before you, admire your willingness, and respect
your commitment to ensure that Federal relief programs enacted
through the Coronavirus Aid, Relief, and Economic Security Act
are both accessible and effective.
I am here this morning to provide testimony from the
perspective of middle-market borrowers to help answer the
question that you all are asking of who the Main Street Lending
program is helping. Regrettably, I have no answer to offer you.
We could neither borrow from the program nor find someone in
our membership who has received a loan through it.
To help illustrate the current obstacles to securing loans
through MSLP, I would like to share some comments from our
members who completed a survey administered in recent days. I
will not read all of them. These are their words, not mine:
The program is moving too slowly, whereas COVID-19
dramatically and quickly caused an impact.
We actively solicited a MSLP loan for a Minority Business
Enterprise, a company whose performance is only 10 to 15
percent lower during the pandemic as it was beforehand. We
approached 15 lenders. Not one was interested.
If the MSLP applies to the lower middle market, it is news
to me. If it does, please send guidelines.
We were excited about the program initially and had two
companies that would be perfect for the program, but the banks
will not do it.
We had plenty more comments that address the challenges
faced by both borrowers and lenders which I am happy to provide
the Commission for its review and reporting purposes.
As the CEO and president of the Association for Corporate
Growth, ACG, I come before you today as an employer and the
leader of an association that represents a vitally important
segment of the economy which employed some 45 million Americans
prior to the pandemic. Founded in 1954, ACG's 15,000 members
operate, advise, and grow approximately 200,000 middle-market
companies.
As a networking organization which hosted more than 1,100
live events annually, ACG, like many other associations, was
devastated by COVID. I lead a staff of nearly 30 people based
out of Chicago, or now all over the country, as well as oversee
operations in 60 chapters, primarily in North America. When the
Paycheck Protection Program was announced, a grant through it
would have served as an $800,000 lifeline for my Chicago team
and staff members dispersed throughout the country. However, as
a 501(c)(6), we too were ineligible.
Consequently, we made more than $600,000 in salary cuts--
currently forecasted to continue through December and beyond.
Since March, every conversation with our members finds them in
the same position--with their employees at the forefront of
their operations, they managed cash flow, tried to prevent
layoffs, and worked diligently to retain employees and not lose
institutional knowledge.
When PPP was closed to us, like many other associations and
a large percentage of our member companies, we looked in
earnest at the Main Street Lending Program. A loan would allow
us to invest in the digital enhancements to our infrastructure
that would ensure we could continue to deliver strong member
value and the necessary tools for business development in this
new virtual world.
But there, too, we found another closed door, as did our
members. Perhaps naively, we thought the Main Street Lending
Program would be accessible to organizations and companies
excluded from the PPP. Suffice to say it has not been accessed
by many. In your recent report, you talked about the Goldman
Sachs estimating that some 45 million Americans or 40 percent
of private-sector are employed by companies who are eligible
for MSLP, yet very few had purchased a loan. Further, Chairman
Powell recognized the challenges with the small and medium-
sized businesses for which MSLP is intended. It is new
territory for the Federal Reserve and very complex because
these businesses are a ``broad and heterogeneous class of
borrowers''' with diverse needs.
In our opinion, the challenges with the Main Street Lending
Program are twofold and equate to awareness and access.
Our recent survey found 22 percent of the respondents
completely unaware of MSLP. And of the respondents who want to
apply for the loans through the program, 81 percent were
unable. When asked what changes could help, they suggested the
removal or the overhaul of the following items, which some of
you have talked about today:
Removal of adherence to the SBA affiliate definition. We
talked about the EBITDA/leverage size based test which excludes
many companies, particularly those early in their life cycle
and family-owned businesses; distribution dividends
restrictions for 1 year after loan payoff; employee
compensation restrictions for 1 year after loan payoff;
decreasing the minimum loan size.
Look, creating a greater awareness of the MSLP and
increasing accessibility should result in a groundswell of
applicants. We believe that. The effect should help companies
retain jobs and maintain operations, and consequently preserve
health care insurance for millions of Americans in this
increasingly unpredictable economy tethered to COVID 19.
We stand to support you in any way you need and hope to
answer any questions you may have today. Thank you.
[The prepared statement of Mr. Bohn follows:]
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Mr. Hill. Thank you, Mr. Bohn.
And now we will hear from Mr. Foster. You are recognized
for 5 minutes.
Mr. Foster. Okay. Can you hear me.
Mr. Hill. We can.
Mr. Foster. Great.
STATEMENT OF VINCENT D. FOSTER, EXECUTIVE CHAIRMAN, MAIN STREET
CAPITAL CORPORATION
Mr. Foster. Members of the Commission, thank you for
inviting me today to testify on the state of the Federal
Reserve's Main Street Lending Program. I am Vince Foster,
executive chairman of Main Street Capital. Main Street Capital
is an active member of the Small Business Investor Alliance in
Washington. We provide long-term debt and equity financing to
lower middle-market U.S. businesses. We currently have
investments in 68 lower middle-market businesses in 26 States,
in which our average ownership is 36 percent. These businesses
on average each have roughly 200 employees.
The Main Street Lending Program, while enacted to assist
businesses like our portfolio companies weather the economic
storm brought on by the pandemic, is not responsive to their
needs as currently structured. The principal structural
problems are:
Number one, requiring lenders to undertake full credit
underwriting for small to mid-sized borrowers seeking 3.5
percent, four to six times EBITDA loans results in a risk/
reward mismatch. Lenders are better off expending their time
and capital underwriting conventional loans.
Number two, requiring 15 percent amortization in year 3 of
the loans is a non-market and very onerous provision,
effectively requiring the loans to be refinanced after 2 years.
