The Board and FRB Boston Generally Followed Their Process for Purchasing MSLP Loan Participations
Summary
Evaluation Report 2023-FMIC-B-011, July 17, 2023, from the Office of Inspector General for the Board of Governors of the Federal Reserve System, titled The Board and FRB Boston Generally Followed Their Process for Purchasing MSLP Loan Participations but Can Formally Document Some Key Processes. The OIG reports that all 35 loans in its sample had complete and properly executed lender-submitted loan documents, and that the SPV team performed required reviews for 33 of the 35 loans. It found that the Board's Legal Division and the Federal Reserve Bank of Boston's Legal Department have not documented the process for addressing potentially ineligible loans, and makes one recommendation to document it. It notes the program's $1.0 billion loan loss allowance and actual loan losses of $136 million. The Board and FRB Boston concur with the recommendation.
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Evaluation Report
2023-FMIC-B-011
July 17, 2023
Board of Governors of the Federal Reserve System
The Board and FRB Boston Generally
Followed Their Process for Purchasing
MSLP Loan Participations but Can Formally
Document Some Key Processes
2023-FMIC-B-011 1 of 24
Executive Summary, 2023-FMIC-B-011, July 17, 2023
The Board and FRB Boston Generally Followed Their Process for
Purchasing MSLP Loan Participations but Can Formally Document
Some Key Processes
Findings Purpose
All 35 of the loans in our sample had complete and properly executed The objective of our evaluation was to
lender-submitted loan documents, as required by the Main Street assess the design and operating
Lending Program (MSLP), and the special purpose vehicle (SPV) team effectiveness of the Board and FRB
performed its required reviews for 33 of the 35 loans. However, the Boston’s process for purchasing MSLP
loan participations. The scope of our
credit administrator did not conduct the required prepurchase reviews
evaluation focused on MSLP loan
for 2 loans to confirm that accounting data matched loan participations purchased from
documentation because the SPV did not define its documentation December 1, 2020, to January 8,
expectations. Rather, the credit administrator reviewed some 2021, because 64 percent of all MSLP
accounting data during the postpurchase review of loan documents for loan participations were purchased
these two loans. Obtaining and reviewing loan documentation ensures during this period. We focused on the
that the loan participations conform to program expectations. three for-profit MSLP lending
facilities: the Main Street Expanded
In addition, the Board of Governors of the Federal Reserve System’s Loan Facility, the Main Street New
Loan Facility, and the Main Street
Legal Division and the Federal Reserve Bank of Boston’s (FRB Boston)
Priority Loan Facility. We excluded the
Legal Department have not documented the general process for two nonprofit MSLP lending facilities
addressing potentially ineligible loans in a manner consistent with because one of these facilities did not
internal control standards. According to a Board official, the process is extend any loans and the other
not formally documented because the current process is well extended loans that accounted for
established. Documenting a framework for reviewing potentially less than 1 percent of the total
ineligible loans can preserve institutional knowledge and help ensure number of loans made.
consistency.
Background
Finally, we identified a matter for management consideration. The COVID-19 pandemic disrupted
Specifically, the SPV has not formally documented its processes to economic activity in the United
review loan participation purchases. The program’s $1.0 billion loan loss States. To support lending to
allowance, coupled with actual loan losses of $136 million as of April 30, businesses and nonprofits, the Board
2023, could result in public scrutiny of loan participation purchases. authorized the MSLP using
Documenting the loan purchasing process, including the successes and section 13(3) of the Federal Reserve
Act, with prior approval of the
challenges associated with each process, can help the SPV retain
U.S. Department of the Treasury’s
institutional knowledge in MSLP loan participation purchases, thereby secretary. The MSLP is administered
reducing its reputational risk. by FRB Boston, which established an
SPV to purchase loan participations
Recommendation from eligible lenders.
Our report contains a recommendation designed to help the Board and
FRB Boston ensure consistency in their process for determining whether
loans were purchased based on inaccurate borrower certifications. In
response to our draft report, the Board and FRB Boston concur with our
recommendation and outline actions to address the recommendation.
We will follow up to ensure that the recommendation is fully addressed.
