Court filing
Interim Report No. 4: MSLP Loan Losses and Federal Reserve Subpoena (SIGPR-A-23-002-4)
Record facts
| Court | Special Inspector General for Pandemic Recovery |
|---|---|
| Filed | 2023-09-14 |
Summary
Interim Report SIGPR-A-23-002-4, issued September 14, 2023 by the Office of Audits of the Special Inspector General for Pandemic Recovery to Treasury's Chief Program Officer, on the effects of Main Street Lending Program loan losses on Treasury's investment. It updates Interim Report Number A-23-002-3 and summarizes subpoena responses from 47 MSLP participating banks that issued 1,094 loans worth over $10.2 billion. The banks reported defaults on loans totaling $878.5 million, impaired loans of $228.9 million and 283 loans paid off worth $2.9 billion. The report notes the Federal Reserve Board's reported $164 million in actual loan losses as of July 31, 2023, later updated to $210 million, and states that SIGPR subpoenaed the Federal Reserve Bank of Boston on September 5, 2023. It says the report is informational and requires no response.
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Full text
SIGPR-A-23-002-4
Interim Report: Audit of the Effects
the Main Street Lending Program’s
Loan Losses Have on Treasury’s
Investment in the Program
Report Number SIGPR-A-23-002-4
September 14, 2023
Office of the Special Inspector General for
Pandemic Recovery
Office of Audits
SIGPR-A-23-002-4
1
Office of the Special Inspector General for Pandemic Recovery
September 14, 2023
TO:
Jessica Milano
Chief Program Officer
U.S. Department of the Treasury
FROM:
Theodore R. Stehney
Assistant Inspector General for Auditing
Special Inspector General for Pandemic Recovery (SIGPR)
SUBJECT:
Interim Report: Audit of the Effects the Main Street Lending
Program’s Loan Losses Have on Treasury’s Investment in the
Program A-23-002-4
The purpose of this interim report is to provide information about data we are collecting
from banks on the performance of their Main Street Lending Program (MSLP) loans. We
are collecting and reviewing this information as part of our Audit of the Effects the Main
Street Lending Program’s Loan Losses Have on Treasury’s Investment in the Program
(A-23-002). This is an update of Interim Report Number A-23-002-3, issued on May 12,
2023.
On August 10, 2023, the Board of Governors of the Federal Reserve System (Federal
Reserve Board) reported that the MSLP has recognized approximately $164 million in
actual loan losses as of July 31, 2023.1 SIGPR requested that Treasury obtain MSLP loan
default information on its behalf from the Federal Reserve Board. However, Treasury
indicated that they are unable to obtain this information. Therefore, in order to obtain this
information, SIGPR issued subpoenas to 47 MSLP participating banks. The subpoenas
requested banks to provide records pertaining to all MSLP loans held by the bank that
met one or more of the following criteria:
• are or were in default;
• are or were at least 90 days delinquent in interest payments;
• are at least 90 days delinquent in providing quarterly or annual financial reports
required by loan covenants;
• are or were deemed “impaired” by the banks or by outside auditors or examiners;
or
• were made to a borrower for whom the bank has determined that there is a
reasonable basis to suspect that the borrower made a material misrepresentation
at any time during the loan process.
1 On September 11, 2023, the Federal Reserve Board provided an updated actual loan loss figure of $210
million as of August 31, 2023.
SIGPR-A-23-002-4
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Office of the Special Inspector General for Pandemic Recovery
This interim report provides a summary of the results of subpoena responses the Office
of Audits has received from the 47 banks.
Background
On April 9, 2020, the Board of Governors of the Federal Reserve System and Secretary
of the Treasury announced the establishment of the MSLP under the authority of Section
13(3) of the Federal Reserve Act, with approval of the Secretary. In total, 319 lender
banks participated in the MSLP issuing 1,830 loans to small and medium sized
businesses. The total value of the loans issued was approximately $17.5 billion. The
Federal Reserve Bank of Boston, which manages the program, set up a Special Purpose
Vehicle (SPV) to purchase 95 percent of participations in MSLP loans from lender banks.
These purchases were backed by a $16.6 billion equity investment by the Department of
the Treasury (Treasury). The lender banks retain the remaining 5 percent of the risk
associated with making a loan.