Number three, prohibiting contractual subordination (in the
case of the new loan facility) and requiring (in the case of
the priority loan facility) senior or pari passu priority to
existing debt is problematic in that most companies will have
preexisting senior debt outstanding, the terms of which will
have to be renegotiated.
Number four, testing the maximum number of employees and
revenue utilizing the affiliation rules contained in the Small
Business Administration regulations applicable to 7(a) loans,
without the exceptions including the PPP program, dramatically
reduces the number of companies eligible for the Main Street
Lending Program.
The lending facilities as currently structured are
unattractive to those borrowers that are reasonably
creditworthy as less restrictive financing is likely to be
available from conventional sources. Yet the facilities remain
unavailable due to lender reluctance to accept balance sheet
exposure with respect to less creditworthy borrowers.
The following structural changes would make the program
more attractive to both lenders and borrowers to advance
Congress' objectives:
Number one, the loans should be unsecured and subject to
preexisting contractual subordination and rank junior in
priority to other preexisting senior debt.
Number two, the loans should have a term of 7 years,
generally sufficient to allow them to mature after the maturity
dates of preexisting debt. Amortization should not begin until
the end of year 4.
Number three, the multiples of 2019 adjusted EBITDA should
be increased from 4 times in the new loan facility and 6 times
in the priority facility to 6 times and 7 1/2 times,
respectively. There should also be elective asset-based
criteria (such as a percentage of loan-to-value and/or a 1.2
times minimum debt service coverage ratio) instead of using
solely leverage multiples for all industries.
Number four, experienced nonbank lenders should be
permitted to participate as eligible lenders (similar to the
PPP program); the loans should have an interest rate of LIBOR
plus 400 rather than 300 basis points; and the upfront
origination fee payable to the lenders should be increased to
200 basis points paid by Treasury.
Number five, the affiliation rules should not limit an
affiliated group to a single Main Street facility or a single
lending facility's size limitation when more than one group
member would like to access that or another Main Street lending
facility.
And, finally number six, one of our lenders, a highly
respected and conservative regional bank, has elected not to
participate in the Main Street Lending Program. Instead they
confirmed that their primary regulator had no issues with the
bank utilizing the 1- and 2-year deferral of interest and
principal feature utilized by the program in the bank's regular
lending program. This will help provide certain qualified
pandemic-affected borrowers the liquidity they need.
Accordingly, it may be helpful to coordinate with the
appropriate regulators as to whether this type of regulatory
action might encourage other banks to similarly modify their
lending programs to assist affected borrowers.
Thank you again for the opportunity to speak to you today,
and I look forward to your questions.
[The prepared statement of Mr. Foster follows:]
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Mr. Hill. Thank you, Mr. Foster.
And now, Ms. Mills, you are recognized for 5 minutes.
STATEMENT OF GWEN MILLS, SECRETARY TREASURER,
UNITE HERE
Ms. Mills. Thank you, members of the Commission. My name is
Gwen Mills. I am secretary-treasurer of the hospitality union
UNITE HERE. While I will focus on our members' experiences, the
recommendations I make are supported by the AFL-CIO,
representing 55 national unions and 12 million workers.
Our 300,000 members work primarily in the hotel, casino,
food service, and airline catering industries--all sectors that
are heavily dependent upon travel and tourism.
Before the CARES Act became law, 90 percent of our members
were laid off. Today 85 percent remain unemployed.
A majority of our members are women and people of color.
Many are recent immigrants. Most have lost or will soon lose
their health care--benefits won often after giving up wage
increases to secure family health care.
Hundreds of our members or their family members have died
from coronavirus--22 in Las Vegas alone, where 350 have been
hospitalized.
Our industries are the most severely affected in terms of
unemployment, so I believe our story is a cautionary tale of
what awaits American workers across the board if we fail to
correct course.
At heart is the question of requiring employers to maintain
employment as a condition of Federal assistance. The Main
Street Lending Program requires only commercially reasonable
efforts to maintain employees in spite of clear congressional
intent. Treasury and the Federal Reserve said they will not
enforce even that.
We have seen this movie before, and we know how it ends for
working people. We have seen how powerful lobbyists transform
the PPP and Payroll Support Programs into subsidies for real
estate investors.
We have identified 200 outlets where we have members that
received PPP loans, and they have not protected paychecks or
health care.
One company--Omni Hotels--received 34 PPP loans worth at
least $53 million. Meanwhile, Omni hotels in Boston,
Providence, and New Haven were shut down in March, and it is
unclear when they will reopen. In Providence, the company then
cut off medical benefits in violation of their union agreement,
and there are many similar stories.
What they reveal is how a powerful industry turned a
program designed to keep workers on payroll into one that could
keep hotel owners current on their mortgages.
The Main Street Program will yield even worse results for
workers if this mission drift is allowed. Now hotels demand a
bailout of $86 billion worth of CMBS loans using the Main
Street Program. This Commission reported that the Fed has
considered establishing an asset-based lending facility that we
fear would do just that.
Who would benefit most from a hotel CMBS bailout? Lobbyists
want you to believe it would mom-and-pop hotels. But the
largest beneficiaries are sophisticated real estate investors.
Our analysis of loan data finds that: the 11 largest
borrowers had at least $1 billion each in hotel CMBS; those 11
had a combined $30 billion in loan balances or about a third of
the total outstanding; four were private equity firms, two were
REITs, one a hedge fund billionaire, and the rest were
developers or billionaire investors. The 12 belong to the
Fontainebleau Miami Beach, whose owner refinanced its debt
twice in 2 years, borrowing more to cash out millions. Now
Fontainebleau has stopped health care for hundreds of laid-off
employees despite subsidies provided by the Employee Retention
Tax Credit.