2023-FMIC-B-011 2 of 24
Recommendations, 2023-FMIC-B-011, July 17, 2023
The Board and FRB Boston Generally Followed Their Process for
Purchasing MSLP Loan Participations but Can Formally Document
Some Key Processes
Finding 1: The SPV Has Complete Loan Documentation and Generally Followed Its Review Processes
Number Recommendation Responsible office
No recommendations.
Finding 2: The Board and FRB Boston Established but Have Not Documented Their Process for Addressing
Potentially Ineligible MSLP Loans
Number Recommendation Responsible office
1 Document a framework outlining the general process for identifying, The Board’s Legal Division
determining, and pursuing action on ineligible loans as well as the key roles and FRB Boston’s
and responsibilities for addressing potentially ineligible MSLP loans. Legal Department
2023-FMIC-B-011 3 of 24
MEMORANDUM
DATE: July 17, 2023
TO: Distribution List
FROM: Cynthia Gray
Deputy Associate Inspector General for Audits and Evaluations
SUBJECT: OIG Report 2023-FMIC-B-011: The Board and FRB Boston Generally Followed Their
Process for Purchasing MSLP Loan Participations but Can Formally Document Some Key
Processes
We have completed our report on the subject evaluation. We conducted this evaluation to assess the
design and operating effectiveness of the Board of Governors of the Federal Reserve System and the
Federal Reserve Bank of Boston’s (FRB Boston) process for purchasing Main Street Lending Program loan
participations.
We provided you with a draft of our report for review and comment. In your response, you concur with
our recommendation and outline actions to address our recommendation. We have included your
response as appendix B to our report.
We appreciate the cooperation that we received from the Board and FRB Boston during our evaluation.
Please contact me if you would like to discuss this report or any related issues.
cc: Kenneth Montgomery
Matthew J. Eichner
Andreas Lehnert
Jason Gonzalez
Bernard Kim
Melissa Ku
Jeff Walker
Casey Clark
Jason Hinkle
Steffanie Brady
Erin Boland
Rut Parrish
Jon Colvin
Alicia Grasfeder
2023-FMIC-B-011 4 of 24
Ricardo A. Aguilera
Cheryl Patterson
Distribution:
Mark E. Van Der Weide, General Counsel, Board
Steven Wright, Senior Vice President and General Counsel, FRB Boston
Joe Lynch, Vice President and Main Street Operations Director, FRB Boston
2023-FMIC-B-011 5 of 24
Contents
Introduction 7
Objective 7
Background 7
MSLP Overview 7
MSLP Key Stakeholders 9
MSLP Loan Participation Purchasing Process 10
MSLP Timeline 10
Finding 1: The SPV Has Complete Loan Documentation and Generally Followed Its
Review Processes 12
The SPV Team Generally Conducted the Required Reviews 12
Conclusion 14
Management Response 14
Finding 2: The Board and FRB Boston Established but Have Not Documented Their
Process for Addressing Potentially Ineligible MSLP Loans 15
The Board and FRB Boston Have Established a General Process for Addressing Potentially
Ineligible MSLP Loans 15
Recommendation 16
Management Response 17
OIG Comment 17
Matter for Management Consideration: The SPV Can Document Certain Elements of
the Loan Purchasing Process to Help Retain Institutional Knowledge and Protect
Against Reputational Risks 18
Appendix A: Scope and Methodology 20
Appendix B: Management Response 21
Abbreviations 23
2023-FMIC-B-011 6 of 24
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 U.S. Department of the Treasury’s secretary, 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, loan
guarantees to, and other investments in the MSLP and other emergency lending facilities authorized by
the Board.1 The MSLP enabled lenders to issue MSLP loans to eligible borrowers. The MSLP purchased a
95 percent participation in eligible MSLP loans, and the lender retained the remaining 5 percent of the
loan’s value, allowing the risk of the loan to be shared.
The objective of this evaluation was to assess the design and operating effectiveness of the Board and the
Federal Reserve Bank of Boston’s (FRB Boston) process for purchasing MSLP loan participations.2 The
scope of our evaluation focused on loan participations purchased through the three for-profit MSLP
lending facilities from December 1, 2020, to January 8, 2021.3 To assess the design of the Board and FRB
Boston’s process for purchasing MSLP loan participations, we reviewed Board and FRB Boston documents
and conducted interviews with relevant officials. To assess the operating effectiveness of the loan
participation purchasing process, we judgmentally selected 35 loan participations and assessed their
compliance with the loan participation purchasing process. 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 U.S. Department of the Treasury’s
secretary. 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 Loan participation means that some or all of the interest in a loan is shared or sold to other lenders. Loan participations allow
banks to enhance their liquidity, diversify their loan portfolio, and serve the credit needs of borrowers.
