FRB Boston Followed Its Processes for Monitoring the Credit Quality of Main Street Lending Program Loans

Summary

Federal Reserve Board Office of Inspector General Evaluation Report 2023-FMIC-B-017, FRB Boston Followed Its Processes for Monitoring the Credit Quality of Main Street Lending Program Loans, dated October 18, 2023, in a memorandum to Joe Lynch of the Federal Reserve Bank of Boston from Cynthia Gray. The report states that the MSLP special purpose vehicle team established processes for quarterly credit scoring and workout loan management and followed them for all loans in the sample, and that it contains no recommendations. It states that as of March 31, 2022, the MSLP had 1,601 loans outstanding totaling $14.8 billion, and that from March 2021 to June 2023 the loan loss allowance decreased from $2.7 billion to $1 billion with reported actual losses of $164 million.

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2023-FMIC-B-017
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Evaluation Report
2023-FMIC-B-017
October 18, 2023
Board of Governors of the Federal Reserve System
FRB Boston Followed Its Processes for
Monitoring the Credit Quality of Main
Street Lending Program Loans

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Executive Summary, 2023-FMIC-B-017, October 18, 2023
FRB Boston Followed Its Processes for Monitoring the Credit Quality
of Main Street Lending Program Loans
Finding
To monitor the credit quality of the Main Street Lending Program
(MSLP) loans, the MSLP special purpose vehicle (SPV) team established
processes for quarterly credit scoring, including monitoring payment
performance, as well as processes for workout loan management. The
SPV followed its processes for quarterly credit scoring and workout loan
management for all of the loans in our sample.
Recommendations
Our report does not contain recommendations. The Federal Reserve
Bank of Boston (FRB Boston) chose not to provide an official response
but concurred with the contents of the report.
Purpose
The objective of our evaluation was to
assess the MSLP’s processes for
monitoring credit quality, including
execution of the credit scoring
process and management of workout
loans. As of March 31, 2022, the
MSLP had 1,601 loans outstanding,
totaling $14.8 billion. To assess the
quarterly credit scoring process, we
tested a judgmental sample of 30 of
the 427 loans scored in the quarter
ending March 31, 2022, and tested
the MSLP’s continuous monitoring of
payment performance for all 8 loans
in the MSLP portfolio that were 45 or
more days delinquent as of March 31,
2022. Finally, we tested all 16 loans in
the MSLP portfolio that proceeded
through the workout loan process as
of March 31, 2022.
Background
The COVID-19 pandemic disrupted
economic activity in the United
States. To support lending to
businesses and nonprofits, the Board
authorized the MSLP using
section 13(3) of the Federal Reserve
Act, with prior approval of the
secretary of the U.S. Department of
the Treasury. The MSLP is
administered by FRB Boston, which
established an SPV to manage the
MSLP loan portfolio.

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Recommendations, 2023-FMIC-B-017, October 18, 2023
FRB Boston Followed Its Processes for Monitoring the Credit Quality
of Main Street Lending Program Loans

Finding: The SPV Followed Its Established Processes for Monitoring Credit Quality of MSLP Loans
Number
Recommendation
Responsible office

No recommendations.

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MEMORANDUM
DATE:
October 18, 2023

TO:
Joe Lynch
Vice President and Main Street Operations Director
Federal Reserve Bank of Boston

FROM:
Cynthia Gray
Deputy Associate Inspector General for Audits and Evaluations

SUBJECT:
OIG Report 2023-FMIC-B-017: FRB Boston Followed Its Processes for Monitoring the
Credit Quality of Main Street Lending Program Loans

We have completed our report on the subject evaluation. We conducted this evaluation to assess the
Main Street Lending Program’s processes for monitoring credit quality, including execution of the credit
scoring process and management of workout loans.
We provided you with a draft of our report for review and comment. An official response was not
required because our report did not contain recommendations; therefore, Federal Reserve Bank of
Boston (FRB Boston) officials verbally concurred with the report and thanked our office for the
collaborative effort.
We appreciate the cooperation that we received from FRB Boston and the Board of Governors of the
Federal Reserve System during our evaluation. Please contact me if you would like to discuss this report
or any related issues.
cc:
Kenneth Montgomery