All MSLP borrowers are required to provide certain financial reporting to their lender either
quarterly or annually, depending on the report. Required reporting includes data on
borrower assets, liabilities, expenses, net income, and other financial data. Borrowers are
also required to provide a list of certifications and covenants, which includes a provision
that any material misrepresentation made by the borrower would result in its loan
becoming promptly due and payable.
Payment terms for MSLP loans are for five years. No payments are due in the first year.
After the first year of the loan, interest payments become due in accordance with the loan
agreement. No principal is paid in the first or second year of the loan. The loans are
amortized over the remaining term of the loan with 15 percent of principal due at the end
of year three, 15 percent due at the end of year four, and a balloon payment of 70 percent
at the end of year five.
All MSLP loans were issued between July 2020 and January 2021. Therefore, interest
payments are the only payments that have been due through the end of June 2023. The
initial 15 percent principal payments became due for the earliest MSLP loans in July 2023,
and will become due for all loans by January 2024.
Because of Treasury’s investment in the MSLP, SIGPR has sought to obtain detail behind
the nature of the program’s reported $164 million in actual loan losses as of July 31, 2023.
SIGPR asked banks to provide information on defaults, which can be either technical (i.e.
a breach of the loan covenants), or monetary (failure to make timely payment). With
interest payments now due, SIGPR requested data on interest payments that were over
90 days delinquent. SIGPR also requested information on impaired loans, which are loans
where the bank or another entity deems it probable that not all the loan principal and
interest will be collected. Finally, SIGPR asked banks about compliance with financial
reporting requirements, and whether banks were aware of any borrower material
misrepresentations during the loan process.
SIGPR-A-23-002-4
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Office of the Special Inspector General for Pandemic Recovery
Summary of Information Received to Date
In total, SIGPR issued subpoenas to 47 lender banks. SIGPR selected banks for
subpoena based on the number of MSLP loans issued, the dollar value of loans, and risk
factors developed internally by the SIGPR Office of Audits.
The 47 subpoenaed banks have issued a total of 1,094 MSLP loans, representing 60
percent of all MSLP loans. The 1,094 loans had a total loan value of over $10.2 billion,
representing 59 percent of the MSLP total loan value.
At this point, all 47 banks have responded to our subpoenas. The banks provided us with
information on whether any of their MSLP borrowers were in default; had delinquent
interest payments; had delinquent quarterly or annual financial reporting; had loans that
were deemed impaired; or who made material misrepresentations during the loan
process. We also obtained information on loans that were paid back in full.
The following tables represent the information we have collected from the 47 MSLP lender
banks:
Figure 1 – Summary of Responses Received Compared to All MSLP Loans
Figure 2 - Summary of 47 Subpoena Responses
Count
$ Loan Value
Defaults
74
$878.5 million
Delinquent Interest
Payments
25
$121.2 million
Delinquent Financial
Reporting
215
$1.1 billion
Impaired Loans
34
$228.9 million
Material
Misrepresentation
5
$66.9 million
Paid Off
283
$2.9 billion
SIGPR Access to Loan Loss Information
As mentioned earlier in the report, SIGPR requested details behind the Federal Reserve
Board’s reported $164 million in actual MSLP loan losses as of July 31, 2023. We
consider this amount to be significant considering that prior to June 30, 2023, no principal
payments were due. SIGPR also finds the differences between the information reported
Subpoena
Responses
MSLP
Universe
% of
MSLP Universe
Number of Banks
47
319
15%
Number of Loans
Issued
1,094
1,830
59.8%
Dollar Value of Loans
Issued
$10,224,112,602
$17,459,024,461
58.6%
SIGPR-A-23-002-4
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Office of the Special Inspector General for Pandemic Recovery
by the MSLP lender banks (including 34 impaired loans valued at $228.9 million) and the
$164 million actual loan loss amount to be noteworthy. Again, to accurately access
Treasury’s financial exposure from the MSLP declared loan losses, the SIGPR Office of
Audits discussed obtaining detailed loan loss information with the Federal Reserve Board
and the Federal Reserve Bank of Boston. We were informed that the Federal Reserve
Board and Federal Reserve Bank of Boston would be “inclined” to provide the records
that the Office of Audits requested with the “understanding that any confidential
information provided to SIGPR in connection with the audit will not be made public and
will be maintained within SIGPR’s audit function and not used for investigative purposes.”