3 We did not include the two nonprofit MSLP lending facilities in the scope of our evaluation because one did not extend any
loans and the other accounted for less than 1 percent of the total number of loans made and dollars loaned by the MSLP.
Further, we focused on loan participations purchased between December 1, 2020, and January 8, 2021, because of the surge in
loan submissions during this time frame that accounted for 64 percent of all MSLP loan participations purchased.
2023-FMIC-B-011 7 of 24
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 Board authorized FRB Boston to administer the MSLP. FRB Boston created a special purpose vehicle
(SPV)—a separate legal entity—to purchase loan participations from eligible lenders across the United
States.4 The program offered 5-year loans with deferred principal payments for 2 years and deferred
interest payments for 1 year to assist those experiencing temporary cash flow interruptions. Lenders
were allowed to rely on borrower certifications that they were eligible for the loan, such as having a
significant amount of their operations based in the United States. However, lenders were required to
verify certain items during their underwriting practices. Specifically, lenders were required to
• conduct due inquiry with respect to borrower certifications to determine that the borrower is a
business and was established before March 13, 2020, as well as to review the borrower’s lien
certifications and covenants5
• use customary underwriting practices, such as reviewing borrower financial records, to assess
credit worthiness
• certify that the loan was subject to certain terms and conditions (for example, that the loan has
not been allowed to be subordinated to other debt)
Once an eligible lender issued an MSLP loan to an eligible borrower, the lender submitted loan
participation information to the SPV for purchase, including the following six completed documents:6
• Participation agreement: The agreement under which the SPV purchases a 95 percent
participation in an eligible loan.
• Borrower certifications and covenants: The borrower certifications stating eligibility to obtain the
loan participation and agreeing to covenants related to section 13(3) of the Federal Reserve Act,
the CARES Act, the Board’s Regulation A, and other MSLP term sheets.
4 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.
5 Due inquiry sets out the duty of care between contracting parties by requiring that lenders conduct reasonable diligence efforts.
6 An eligible lender is a U.S. federally insured depository institution, a U.S. branch or agency of a foreign bank, a U.S. bank holding
company, a U.S. savings and loan holding company, a U.S. intermediate holding company of a foreign banking organization, or a
U.S. subsidiary of any of the foregoing. An eligible borrower is a business that (1) was established before March 13, 2020; (2) is
not an ineligible business; (3) has either 15,000 employees or fewer, or had 2019 annual revenues of $5 billion or less; (4) was
created or organized in the United States or under the laws of the United States with significant operations in and a majority of
its employees based in the United States; (5) does not participate in the Primary Market Corporate Credit Facility or have existing
loans in another MSLP facility; and (6) has not received specific support pursuant to subtitle A of title IV of the CARES Act.
2023-FMIC-B-011 8 of 24
• Lender transaction–specific certifications and covenants: The eligible lender certifications in
which the borrower confirms that eligibility requirements have been met and agrees to
covenants based on the relevant MSLP term sheets.
• Assignment executed in blank: Advance consent by the eligible lender and the eligible borrower
that allows the SPV to assign the loan or transfer loan rights. This assignment is intended for the
SPV to elevate its participation to be in privity with the borrower in limited circumstances, such as
when a borrower has become the subject of bankruptcy
• Co-lender agreement: Advance agreement that takes effect when the SPV, in limited
circumstances, elevates its participation in the loan to be on par with the initial lender or sells its
interest to another lender, to allow for direct enforcement of the terms of the loan.
• Servicing agreement: The agreement establishing that the SPV will pay the eligible lender an
annual servicing fee for reporting on the borrower’s financial information, assets, and liabilities.
Once the loan was purchased by the MSLP, the SPV and the lender shared a mutual interest in its
repayment. Specifically, the SPV purchased a 95 percent participation in MSLP loans, and the lender
retained the remaining 5 percent participation.