Matthew J. Eichner

Mark E. Van Der Weide

Andreas Lehnert

Jackie Palladino

Sandra Costa

Mona Johnson

Rut Parrish

Jeffrey Walker

Casey Clark

Jason Hinkle

Jon Colvin
Alicia Grasfeder

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Contents
Introduction
6
Objective
6
Background
6
MSLP Overview
6
MSLP Key Stakeholders
7
Credit Monitoring Processes
8
MSLP Loan Portfolio Performance
8
Finding: The SPV Followed Its Established Processes for Monitoring Credit Quality of
MSLP Loans
9
The SPV Followed Its Established Processes for Quarterly Credit Scoring
9
The SPV Followed Its Established Process for Managing Workout Loans
10
Conclusion
11
Management Response
12
Appendix A: Scope and Methodology
13
Abbreviations
14

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Introduction
Objective
The COVID-19 pandemic disrupted economic activity in the United States, which heightened the need for
businesses to obtain credit to manage cash flows and sustain operations until economic conditions
normalized. To support lending to businesses and nonprofits, under section 13(3) of the Federal Reserve
Act and with prior approval by the secretary of the U.S. Department of the Treasury, the Board of
Governors of the Federal Reserve System authorized the Main Street Lending Program (MSLP). The
Coronavirus Aid, Relief, and Economic Security (CARES) Act also authorized the Treasury secretary to
make loans to, loan guarantees to, and other investments in the MSLP and other emergency lending
facilities authorized by the Board.1 The Board authorized the Federal Reserve Bank of Boston (FRB
Boston) to administer the MSLP, which includes conducting credit monitoring activities to measure and
manage the MSLP loan portfolio.
The objective of this evaluation was to assess the MSLP’s processes for monitoring credit quality,
including execution of the credit scoring process and management of workout loans. Our scope focused
on loan portfolio performance as of March 31, 2022, when the majority of initial interest payments were
due but principal payments were not yet due. The majority of loans had initial interest payments due
starting between December 2021 and January 2022 and principal payments due a year later. As of
March 31, 2022, the MSLP had 1,601 loans outstanding, totaling $14.8 billion.2
To assess the design of the MSLP’s processes for monitoring credit quality, we reviewed MSLP documents
and conducted interviews with relevant officials. To assess compliance with the quarterly credit scoring
process, we tested key controls for a judgmental sample of 30 of the 427 loans scored for the quarter
ended March 31, 2022, and we tested the MSLP’s continuous monitoring of payment performance for all
8 loans in the MSLP portfolio that had payments past due for 45 or more days as of March 31, 2022. To
assess the workout loan management process, we tested key controls for all 16 of the loans that
proceeded through this process as of March 31, 2022. Details on our scope and methodology are in
appendix A.
Background
MSLP Overview
Section 13(3) of the Federal Reserve Act permits the Board of Governors, in “unusual and exigent
circumstances,” to authorize the Federal Reserve Banks to extend credit to participants in any program or
facility with broad-based eligibility, with the prior approval of the secretary of the U.S. Department of the
Treasury. In addition, the CARES Act authorized, among other things, the Board’s ability to extend

1 The Consolidated Appropriations Act, 2021 (Pub. L. No. 116–260) prohibited the Board and the Federal Reserve Banks from
reestablishing any emergency lending programs that received CARES Act funding.
2 As of July 31, 2023, the MSLP had $9.3 billion in loans outstanding.