Lobbyists claim if the Fed does not rescue CMBS borrowers,
hotels will default and workers will not have jobs to come back
to. But that is not our experience, and this is not the first
time hotel owners got themselves in trouble using these
inflexible loans. After the financial crisis, there were scores
of defaults across the country. But defaults and foreclosures
did not lead to closed hotels. Hotel workers who are used to
seeing absentee owners come and go understand that jobs are
driven by occupancy, and only ending the pandemic can fix that.
Almost half of hotel CMBS mortgages mature within 2 years,
before the industry is projected to recover. Should the Fed
refinance the entire hotel lending market while real estate
investors lay off 85 percent of hotel workers and end their
health care in a pandemic?
There is a second critical lesson here which relates to the
Main Street Program. There is no question that stabilizing
credit markets is extremely important in a crisis, and the Fed
has done that. But the real mission should be to protect jobs
of American workers. The exclusive focus on markets and not on
jobs means our members, most of whom are brown and black, are
thrown off payrolls while their employers, whose boards and
shareholders are predominantly white, can simply tap their
credit lines and ride out the crisis.
It is no longer acceptable for the Fed to just stand by and
watch us fall off a fiscal cliff. Millions of American workers
are right behind us on the precipice.
Instead, what if program designers at the Fed take the
CARES Act mandate to heart? What if credit terms were loosened
so long as--and here is the important part--so long as there
were airtight requirements, not incentives, not
recommendations, but requirements that recipients keep workers
on payroll? It is what the PPP could have done if it had not
been hijacked by the real estate industry.
The Fed and Treasury must learn from PPP and reform Main
Street lending so that it actually contributes to the
employment of working Americans. But please do not bail our
real estate investors while they push workers off the cliff.
Thank you for this opportunity, and I welcome your
questions.
[The prepared statement of Ms. Mills follows:]
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Mr. Hill. Thank you, Ms. Mills. Appreciate your testimony
today.
We will now have a round of questioning, and I recognize
myself for 5 minutes.
Let us start with Ms. Anderson. You were talking about your
view of the banks taking up of these loans and what
modifications might be made for less than creditworthy
borrowers. I understood that point. But as I said in my earlier
questioning, 5,000 banks jumped on the opportunity to help in
the PPP environment under the CARES Act, and we have got very
few banks that are engaging here.
What is the Bank Policy Institute doing to promote banks
participating in the Main Street Program?
Ms. Anderson. Thank you for your question. In terms of BPI
member banks, the vast majority of our members are
participating in the program. I cannot speak, obviously, for
all banks across the country, but I think when you think about
the complexity of the program, it is difficult not just for
small borrowers but also for smaller lenders. The program is
set up as a participation structure, which is typically used in
the syndicated loan market. Many smaller banks may not actually
be active in that space, familiar with it, and there is quite a
lot in terms of going through the legal documentation and
setting up the infrastructure to actually lend in that manner
and comply with the terms of the program. So while we certainly
have our members participating, it may be more challenging for
smaller banks.
Mr. Hill. Thank you. And do you agree with the testimony on
our panel that it is possible to make a very creditworthy loan
that is not based on the EBITDA multiples and the senior nature
of the term sheet? In other words, that if one were to have
sufficient collateral coverage and a 1.25 debt service coverage
ratio but a junior lien, wouldn't that be considered a
creditworthy loan as well?
Ms. Anderson. So a number of our members have said that
they would be interested possibly in lending at a junior
facility, something that is collateralized. I think it would be
up to the Fed and the Treasury to decide exactly what their
risk appetite would be in such a structure and structure the
terms appropriately. So it may not be 1.2 but something
similar. So, yes, I do think banks would be interested if there
was a junior facility available.
Mr. Hill. Do you think the Fed and the Treasury are not
setting the risk parameters appropriately in their existing
Main Street term sheets? In other words, are they too strict?
Are they too much like a traditional senior bank loan with not
even a step in the direction towards a slightly distressed--
solvent, creditworthy, but distressed, temporarily distressed
borrower?
Ms. Anderson. So I think the eligibility criteria that the
Fed and the Treasury established probably fit the program that
they set out to design, as President Rosengren said, in terms
of the liquidity program. But there is a key element. So even
if you reduced some of the stringency of those terms, you still
have the underwriting element. And in this environment,
underwriting on today's information will be difficult for many
borrowers in that distressed space. So I am not sure that
actually loosening the criteria is necessarily the right
answer.
But I think also in terms of what President Rosengren said,
if companies really need equity, then a Federal Reserve lending
program is not the right solution for them.
Mr. Hill. Understood. Thank you for your response.
Mr. Bohn, let us talk about the affiliation rules. You
heard my conversation with Dr. Rosengren that the Fed here in
the Main Street Facility has adopted those Small Business
Administration 7(a) lending affiliation limitations. For this
middle market of non-super small businesses and certainly those
not eligible to raise capital in the public markets, are those
affiliation rules a serious impediment? And can you give us an
example?
Mr. Bohn. Thank you, Congressman. I think that what we are
seeing and hearing and what was evident in the survey that we
had is that these businesses were originally excluded from the
PPP, and there was hope initially that in the Main Street
lending provision that there would be opportunities for them to
utilize benefits and lending from Main Street in order to not
only keep jobs but also invest in some of the changes that they
need to do as people start to pivot based on the economy and
whether that is setting up plexiglass and rearranging their
buildings or whether or not that is related to simply doing
business in a much different way. But we have heard from them
loud and clear that their inability to access them has had a
significant impact on their business. When we first went out
there and talked to our members----
Mr. Hill. Thank you. Let me--thank you for that. We will
have another round, but my time has expired.