MSLP Key Stakeholders
The SPV leveraged FRB Boston staff and vendors to administer the MSLP. Key stakeholders in the loan
participation purchase process included the following:
• The credit administrator: The SPV contracted with an external vendor to assist with asset
purchase intake services for the MSLP. The credit administrator’s asset purchase intake
responsibilities included (1) registering lenders, (2) reviewing and confirming that all MSLP-
required documents had been obtained from lenders and were appropriately completed, and
(3) validating the accuracy of accounting data.
• Legal stakeholders: The SPV used a combination of internal legal resources from FRB Boston, the
Federal Reserve Bank of New York, and the Board, as well as external legal vendors, to support
the purchase of loan participations. The legal stakeholders ensured that the legal documentation
of each loan participation was complete and met MSLP requirements. Further, the Board’s Legal
Division assisted FRB Boston’s Legal Department to determine whether MSLP loans met certain
requirements at the time of purchase.
• The MSLP Executive Oversight Committee (EOC): FRB Boston established the EOC to oversee
MSLP strategic policy and operational matters and to make key decisions to support the MSLP’s
implementation and ongoing operations. The EOC comprises 13 voting members who are leaders
from a variety of 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.
2023-FMIC-B-011 9 of 24
MSLP Loan Participation Purchasing Process
From July 6, 2020, through December 14, 2020, the SPV accepted new loan participation funding
requests. The SPV initiated the MSLP with one standard loan participation purchase review process for all
loans, but by December 2020 it had created two additional processes to help it manage the high volume
of loan applications. To review the loan participation requests, the SPV team used the following separate
review processes:
• Standard review process: The SPV established this process at the outset of the program for loan
participation requests received from July 2020 through mid-December 2020. The standard review
process required that the credit administrator, the SPV team, and legal stakeholders review the
loan file in its entirety before the SPV purchased the loan participation.
• Expedited review process: In August 2020, the SPV implemented the expedited review process to
allow the SPV to focus on (1) first-time submissions, (2) lenders that required multiple
resubmissions on prior loan participation purchases, and (3) more-complex transactions. Lenders
that had requested less than $5 million and successfully passed the required legal documentation
review a minimum of three times without document resubmission requests qualified for the
expedited review process. Only two lenders qualified for the expedited review process. The
expedited process deferred all legal reviews of the loan documentation until postpurchase.
• Streamlined review process: In December 2020, the SPV implemented the streamlined review
process to meet the increased demand for MSLP loans associated with the November 2020
Treasury announcement that the program would terminate at the end of the year. The SPV team
determined eligibility for the streamlined review process based on the dollar amount requested
and the backlog of applications for loan participation purchases. The streamlined review process
was initially available only for loans participation requests under $5 million but was expanded to
loan participation requests of up to $50 million. The streamlined review process deferred some
legal reviews of the required loan documentation and the accounting review until postpurchase.
MSLP Timeline
The Board and FRB Boston established the MSLP, developed terms of the program, and established
operating procedures in a short time. Specifically, the Board established the MSLP in April 2020. By
July 2020, the MSLP began purchasing loan participations. By the time the MSLP closed in January 2021,
three different purchase processes had been established and approximately $17.5 billion in loans had
been issued (see figure).
2023-FMIC-B-011 10 of 24
Figure. MSLP Timeline
Source: OIG analysis of MSLP documents and interviews with Board, FRB Boston, and SPV officials.
2023-FMIC-B-011 11 of 24
Finding 1: The SPV Has Complete Loan
Documentation and Generally Followed Its
Review Processes
All 35 of the loans we reviewed had complete and properly executed loan documentation. Further, the
SPV team performed its required reviews for the 33 standard and streamlined loans in our sample.
However, for the 2 expedited loans in our sample, the SPV team did not perform its prepurchase review
to confirm that accounting data entries matched loan documentation. Rather, the credit administrator
reviewed some accounting data during the postpurchase review of loan documents for these 2 loans. The
SPV did not define its expectations for how the credit administrator should document its prepurchase
review of accounting data. Reviewing loan participation requests—including the accounting data—and
obtaining complete and properly executed loan documents ensures that the loan participation purchases
conform to program expectations.
