OCC Releases its Final True Lender Rule; Federal Reserve Board Improves Terms of its Main Street Lending Program; SBA Intends to Issue New Loan Necessity Questionnaires for Borrowers with PPP Loans Over $2 Million
A. OCC Releases its Final True Lender Rule
On October 27, 2020, the Office of the Comptroller of the Currency (OCC) released its final True Lender Rule. The rule determines when a national bank or federal savings association make a loan and is the “true lender,” including in the context of a partnership between a bank and a third party, paving the way for banks to partner with FinTechs and other third parties who develop and utilize innovative technology to reach a wider customer base and expand access to credit. The rule specifies that a bank makes a loan and is the true lender if, as of the date of origination, it (1) is named as the lender in the loan agreement or (2) funds the loan. The rule also specifies that if, as of the date of origination, one bank is named as the lender in the loan agreement for a loan and another bank funds that loan, the bank that is named as the lender in the loan agreement makes the loan. The rule also clarifies that as the true lender of a loan, the bank retains the compliance obligations associated with the origination of that loan, thus negating concern regarding harmful rent-a-charter arrangements. It takes effect 60 days after publication in the Federal Register.
B. Federal Reserve Board Improves Terms of its Main Street Lending Program
In prior articles we discussed the terms of the Main Street Lending Program (MSLP). Check out our firm’s past articles here and conduct a key word search for this or whatever other topic is of interest to you. The MSLP is a $600 billion loan program funded through the CARES Act. Compared to the Paycheck Protection Program (PPP), which has disbursed more than $500 billion in loans to small businesses and nonprofit organizations, MSLP has been a disappointment, funding less than 400 loans representing $3.7 billion of its $600 billion availability as of October 30, 2020. MSLP is set to expire this year.
On October 30, 2020, the Federal Reserve Board (Fed) adjusted the terms of the MSLP in two important ways to better target support to smaller businesses. First, the minimum loan size for two of its for-profit facilities (the New Loan Facility and the Priority Loan Facility) and one of its nonprofit facilities has been reduced from $250,000 to $100,000. The Fed and the Department of the Treasury also issued a new frequently asked question clarifying that PPP loans of up to $2 million may be excluded for purposes of determining the maximum loan size under the MSLP, if certain requirements are met concerning the expected forgiveness of such PPP loans. This is an important change because outstanding debt may either reduce or eliminate the loan amount that a borrower is eligible to obtain under the MSLP. In particular, many small businesses were excluded from MSLP eligibility because of outstanding PPP debt and this change may now allow them to qualify. Copies of the new term sheets for each type of MSLP loan and a copy of the frequently asked question can be found at the above link.
Lenders should also take note that the Fed sweetened the pot for them, hoping to incentivize them to make more loans. For loans less than $250,000, it eliminated the lender’s payment of a 100 basis point transaction fee and it increased the lender’s origination fee from 100 to 200 basis points, and its servicing fee from 25 to 50 basis points. Unlike PPP, lenders carry risk under the MSLP as they retain a five percent interest in the loan. Lenders utilize their own underwriting standards when deciding whether to approve a MSLP loan and many borrowers have reported being turned down for loans. The Fed’s changes to lender fees will hopefully encourage more lenders to begin issuing loans before the MSLP expires.
C. SBA Intends to Issue New Necessity Questionnaires for Borrowers with PPP Loans Over $2 Million
On October 26, 2020, the Small Business Administration (“SBA”) issued a notice in the Federal Register stating that it intends to release two new forms relating to FAQ #31 - the question relating to borrowers’ good faith certifications that current economic conditions made the PPP loan necessary to support ongoing business operations. The new forms are Form 3509 – Loan Necessity Questionnaire (For-Profit Borrowers) and Form 3510 – Loan Necessity Questionnaire (Non-Profit Borrowers). These questionnaires were not immediately released by the SBA, but they have been leaked by various sources and are easy to locate online. They will be used by the SBA in its review of whether the PPP borrower made the necessity certification in good faith. The instructions to the forms indicate that they will be required for borrowers who, combined with their affiliates, received PPP loans of $2 million or more, and borrowers are required to provide responses within ten business days of receiving the relevant form from their lenders. Given this relatively short deadline to respond, we recommend borrowers with aggregated loans of $2 million or more start gathering the information required by these forms so they are prepared to respond timely when they receive the official request.