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liquidity to support lending to businesses, as well as Treasury’s investment in certain emergency lending
facilities established by the Board.
The MSLP was designed to help credit flow to small and medium-sized for-profit businesses and nonprofit
organizations that were in sound financial condition before the onset of the COVID-19 pandemic but
needed loans to help maintain their operations until they recovered from, or adapted to, the effects of
the pandemic. The MSLP comprises the following five emergency lending facilities: the Main Street
Expanded Loan Facility, the Main Street New Loan Facility, the Main Street Priority Loan Facility, the
Nonprofit Organization Expanded Loan Facility, and the Nonprofit Organization New Loan Facility.
The MSLP enabled lenders to issue loans to eligible borrowers. The MSLP purchased a 95 percent
participation in eligible loans, and the lender retained a 5 percent interest in the loan’s value, thereby
creating shared credit risk. Lenders—who have a direct relationship with MSLP borrowers—also act as
loan servicers on behalf of the program.
MSLP Key Stakeholders
FRB Boston created a special purpose vehicle (SPV)—a separate legal entity—to manage the MSLP’s loan
portfolio.3 The SPV team works with FRB Boston staff and vendors to conduct ongoing loan portfolio
management activities. Key stakeholders in the credit monitoring process include the following:
•
Credit administrator—The SPV contracted with an external vendor to assist with quarterly credit
scoring of the loan portfolio. The credit administrator is responsible for executing the credit
scores calculation on a quarterly or annual basis and providing the credit scores output to the SPV
team for review.
•
Workout advisor—The SPV contracted with an external vendor for problem loan administration,
such as proposing disposition plans, risk ratings, impairment analyses, and charge-off
recommendations, which are provided to the SPV team for review.
•
Oversight committees—FRB Boston established two committees that oversee MSLP credit
monitoring activities: the Executive Oversight Committee (EOC) and the Credit Subcommittee.
The EOC oversees MSLP strategic policy and operational matters and makes key decisions to
support the MSLP’s implementation and ongoing operations. The EOC comprises 13 voting
members who are leaders from various FRB Boston divisions and offices, such as the Office of the
President; the Legal Department; Corporate Strategy and Risk; and Supervision, Regulation, and
Credit. The EOC also includes nonvoting members, such as representatives from FRB Boston’s
General Auditor and the Board’s Division of Reserve Bank Operations and Payment Systems. The
Credit Subcommittee, which is composed of EOC members, oversees and advises on a wide range
of issues related to the extension and management of credit, including credit monitoring, vendor
engagement, and management’s response to audit reports pertaining to credit-related issues.
The Credit Subcommittee reviews and endorses SPV-recommended credit quality monitoring
decisions, including the quarterly credit scores and workout recommendations for the MSLP loan
portfolio. The EOC reviews and approves these credit monitoring decisions.

3 An SPV is formed by an organization as a separate company with its own legal identity, assets, and liabilities. Typically, SPVs are
used to isolate financial risks from the parent organization.

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Credit Monitoring Processes
The SPV team established the following credit quality monitoring processes for the MSLP loan portfolio:
•
Quarterly credit scoring—On a quarterly basis, the SPV team works with the credit administrator
to assign credit ratings to a subset of individual loan participations in the MSLP loan portfolio
based on the principal balance and availability of updated financial statements.4 The credit
administrator uses a statistical model—which was reviewed by FRB Boston and is aligned with
commonly used commercial credit scoring practices—to calculate and provide a credit score to
the SPV team for each individual loan participation scored that quarter. The SPV team reviews the
credit scores and downgrades credit scores for loans that (1) are 60 days or more delinquent or
(2) have stale financial statements. The SPV then obtains approvals from the oversight
committees. Additionally, to support the quarterly credit scoring process, the SPV team
continuously monitors portfolio payment performance to identify delinquent loans and follows
up with lenders on loan participations with payments that are 45 days or more past due.
•
Workout loan management—The SPV team works with lenders to renegotiate, restructure, or
modify the terms of the MSLP loan participation. The MSLP workout process is initiated when a
lender requests that the SPV team modify loan terms because of a credit risk event for an
individual borrower, such as payment delinquency, bankruptcy, or business closure. Requests for
modifying MSLP loan participation terms can be managed by either the workout advisor or by the
SPV team with the help of lenders. The oversight committees approve the workout terms.
MSLP Loan Portfolio Performance
The Board reports monthly on the repayment history of the MSLP loan portfolio, including actual loan
losses and the estimated loan loss allowance.5 The loan loss allowance is driven by the credit quality of
the loans, which was initially assessed based on the availability of borrowers’ financial statements
because interest payments were deferred for a year.6 As payments became due, the SPV began using
both the payment history and borrowers’ financial statements to assess the credit quality of each loan.
According to an SPV employee, this update to the process contributed to the decrease in loan loss
allowance and overall portfolio improvement.
From March 2021—the first quarter after loan purchases ended—to June 2023, the loan loss allowance
decreased from $2.7 billion to $1 billion, and the MSLP reported actual losses of $164 million. The Board
does not expect the Federal Reserve System to incur any losses.

4 The credit administrator scores loans with a principal balance under $5 million annually. Any loan without updated financial
statements maintains the previously assigned credit score until a lender provides updated financial statements for the respective
loan or the SPV requests that the credit administrator reassesses based on additional information.
5 Loan loss allowances are used to estimate credit losses within a loan portfolio and are representative of the current amount of
loans that are likely to not be collected based on current information about the loan portfolio.
6 The MSLP purchased loan participations between July 2020 and January 2021, with 64 percent of all MSLP loan participations
purchased between December 1, 2020, and January 8, 2021. MSLP loan participations have a 5-year maturity in which interest
payments are deferred for the first year and principal payments are deferred for the first 2 years. Therefore, the majority of loans
had their first interest payment due between December 2021 and January 2022.