Let me turn to Mr. Ramamurti for 5 minutes.
Mr. Ramamurti. Thank you, Mr. Chairman. And thank you, Ms.
Mills, for your testimony today. You noted in your written
testimony that hundreds of your union's members and family
members have died from COVID, and many more have been
hospitalized. I just want to extend my condolences to them and
their families and to you, and I think it is a powerful
reminder that this is first and foremost a health crisis, and
that front-line workers like the people that you represent are
bearing the brunt of it.
You represent a lot of people who work in hospitality and
in tourism as front-line service workers, hotel housekeeping,
bellmen, wait staff, cooks, bartenders, casino workers. You
mentioned in your opening statement that a majority of your
members are people of color and that a majority are women.
When the companies who employ your members struggle, who
are the first people to suffer via layoffs or furloughs?
Ms. Mills. Yeah, thank you for your question. Across the
board it is the front-line workers first, our members, who are
laid off.
Mr. Ramamurti. Right.
Ms. Mills. And our experience is that the white middle
management are able to keep their jobs.
Mr. Ramamurti. And when they are laid off or furloughed, it
is not just lost income, right? In many cases they are losing
access to health care, to retirement contributions, and to
other benefits?
Ms. Mills. Absolutely, yes.
Mr. Ramamurti. And so among the hundreds of thousands of
travel and tourism industry workers that you represent, 4
months into this crisis are you aware of a single job that has
been saved by the Main Street Program or even a single hours
cut or furlough that the Main Street Program has stopped?
Ms. Mills. No.
Mr. Ramamurti. And as the Main Street Program is currently
designed, do you think it will help workers in the future, even
if more companies participate in it?
Ms. Mills. No. As I said in my testimony, not without
binding requirements that employees be rehired from the first
day of the aid.
Mr. Ramamurti. Right. So, in other words, even if a lot of
companies end up getting loans through this program, you do not
think that the benefits of those loans will flow through to
workers?
Ms. Mills. No, not without binding requirements.
Mr. Ramamurti. So 45 million people work at companies that
are eligible for the Main Street Program. If the goal is to
help those millions of workers, do you think the Fed can just
make tweaks to the Main Street Program to achieve that? Or do
you think Congress needs to come up with a brand-new approach?
Ms. Mills. In this case I do not think tweaks will work. I
think Congress does need to come up with a new approach.
Mr. Ramamurti. So let us talk about that a little bit. In
your experience, what kind of new approach do you think would
be helpful to your workers? In your experience and the
experience of your members, does providing financial support to
businesses help workers without express and enforceable
requirements that businesses actually use that aid to support
workers?
Ms. Mills. No. Time and again in many different programs,
without enforceable requirements, support to businesses does
not help workers.
Mr. Ramamurti. So of the $500 billion that Congress gave to
the Treasury in the CARES Act in March, there is currently more
than $200 billion sitting unused and uncommitted. If you were
to use that money to develop a program that would be most
helpful to your members, what would you do with it?
Ms. Mills. The two things that matter are health care and
wages, so we would fund COBRA payments so that we could
continue health care, and then give direct support to workers.
Mr. Ramamurti. Thank you. And one final question about
this. Did the Treasury Department ever reach out to your union
as it was designing this lending program that was ostensibly
about helping workers?
Ms. Mills. No.
Mr. Ramamurti. Thank you, Ms. Mills. Look, I share your
views and, frankly, I think it is time we started to listen to
working people, not executives and investors and their
lobbyists, when we design these programs that are supposed to
be ultimately about helping workers.
Thank you, Mr. Chairman. I yield back.
Ms. Mills. Thank you.
Mr. Hill. Thank you, Mr. Ramamurti.
Congresswoman Shalala is recognized for 5 minutes.
Ms. Shalala. Thank you. Let me follow up with Ms. Mills
since I represent a district that has a huge number of workers
that work in the tourism industry, particularly in the hotels,
including the Fontainebleau, which you mentioned.
We had a debate with the Fed over whether their term
``commercially reasonable'' was better than ``reasonable,'' but
it sounds to me from what you said that either one does not
mandate that these programs keep people employed or even
furloughed workers keeping their health care so that they can
get on unemployment and keep their health care. I take it that
we would have to really fine-tune that requirement in these
programs to make a difference for not only the workers that
UNITE represents, but the thousands of workers that work in
this industry.
Ms. Mills. Yes, thank you, Congresswoman, for your
question. I mean, our great concern about the Main Street
Lending Program is that the hotel industry is seeking changes
so that they can use the program to pay their CMBS mortgages,
like there is a $975 million loan at the Fontainebleau Miami
Beach that is in your district. As I mentioned, the
Fontainebleau stopped paying health care for hundreds of our
laid-off members. We believe it is a violation of our contract,
and so it would be wrong for taxpayers to fund a year or two
worth of Fontainebleau's debt payments of $39 million a year
while laid-off workers lose their health insurance and rely on
the public hospital system. So fine-tuning absolutely
requirements would be necessary, and I really appreciate your
question today because one of the Fontainebleau workers died
this morning of COVID in the hospital without his medical or
life insurance.
Ms. Shalala. I heard that, and I am so sorry. I want to
point out that those workers are also taxpayers, because we are
talking about their money being used for the mortgage payments.
So you do not see anything in the Main Street Program that
could be significantly improved unless it was totally
restructured in terms of helping workers in this country?
Ms. Mills. I think that is right. It would need to be
restructured with requirements off the bat for bringing workers
back as soon as any assistance was issued, yes.
Ms. Shalala. Well, thank you very much.
