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Interim Report No. 5: MSLP Losses and Fraud Investigation Link (SIGPR-A-23-002-5)
Record facts
| Court | Special Inspector General for Pandemic Recovery |
|---|---|
| Filed | 2023-11-07 |
Summary
Interim Report SIGPR-A-23-002-5, issued November 7, 2023 by the Office of the Special Inspector General for Pandemic Recovery to the Chief Program Officer of the U.S. Department of the Treasury, as part of its audit of Main Street Lending Program loan losses. It updates Interim Report Number A-23-002-4 of September 14, 2023 with loan loss data SIGPR obtained from the Federal Reserve on October 5, 2023. The report states that 43 MSLP loans totaling $164,115,308 were declared losses as of July 31, 2023, and that 21 of them, totaling $72,843,636, have borrowers under investigation for alleged fraud. It notes the Federal Reserve Board reported losses up to $257 million as of September 30, 2023, and that SIGPR issued a further subpoena on October 25, 2023. The report is informational and requires no response.
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SIGPR-A-23-002-5
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-23-002-5
November 7, 2023
Office of the Special Inspector General for
Pandemic Recovery
Office of Audits
SIGPR-A-23-002-5
1
Office of the Special Inspector General for Pandemic Recovery
November 7, 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-23-002-5
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-23-002-4, issued on September
14, 2023.
In our September 14, 2023 interim report, we detailed our attempts to get access to the
details behind MSLP loan loss data reported by the Federal Reserve Board. In a report
dated August 10, 2023, the Federal Reserve Board reported that the MSLP has
experienced approximately $164 million in actual loan losses as of July 31, 2023. On
September 5, 2023, SIGPR issued a subpoena to the Federal Reserve Bank of Boston
to obtain the documents that identify the MSLP loans comprising the $164 million. The
Federal Reserve responded to our subpoena on October 5, 2023. This interim report
provides summary data on the information we obtained on MSLP loan losses.
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.
SIGPR-A-23-002-5
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Office of the Special Inspector General for Pandemic Recovery
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 were the only payments 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.
Loan Loss Data and Correlation to Fraud
We received MSLP loan loss data from the Federal Reserve Board on October 5, 2023.
The data showed a listing of MSLP loans that the Federal Reserve Bank of Boston’s SPV
recognized as losses as of July 31, 2023. According to the data, 43 MSLP loans have
been declared losses by the SPV. These 43 loans amount to $164 million in charge-offs.
After reviewing this information, SIGPR issued three subpoenas to MSLP lenders to
obtain the loan files for selected MSLP loans.
We noted that among the 43 MSLP loans that the SPV recognized as losses, several are
under investigation for alleged fraud on the part of the borrower. The table below captures
statistics on the number of charged-off loans under criminal investigation:
Figure 1 – Loans Declared Losses Under Investigation
Number
Amount
Loans Charged-Off
43
$164,115,308
Loans Charged-Off Under Investigation
21
$72,843,636
As shown in Figure 1, 21 of the 43 MSLP loans that the SPV recognizes as losses are
under investigation for alleged fraud. Therefore, approximately 49 percent of the loans,
and 44 percent of the loan dollars declared a loss in the program so far have borrowers
under investigation for alleged fraud.
SIGPR-A-23-002-5
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Office of the Special Inspector General for Pandemic Recovery
Updates Show Increases in MSLP Loan Losses
The loan loss data covered in this report represents MSLP loans declared a loss by the
SPV as of July 31, 2023. However, the Federal Reserve Board’s latest update shows an
increase in the loss amount. According to its latest Periodic Report issued on October 10,
2023, the MSLP actual loan loss figure is up to $257 million as of September 30, 2023.
This represents a $93 million increase from the figure reported two months earlier.
As MSLP borrowers’ initial 15 percent principal payments continue to become due over
the next couple of months, it is reasonable to assume the losses will continue to increase
significantly. For example, one MSLP borrower recently contacted SIGPR after reading
our reporting on MSLP loan loss information to ask for guidance in working with their
lender. The borrower indicated that it will be unable to make its initial principal payment.
This borrower has an MSLP loan of over $10 million.
As of September 30, 2023, only 312 of the 1,830 loans in the MSLP universe have
reached the initial principal payment due date. Those 312 loans represent only
approximately 17 percent of the number of loans, and 19 percent of the money lent.
Between October 1, 2023 and January 5, 2024, the initial principal payments become due
on the remainder of the MSLP loans.
Conclusion
As of July 31, 2023, the Federal Reserve Bank of Boston’s SPV has recognized $164
million in actual loan losses. Those losses cover 43 MSLP loans. SIGPR finds it
noteworthy that of the 43 loans recognized by the SPV as losses, 21 loans are or were
part of an investigation for alleged fraud.
Initial principal payments still have not become due on the vast majority of MSLP loans,
and those initial principal payments will not have come due on all MSLP loans until
January 2024. Because of this, it is reasonable to conclude that the SPV’s amount of
recognized loan losses are likely to increase significantly in the coming months. For
example, the latest update from the Federal Reserve Board shows that recognized loan
losses have increased by $93 million in the two-month period between July 31, 2023 and
September 30, 2023, during a time when initial principal payments started to become due.
On October 25, 2023, SIGPR issued a subpoena to the Federal Reserve Bank of Boston
for the detail behind the additional $93 million in loans that have been declared a loss
since July 31, 2023. SIGPR will continue to monitor the MSLP loan portfolio and work
with the Federal Reserve Board and Federal Reserve Bank of Boston to remain up to
date on MSLP loan losses as they are recognized.
This interim report is informational in nature, and no response is required. We plan to
issue additional interim reports as we get more information.
SIGPR-A-23-002-5
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Office of the Special Inspector General for Pandemic Recovery
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-23-002-5
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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
Office of General Counsel – Special Inspector General for Pandemic Recovery
Federal Reserve Bank of Boston
Federal Reserve Board of GovernorsFile and source
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