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Finding: The SPV Followed Its Established
Processes for Monitoring Credit Quality of
MSLP Loans
To monitor the credit quality of MSLP loans, the SPV team established processes for quarterly credit
scoring, including monitoring payment performance, as well as processes for workout loan management.
The SPV followed its processes for (1) quarterly credit scoring for the 30 loans in our sample,
including continuous monitoring of all 8 loans in our scope that were delinquent 45 days or more, and
(2) managing workouts for all 16 loans that proceeded through the workout process as of March 31,
2022.
The SPV Followed Its Established Processes for
Quarterly Credit Scoring
To monitor the credit quality of MSLP loans, the SPV team established a quarterly credit scoring process
in its Main Street Lending Program Quarterly Credit Scoring Procedure. For all 30 loans in our sample, the
SPV followed its quarterly credit scoring process as outlined in the procedure document. Further, to
support the quarterly credit scoring process, the SPV team established a process to continuously monitor
portfolio payment performance in the Main Street Lending Program Portfolio Monitoring Process
Framework. For all 8 loans in our scope that had payment delinquencies of 45 days or more, the SPV
team followed up with lenders as required. Table 1 provides an overview of the quarterly credit scoring
requirements and our results.

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Table 1. Overview of the MSLP’s Compliance With the Quarterly Credit Scoring Processes
Process component
Completed
The SPV team reviews the credit administrator’s proposed loan credit scores.
✓
The SPV team downgrades loans with a payment delinquency of 60 days or more.
✓
The SPV team downgrades loans with financial statements 13 months or older.
✓
The EOC and Credit Subcommittee review, provide input on, and approve loan portfolio credit
scores.
✓
The credit administrator uploads the final credit scores into the MSLP information system after
the SPV team notifies the credit administrator that the credit scores have been approved by
the oversight committees.
✓
The SPV team follows up with lenders on loan participations with payments that are 45 days or
more delinquent.
✓
Source: OIG analysis of MSLP-provided documents.

The SPV Followed Its Established Process for
Managing Workout Loans
To monitor the credit quality of MSLP loans, the SPV established a process for managing workout loans in
the Main Street Lending Program Portfolio Monitoring Process Framework. For all 16 loans that
proceeded through the workout process as of March 31, 2022, the SPV team followed its established
workout process. Table 2 provides an overview of the workout process requirements we tested and our
results.

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Table 2. Overview of the MSLP’s Compliance With the Workout Loan Process Components
Process component
Completed
Workout advisor–managed loans

For workout activities that will cost more than $50,000 or 50 percent of the loan balance,
the SPV team obtains approval to engage the workout advisor from the oversight
committees through either email or votes during a meeting.
✓a
The workout advisor prepares an assessment memorandum on the workout loan using
information such as borrower financial information, collateral and guarantor information,
and background on the credit risk event.
✓

The workout advisor submits the assessment memorandum, along with recommended next
steps (such as charging off the loan balance or modifying loan terms), to the SPV team for
review.
✓
SPV-managed workout loans

A lender requests that the SPV team modify loan terms because of a credit event.
✓
The SPV team reviews the lender’s request for a workout and recommends the next steps to
the oversight committees.
✓
Oversight of all workout loans

The SPV team provides the oversight committees with a workout analysis and recommends
workout terms.
 ✓
The oversight committees review the recommended workout terms, provide input, and
approve the workout terms.
 ✓
Source: OIG analysis of MSLP documents.
a The SPV team assesses the need to use the workout advisor based on anticipated complexity, cost of workout advisory services,
and the subject-matter expertise required.
Conclusion
Following established policies and procedures provides the SPV team with assurance that their processes
for monitoring credit quality are operating as intended. Further, having established policies and
procedures protects the SPV against operational risks related to losing institutional knowledge if key
personnel leave the organization. Based our review, we found that the SPV team established and
followed its process for monitoring credit quality, including execution of the credit scoring process and
management of workout loans. As a result, we do not have a recommendation.

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Management Response
Since our report does not contain recommendations, an official response was not required. FRB Boston
management chose not to respond but concurred with the contents of the report and thanked our office
for the collaborative effort.