Let me ask Ms. Anderson a question. The Main Street Lending
Program allows banks to employ their own underwriting standards
to loan applications. Does that mean that banks are making
loans under the program that they would have made anyway absent
the Fed program? And if so, is the Main Street Lending Program
providing any benefit to borrowers at all?
Ms. Anderson. Thank you for your question. In terms of the
loans that are being made, I think they are quite specific in
terms of the circumstances, because you are absolutely right, a
borrower who can meet a bank's basic underwriting standards is
typically finding out that there is a product that is more
suited to them given their credit needs. So, for example, maybe
a term loan really is not what they need and they really need
something more like a flexible working capital facility. So our
banks are actually many times finding better solutions for
these borrowers when they inquire about the program.
In terms of the live cases that look like they might go
through, one example is a travel company that basically came to
one of our banks as a new lender--a new borrower, sorry, and
the bank would be comfortable possibly lending the 5 percent.
And in a normal circumstance they would go out and syndicate
that loan to the market. But given the timing that it takes to
do that and the need to actually get finances to these
borrowers, that is one where they think it makes sense to use
Main Street because the Government is there ready and waiting,
so they do not have to go through a syndication process. But,
you know, whether there are lots of borrowers in those specific
circumstances I think is questionable.
Ms. Shalala. One more quick question. Many of the small to
mid-sized businesses that were able to get by in the first few
months, they used the PPP program, are now at the end of their
ropes. Goldman Sachs reported that more than 80 percent will be
out of PPP money. If that is the case, where are they turning
for funding? Are your banks seeing an uptick in loan requests?
Ms. Anderson. I would not say we are seeing a huge uptick
in loan requests, but something that is interesting is that the
vast majority, so probably over 70 percent, of new borrower
inquiries that our banks are getting are actually borrowers who
think Main Street is a PPP program. So they think it is a loan
forgiveness program or a grant program. And once they hear the
details, then they realize it is actually not for them. So they
are looking for something that is equivalent to a PPP type
structure.
Mr. Hill. Thank you.
Ms. Shalala. I yield back.
Mr. Hill. Yes, thank you, Congresswoman Shalala. Your time
has expired.
Now we will turn to Senator Toomey for 5 minutes.
Senator Toomey. Thank you, Mr. Chairman.
I just want to go back and review very briefly a little bit
of the history about how these programs came together, because
we debated the extent to which we should have mandates to
retain a workforce and how best to do that. And for small
businesses, we thought that it might be possible for
businesses, even businesses that are essentially closed, have
no business, it might be possible to maintain the payroll if we
pay for it, if we had the taxpayers pay for it. And so that is
what the PPP program was designed to do, take a finite period
of time and have the taxpayer just pick up the tab for the
payroll. And to a very significant degree, I think it has
worked, and it was probably necessary.
With the Main Street Lending Program, the idea was that
these would be loans. And while obviously everybody wants to
maximize employment opportunities, maximize jobs, we are all
celebrating record-low unemployment, record-high job
opportunities for everybody in America, most especially the
African American community, the Hispanic community, people who
have historically have higher rates of unemployment. We are
seeing tremendous gains. This was all great.
But the idea that we would require companies to borrow
money for the purpose of maintaining a payroll for people who
they did not have work for because the business was closed,
that did not seem to make sense, which is why we made
unemployment benefits more generous; we did direct payments of
$1,200 to everyone to offset the lost income that was notable.
So let me try to illustrate this another way with a
question, and maybe Mr. Bohn or Mr. Foster would want to take a
shot at this. If a business is losing money, probably
massively, as it collapses in sales, has no orders coming in
because of this contraction that was underway, and hopefully is
in the process of getting behind us, and, therefore, has no
work for its workers, if that business goes out and borrows a
lot of money to pay those workers anyway, does that make that
business more viable, more likely to succeed, more likely to be
there at the end of this contraction to be able to bring
workers back?
Mr. Bohn. Well, Senator Toomey, thank you. If I could, I
will take a stab at that. I think what we are talking about
here is really two separate things. I think, yes, PPP was
definitely designed to save jobs in the immediate term and as
quickly as possible. What we are hearing and seeing from
middle-market organizations, though, is that the loans, if they
were able to get them, would go to investment in opportunities
that would create jobs or bring back jobs within their company.
So if you even use the example of ACG as an organization, there
is a lot we have to do and do not have the finances to be able
to really exist well equipped in this new virtual environment.
We are seeing that time and time again, whether it is for our
restaurants and how they are having to handle how they prepare
for orders and utilize technology, so there are opportunities.
But at the end of the day, it is a moot point because there is
such a large number of them who are not able to access the
program overall.
Senator Toomey. Thank you.
Mr. Foster, do you have a comment on this?
Mr. Foster. Yes, I mean, I think that the main thing right
now is for the type of business that you illustrated is to keep
the business, because the business is in survival mode. And you
need to let the business owner do what is necessary with the
capital to keep the business alive. Certainly payroll is a part
of it, but frequently they are behind on lease payments, and
they could lose their facility. They have stretched their
suppliers. You know, you just have to leave it up to the
business owner because they really need--they are in survival
mode.
Senator Toomey. Let me ask a question of Ms. Anderson. My
understanding is that the Federal bank supervisors have made it
clear that they will treat the Main Street Lending loans in a
manner consistent with their supervisory approach to other
commercial and industrial loans. So here is my question: If
they were to change that and they were to take, say, a less
restrictive view in their supervisory capacity, would bank
behavior be likely to change? Or is bank behavior so driven by
the existing set of internal rules that they would be unlikely
to change?