SIGPR was not able to agree with the conditions of use set forth by the Federal Reserve
Board. Any such agreement, which potentially restricts the Office of Audits from sharing
certain information with investigators under all circumstances, would potentially violate
long established auditing standards. Therefore, we were not able to agree to the
requested restrictions on use. As a result, on September 5, 2023, the SIGPR Office of
Audits issued an IG subpoena to the Federal Reserve Bank of Boston to obtain the
documents that identify the Main Street Lending Program loans comprising the
approximately $164 million in actual loan losses as of July 31, 2023.
Initial MSLP Principal Payments Coming Due
As mentioned in the Background section of this report, the only MSLP borrower payments
due through June 2023 have been interest payments. Principal payments (15% of the
loan balance) become due at the end of Year 3 of each loan. The MSLP program granted
1,830 loans, from July 1, 2020 through January 5, 2021. Accordingly, the first principal
payments became due starting in July 2023. As of the end of August 2023, the first
principal payment became due on 173 of the 1,830 MSLP loans. Total principal payments
due by January 5, 2024 total approximately $1.6 billion.
Conclusion
As of August 4, 2023, all 47 banks responded to our subpoenas for MSLP loan
information. Those 47 banks issued 1,094 MSLP loans, at a value of over $10.2 billion.
That represents approximately 60 percent of the total number of MSLP loans issued, and
59 percent of the total dollar value.
SIGPR finds this loan loss information significant considering that principal payments are
just now becoming due on the earliest MSLP loans. Bank responses to our subpoenas
show that of the 1,094 loans issued by the 47 responding banks, $878.5 million in loans
are or were in default; $121.2 million in loans have or had delinquent interest payments;
215 borrowers are at least 90 days delinquent in providing required quarterly or annual
financial reports; $228.9 million in loans are or were deemed impaired by the bank or by
outside auditors or examiners; and 5 loans had borrowers where the bank determined
that the borrower made material misrepresentations during the loan process. However,
bank responses did show that 283 of the 1,094 MSLP loans, with a value of $2.9 billion,
have been paid in full by the borrower.
SIGPR-A-23-002-4
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Office of the Special Inspector General for Pandemic Recovery
The Federal Reserve Board reported that as of July 31, 2023, the MSLP has experienced
$164 million in actual loan losses. SIGPR finds this to be significant considering that prior
to June 30, 2023, no principal payments were due. SIGPR also finds the differences
between the information we received from the MSLP lender banks and the $164 million
actual loan loss amount declared by Federal Reserve Board to be noteworthy. In order to
get more insight into the $164 million MSLP loan loss figure, the SIGPR Office of Audits
issued a subpoena to the Federal Reserve Bank of Boston to obtain the documents that
identify the MSLP loans comprising those losses.
Because MSLP loan principal payments are just now becoming due, it can be expected
that the level of defaults, delinquent payments, and impaired loans will increase. In fact,
three days prior to the issuance of this report, the Federal Reserve Board updated their
actual loan loss figure to $210 million as of August 31, 2023. Treasury should coordinate
with the Federal Reserve to monitor this situation and take action to ensure its investment
in the MSLP is protected to the extent possible.
This interim report is informational in nature, and no response is required. We plan to
issue additional interim reports as we get more information.
Compliance Statement
In accordance with generally accepted government auditing standards (GAGAS), during
an audit, the auditors may provide interim reports to appropriate entity and oversight
officials. This communication is informational in nature and requires no further action
from management.
The related ongoing audit, when completed, will comply with GAGAS. The associated
performance audit report that will be issued in the future will incorporate the information
discussed in this report.
Audit Team
This audit is managed and conducted by the individuals listed below:
Kevin Gallagher
Audit Manager
Victor Martinez
Auditor-In-Charge
SIGPR-A-23-002-4
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Office of the Special Inspector General for Pandemic Recovery
Memorandum Distribution
Chief Program Officer – U.S. Department of the Treasury
Office of General Counsel – U.S. Department of the Treasury
Inspector General – Special Inspector General for Pandemic Recovery
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