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Appendix A: Scope and Methodology
Our objective was to assess the MSLP’s processes for monitoring credit quality, including execution of the
credit scoring process and management of workout loans. Our scope focused on the loan portfolio
performance as of March 31, 2022, when the majority of initial interest payments were due but principal
payments were not yet due; the majority of loans had initial interest payments starting between
December 2021 and January 2022 and principal payments due a year later. As of March 31, 2022, the
MSLP had 1,601 loans outstanding, totaling $14.8 billion.
To assess the design of the MSLP’s processes for monitoring credit quality, we reviewed applicable laws,
policies, and guidance. We also conducted interviews with relevant officials and employees from the SPV
team as well as FRB Boston’s Legal Department.
To assess the quarterly credit scoring process, we judgmentally selected a sample of 30 of the 427 loans
scored in the quarter ending March 31, 2022. To judgmentally select our sample, we selected loans in
each of the three different categories that required review by the SPV team and approval of credit scores
by the oversight committees—loans less than $5 million, loans between $5 million and $15 million, and
loans more than $15 million—and had corresponding credit scores that indicated a heightened risk of
default. We also tested the SPV’s continuous monitoring of payment performance for all 8 loans in the
MSLP portfolio that were 45 or more days delinquent as of March 31, 2022. Finally, to assess the workout
loan process, we tested all 16 loans in the MSLP portfolio that proceeded through the workout loan
process as of March 31, 2022.
The sample of loans to test the quarterly credit scoring process was a nonstatistical sample; therefore, we
are unable to project the results to the population of the MSLP’s quarterly credit scores. We tested
100 percent of the population of loans that were subject to the continuous monitoring of portfolio
payment performance and the workout loan process for the testing period; therefore, we can conclude
on the overall continuous monitoring of portfolio payment performance and workout loans population.
We assessed the SPV’s monitoring of credit quality processes administered by FRB Boston because the
Board authorized the lending facilities and reports to Congress and the public in accordance with
sections 11(s) and 13(3) of the Federal Reserve Act as well as the CARES Act. Moreover, the Board
authorized FRB Boston to establish and operate the MSLP, and as such, the lending facilities, including the
MSLP, are subject to the limitations, restrictions, and regulations of the Board.
We conducted our work for this evaluation from November 2021 to September 2023. Shortly after the
end of our scoping phase, in July 2022, we split the original evaluation into two phases. Phase I focused
on the loan participation purchase process and was issued separately.7 Phase II focuses on the credit
monitoring process for the loan portfolio and is the subject of this report. Phase II was suspended
between December 2022 and March 2023. We conducted this evaluation in accordance with the Council
of the Inspectors General on Integrity and Efficiency’s Quality Standards for Inspection and Evaluation.

7 Office of Inspector General, The Board and FRB Boston Generally Followed Their Process for Purchasing MSLP Loan
Participations but Can Formally Document Some Key Processes, OIG Report 2023-FMIC-B-011, July 17, 2023.

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Abbreviations
CARES Act
Coronavirus Aid, Relief, and Economic Security Act
EOC
Executive Oversight Committee
FRB Boston
Federal Reserve Bank of Boston
MSLP
Main Street Lending Program
SPV
special purpose vehicle

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Report Contributors
Alain Habimana, Project Lead
John Galvin, Senior Auditor
Michael Rivera, Senior Auditor
Olaiya Adeyemi, Auditor
Darren Rector, Auditor
Jennifer Venzor, Auditor
Neha Davaluri, Audit Intern
Megan Taylor, OIG Manager, Financial Management and Internal Controls
Jackie Ogle, Senior OIG Manager for Financial Management and Internal Controls
Cynthia Gray, Deputy Associate Inspector General for Audits and Evaluations
Michael VanHuysen, Associate Inspector General for Audits and Evaluations
Contact Information
General
Office of Inspector General
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Mail Center I-2322
Washington, DC 20551
Phone: 202-973-5000
Fax: 202-973-5044
Media and Congressional
OIG.Media@frb.gov
OIG Hotline

Hotline
Report fraud, waste, and abuse.
Those suspecting possible
wrongdoing may contact the
OIG Hotline by mail,
web form, phone, or fax.
OIG Hotline
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Mail Center I-2322
Washington, DC 20551
Phone: 800-827-3340
Fax: 202-973-5044

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