Ms. Anderson. Thank you. So some bank behavior might
change, but it may not be actually the behavior that is
desirable overall. I think one thing to be clear is we do not
think it is appropriate to have supervisory forbearance. The
transmission of risk from the corporate sector to the banking
sector is really not in the best interest of anyone, and
certainly if you ask banks to go and make riskier loans right
now, it might be okay for 12 months. But the credit problem
will still be there just down the road.
So I think banks basically are looking at that, and even
where supervisory requirements were relaxed somewhat, I think
they can see that it is not worthwhile to rack up bad loans on
their balance sheet that they will have to basically work out
at some point in the future.
Mr. Hill. Thank you, Ms. Anderson. Senator Toomey, your
time has expired.
Senator Toomey. Thank you.
Mr. Hill. The gentleman yields back.
We now have a second round of questioning for this panel,
and I will yield myself 5 minutes to start that.
Some of these questions we are faced with today and that
the Fed and the Treasury are faced with are not new questions.
I would like to read a quote: ``If it is a pawnshop in which
necessitous borrowers are compelled to hock assets worth two to
three times the amount of the loan, we are opposed, and we
think most business people will be as well. We see no reason
why the Government should be engaged in a careful pawnbrokering
enterprise, niggling over security, haggling over interest, and
competing with other lenders.''
That was written back in 1933 as the Reconstruction Finance
Corporation and the Fed struggled with how to get credit out to
the American marketplace in a very tough economic recession of
the 1930s, and I think we are dealing with that issue now in
this middle-market segment that we are talking about today.
Mr. Foster, you offered some very good, constructive
comments on specific loan term changes, but can you also
address the affiliation question that I posed earlier?
Mr. Foster. Sure. Let me try to do that by giving you an
example, and I want to compare and contrast with PPP. So when
PPP, which used the same 7(a) program affiliation rules with
relaxation for companies with an SBIC investment, the
hospitality industry, et cetera, so you do not even have that
in Main Street. So in PPP, if you had two commonly owned
businesses that had 200 employees each, and they each had, you
know, say $20 million in preexisting debt, they could each
access up to $10 million of PPP for a total of 20. They needed
to have the requisite cost structure that would do that.
You switch over to Main Street, two companies under common
control, 7,000 employees each, each with $20 million in
preexisting debt, 14,000 total employees, they have to share--
if one of them wants to do the new loan facility, they have to
share $15 million in total assistance under that program, and
it really does not make any sense from an employee perspective,
that 14,000 employees have access in total to a $15 million
loan versus under PPP you had 400 employees that had access to
up to $20 million.
So it really is poorly designed, and it does not make any
sense for these kind of companies to have to run through really
complicated and really severe 7(a) regulations that are really
focused on making sure companies with more than 500 employees
do not have access to a 7(a) loan.
Mr. Hill. Thank you. That is helpful. I appreciate that
example.
Ms. Mills, let me turn to you and first echo the comments
of our fellow Commissioners about condolences. So many of our
families across the country have really suffered in this
pandemic. We have to remember when we are doing our oversight
work that, first and foremost, this is a public health crisis
that has led to an extraordinary economic crisis. And so I
appreciate the comments you made and the care you have for all
of your members and your advocacy today.
And I also agree with Senator Toomey that the Main Street
Program is not the solution to all challenges in this pandemic
either, and that is why we have the unemployment compensation,
the direct payments to our families, the forbearance in
mortgage and rental payments, the payment for leave, the
payment for testing, the flexible furlough program in the
States so that people can be furloughed and maintain some
benefits and get unemployment compensation, and obviously the
aforementioned PPP. So all these Federal policies work together
to try to minimize the impact on our families and help them get
through the pandemic and also help get our economy back to full
capacity.
In looking at your testimony, though, 74 percent of CMBS
are less than $20 million, and in my district Asian American
hotel owners are the classic small business entrepreneurs. And
as I understand it, over 50 percent of hotel rooms are owned by
these kinds of classic small business entrepreneurs across the
country. And they are worried about getting October property
tax payments in Arkansas, is, I know, one of their concerns,
because they want to bring their staff back. They want to bring
their staff back commensurate with the economy reopening. And,
also, owners of CMBS securities are mostly pension funds and
people's retirement accounts, and so they are all benefitted by
trying to get capital into the industry and get people hired
back and reopen.
So I am empathetic to your testimony. I thank you for being
here very much and for your comments. But I think that the Main
Street Program's mission is to try to get our hotel and
hospitality open, and I hope we can find a such that does that.
Let me yield back and turn to my friend Mr. Ramamurti for 5
minutes.
Mr. Ramamurti. Thank you, Mr. Chairman.
Mr. Bohn, thank you for your testimony as well. I want to
ask you the same type of questions that I asked Ms. Mills
earlier. You come at this from a different perspective. You run
a mid-sized company. Your organization represents a lot of such
companies. But you seem to agree with Ms. Mills that this
program has not been helpful so far. In fact, not a single one
of your member companies has actually been helped by the Main
Street Program so far. Is that right?
Mr. Bohn. That is correct.
Mr. Ramamurti. And it is in your testimony that the program
needs to be changed. Can you describe the kinds of ideas you
have in mind for that?
Mr. Bohn. Yeah, we list a couple of ideas in there that
start with the removal of the affiliate exclusion, reducing the
EBITDA requirements to make it more appealing to a broader
class, particularly in the lower middle market, and we also
talk specifically about the loan size and bringing the loan
size down even further. Those are just some of them that we
think--and, again, this is not only, you know, our team
internally talking. These are is the direct comments we
received back in the survey we just did.
Mr. Ramamurti. You also mentioned eliminating the
restrictions on shareholder payouts and on executive
compensation. Is that right?
Mr. Bohn. Correct.
Mr. Ramamurti. So, look, I agree with you on the diagnosis
here, which is that the Main Street Program has not really
helped anybody so far very much, and it is also unlikely to
help a lot more companies without significant changes. But I am
concerned about the proposed solution that you are offering.
You propose changing the rules so that every company can get a
loan even if before the crisis they had a lot more debt than
they had earnings, you know, in other words, no matter how much
risk there is that the public is going to end up holding the
bag at the end of this. And at the same time, you propose
eliminating restrictions on companies spending the loan money
on payments to their shareholders and eliminating restrictions
on executive pay. So I guess my question is: Why should the
American people be willing to give billions of dollars to
potentially failing companies that can just use that money to
pay shareholders and executives while firing workers?
Mr. Bohn. Well, I think, Commissioner Ramamurti, when we
talk about things like EBITDA and whether or not the company
was at a higher risk prior, if you consider a large part of the
lower middle market, which are oftentimes family-owned
businesses, EBITDA in that case can be a misleading indicator
because a lot of the costs and expenses roll through salaries
and other types of things, and at the end of the day the EBITDA
is not something significant. We see this a lot of times when
purchases and acquisitions are made where there is a lot of
debate and discussion over EBITDA and what is published through
their regular financials.
So I think when we are looking at that, we tend to
eliminate the opportunity for companies, particularly family-
owned companies who are in that lower middle market, who at the
end of the day their margins, their EBITDA are very, very
limited and small, but yet they have been very successful for
years, employ a number of different people.
Mr. Ramamurti. Can I ask just a follow-up question on that?
On, let us say, the executive compensation restriction
specifically, if a company exists that is not interested in the
Main Street Program because of the executive compensation
restriction, isn't it a fair guess to say that the reason that
they are not interested is because they want to use some of
that money to increase executive compensation? Otherwise, why
is it a deterrent to them?
Mr. Bohn. Well, again, so that particular comment comes
directly from some of our members of why they are not
interested. What their particular reason for not being
interested, I cannot go to that intent. But I will say that if
there is anything that limits their ability to eventually sell
the company upon paying the loan or to derive the benefits that
they have built for building a company over time, I think that
that is going to absolutely preclude them from wanting to
utilize the funds that could otherwise be available to them.
Mr. Ramamurti. Thanks. Look, just to sum up quickly, I
think we have actually seen a remarkable consensus emerge at
this hearing, which is that the Main Street Program as
currently designed is failing. The representative of the
banking industry told us that we are not seeing meaningful
demand for loans right now from their clients. The
representative of small and mid-sized businesses told us that
the program would not help its members as currently designed.
And Ms. Mills, representing hundreds of thousands of workers,
told us that the Main Street Program has not helped a single
worker and is not likely to.
I do not question the hard work of President Rosengren and
the Fed staff, but more loans are not going to solve this
crisis. Struggling small and mid-sized companies cannot take on
more debt right now, so the only tool in the Fed's belt is the
wrong one. This program was given $75 billion and months to
succeed. It did not and it cannot. It is time to stop tinkering
around the edges with adjustments to loan eligibility and loan
terms when the fundamental problem is with the nature of the
loans themselves.
It is time for Congress to step back in so that we can
actually save small and mid-sized businesses, and when it does,
it needs to tie the assistance to meaningful, enforceable
protections for workers, and not just hand money to executives
and trust them to take care of workers' interests.
Thank you, Mr. Chairman.
Mr. Hill. The gentleman yields back, and we now turn to
Congresswoman Shalala for 5 minutes.
Ms. Shalala. Thank you very much.
Ms. Mills, one of the problems with the loan program, it
seems to me, including this program, which clearly has flaws in
it, is that loans protect the health care of executives but not
of workers. Nothing that we have done--unemployment insurance
to support workers--protects their health care, unless these
hotels, for example, furlough people and keep their health
care.
So, fundamentally, what the Fed has done will protect the
health care of a lot of executives, but there is nothing that
we have done, particularly in the unemployment insurance
system, that protects the workers' health care. I think that
was one of your points.
Ms. Mills. Yes, thank you. That is correct that the
extension of the wages that the Congressman mentioned has been
appreciated, although it is now ending. That is problematic.
But there has not been an extension of health care. And even in
a case where we have some health care negotiated, companies
like the Fontainebleau, you know, are not abiding by that. So
that is absolutely correct.
Ms. Shalala. Thank you.
Ms. Anderson, three of the five facilities require that
Main Street loans be senior or pari passu with, in terms of
priority and security, the borrower's other loans or debt
instruments other than mortgage debt. Are lenders willing to
subordinate or dilute their priority and security? What impact
does this provision have on an applicant's ability to borrow
under the Main Street Lending Program?
Ms. Anderson. Thank you for your question. This is a true
issue in the sense that many mid-sized companies have existing
debt structures and having senior credit come in at this point
basically has to be negotiated with those existing lenders,
many of whom are not bank lenders, and that then becomes a
complex process in terms of an inter-creditor agreement. And I
know that has certainly put off some borrowers in terms of
trying to go through that process when you may not receive the
consent from the other lenders who may just not have the same
incentives as the originating bank. So it is a problem, and it
is complex.
Ms. Shalala. Thank you.
I have a question for Mr. Bohn. In your written testimony,
you stated that the challenges with the Main Street Lending
Program have a lot to do with whether people actually
understand it. Do you have some specific recommendations in
that regard?
Mr. Bohn. Thank you, Congresswoman Shalala, and as I am
sitting here in Orlando, Florida, thank you for representing
our great State here on the Commission and in general.
So, yes, I think that one of the things we heard back from
our survey was that there was--unlike the PPP, where there was
significant awareness about the various provisions and tenets
of it, there was a lot more ambiguity and misunderstanding.
Some of that related to how long it is taking for the program
to come together, some of that because there was a little bit
of misunderstanding thinking that it would be different than
PPP because it was loans and not carve-out 501(c)(6)'s or
affiliated groups.
So I think that there is an opportunity here, regardless of
where the changes are made, to make sure that the program is
much more clearly communicated on a wider basis, and we are
willing and able to help with that in any way we can.
Ms. Shalala. Do you have a specific recommendation on the
loan size?
Mr. Bohn. Well, I have a specific recommendation on the
loan size that it should come down to closer to $50,000, and
here is what makes me say that. There were a number of smaller
family-owned businesses in the middle market that I have spoken
to recently right here in Orlando who have said, look, we do
not need $250,000 but we do need $50,000 or $75,000 in order to
prepare what we think is going to be a longer haul to deal with
the fallout from COVID, whether that is safety equipment or how
we run our operation. But $250,000 is too large of a haul for
them, and, again, do not want to get out over their skis
financially. So, yes, a specific recommendation on that, yes,
ma'am.
Ms. Shalala. Thank you. I yield back.
Mr. Hill. Thank you, Congresswoman, and now we will yield
to Senator Toomey for 5 minutes.
Senator Toomey. Thank you very much, Mr. Chairman. This has
been very, very helpful and informative, and I really
appreciate the testimony of all of the participants.
My own view is it is way premature to come to the
conclusion that this has all been a failure. Okay, I think
there are definitely some improvements we ought to be looking
at, and there might be entire new versions of Main Street
Programs that we ought to contemplate. We talked about
affiliation rules, which I think need to be changed. There may
be terms that ought to be modified. I am interested in
something that would be more asset-based rather than just
income-based.
But let us keep in mind it took a long time to get this up
and running. That was always going to be the case because of
the nature of the complexity of doing this kind of funding.
There has been a recent acceleration in use. If the
acceleration continues, we may see significant pickup.
Mr. Bohn makes the argument that there is a high level of
unawareness or low level of awareness about this. There is a
lot we could do to remedy that which could result in more
participation.
And then, finally, this leads to my question. You know, I
would argue that the corporate bond programs, which are not the
ones we are here to talk about today, but the 13(3) facilities
that set up the corporate bond-buying programs have been
enormously successful despite the fact that the Fed has
purchased very, very few bonds. It was the standing up of the
program, the existence of the program, that allowed the private
market to operate, to operate actually at an all-time record
volume, after having been frozen. That is a remarkable success
story, despite the fact that there was not a lot of history.
So that gets me to my question, and maybe I should have
asked this at the beginning, and, Ms. Anderson or Mr. Bohn or
Mr. Foster, any of you might have a thought on this. But how
should we best determine objectively the extent to which credit
needs are being met or not being met? I have heard anecdotally
from Pennsylvania companies and Pennsylvania banks that when
this pandemic resulted in a shutdown, there was a massive
drawdown on existing credit lines. People piled up as much
liquidity as they possibly could. Then after a little time
passed, they started to pay down some of those balances. But,
you know, we can certainly seek bankruptcy filings; at that
point it is kind of too late.
What should we be looking at on a day-to-day basis, what
metric should we be using to determine how significant the
unmet credit demands are in this space? And, Ms. Anderson,
maybe you could lead it off.
Ms. Anderson. Sure. Thank you. So I think you make a good
point in that, by and large, credit demands for many companies
are being met. We saw record lending from banks early on in the
pandemic, so $700 billion plus was lent over the course of 3
months.
Since then, we have seen about $200 billion in that C&I
lending space be repaid, so I think you are right, businesses
are, you know, paying down some of that liquidity that they
took in in the early days of the crisis.
And speaking to our banks, the demand for credit has
lessened. They are not getting millions of inquiries from their
customers, new or existing. And I think that really says
something, and they have all been segmenting their books trying
to see who needs credit or other solutions, and I think really
is a temporary liquidity credit need, then the banks by and
large are providing that. If it is a solvency need, that is not
something that banks provide to companies.
Mr. Foster. Senator, I think one simple way to figure out
if there is unmet credit needs is to ask the banks how many
Main Street loans have been requested by borrowers that the
banks have rejected. If you could capture that data, you would
get a real good idea, because I am aware of probably a hundred.
And it is not the banks' fault. You know, we have a restaurant
group in Florida and the bank who signed up for the program
said, ``I cannot take any more restaurant exposure in my
portfolio,'' because they are approaching it like a bank. They
are not approaching it differently. They are not relaxing
underwriting standards. If you are a restaurant group, you are
not getting a bank loan. And if we do not capture that data,
you figure it out.
Senator Toomey. I think that is a very interesting point.
Ms. Anderson, is there a way that that data is being
collected systematically so that we could access that? Or does
that not exist in a centralized place?
Ms. Anderson. So it is not being collected systematically
at this point in time. Certainly we could work with our members
to get you additional data on that in terms of our members who
are active in the program. They are receiving between 500 to
maybe 2,000 inquiries in relation to the Main Street Loan
Program, and as I said before, you know, upwards of three-
quarters of those actually do not understand the program and
think it is a grant program. So it is really not a high level
of inquiries even.
Senator Toomey. Thanks very much. Mr. Chairman, I see my
time has expired.
Mr. Hill. I want to thank our witnesses again, both panels.
Excellent discussion. I want to thank our Commissioners for
their participation today and for their thoughtful questions.
And on behalf of the Commission, in addition to thanking the
witnesses, let us thank the staff as well for their preparation
in putting the hearing together.
This hearing is adjourned.
[Whereupon, at 12:04 p.m., the Commission was adjourned.]
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