The SPV Team Generally Conducted the Required
Reviews
All 35 loans we reviewed had the six required lender-submitted MSLP documents and the critical fields,
such as borrower and lender signatures, completed on each form. Further, the SPV team performed the
required prepurchase and postpurchase reviews for the 33 loans in our sample purchased through the
standard and streamlined review processes. The SPV team, the credit administrator, and legal
stakeholders also documented these reviews in standardized checklists. However, for the 2 expedited
loans in our sample, the credit administrator documented the postpurchase review in a spreadsheet but
did not conduct a prepurchase review of accounting data. The loan participation intake system to
purchase MSLP loan participations included validation flags that confirm that accounting data match loan
documentation. For these 2 loans, the system validation flags show that the accounting data matched
loan documentation. Further, as part of its postpurchase review of loan documents for the 2 expedited
loans in our sample, the credit administrator reviewed some accounting data; for example, the credit
administrator verified the accuracy of the credit agreement date.
Eligible lenders were required to complete and submit the six required documents to the SPV. The SPV
implemented document review processes to ensure that (1) each loan participation met MSLP
requirements, (2) the required legal documents had been properly executed, (3) certain accounting
details were accurate, and (4) exceptions identified during the review had been sufficiently addressed.
The table provides an overview of the program’s requirements for each of the different review processes
we tested and our results.
2023-FMIC-B-011 12 of 24
Table. Overview of Completion of Review Processes for Loans in Our Sample
Type of review Review components Completed
Standard loan participation purchase review process
Prepurchase review The credit administrator and the SPV team review accounting data, ✓
and legal stakeholders review legal documents.
Prepurchase closure of The credit administrator and the SPV team resolve exceptions ✓
exceptions identified in reviews.
Expedited loan participation purchase review process
Prepurchase review The credit administrator confirms that accounting data match loan a
documentation.
Postpurchase review The credit administrator reviews loan documents and resolves ✓
exceptions.
Streamlined loan participation purchase review process
✓
Prepurchase review The credit administrator and legal stakeholders conduct an
abbreviated review of loan documents.
Postpurchase review The credit administrator, legal stakeholders, and the SPV team ✓
review the deferred loan documents and accounting data.
Postpurchase closure of The credit administrator and the SPV team resolve material ✓
exceptions exceptions identified in reviews.
Source: OIG analysis of MSLP loan participation purchasing requirements and MSLP documents.
a The credit administrator reviewed some accounting data as part of its postpurchase review of the co-lender agreement.
The credit administrator’s prepurchase reviews of expedited loans were not completed because the SPV
did not define its expectations or develop review documents (such as checklists like those used for the
standard and streamlined review processes) for the credit administrator to document their prepurchase
reviews.
Reviewing loan participation requests—including the accounting data—and obtaining complete and
properly executed loan documents ensure that the loan participation purchases conform to program
expectations and help reduce reputational risk to the Board and FRB Boston.
2023-FMIC-B-011 13 of 24
Conclusion
We do not have a recommendation for this finding because the loan participation purchasing process has
ended. Therefore, an ongoing need to address this issue does not exist. However, we included a matter
for management consideration in this report that addresses the need for the SPV to clearly document its
loan participation purchasing processes, including those for expedited loans.
Management Response
In their response to our draft report, the Board’s General Counsel and FRB Boston’s General Counsel
concur with the conclusions in our report.
2023-FMIC-B-011 14 of 24
Finding 2: The Board and FRB Boston
Established but Have Not Documented
Their Process for Addressing Potentially
Ineligible MSLP Loans
FRB Boston’s Legal Department and the Board’s Legal Division have established a general process for
addressing potentially ineligible loans but have not documented that process. Internal control standards
state that documentation provides the means to retain organizational knowledge and mitigates the risk of
concentrating that knowledge with a few employees. According to a Board official, the Board and FRB
Boston had not formally documented the process for determining whether loans purchased were
ineligible because the process was well established. Formal documentation of the roles and
responsibilities of key positions and the general process for reviewing loans that potentially had been
ineligible when purchased can help the Board and FRB Boston preserve institutional knowledge and
ensure consistency in a key process.
The Board and FRB Boston Have Established a
General Process for Addressing Potentially
Ineligible MSLP Loans
As noted in finding 1, the 35 loans in our sample—3 of which are potentially ineligible loans—had
complete and properly executed loan documents, and the SPV team generally reviewed and approved
the loan participation requests, as required.7 Given the reliance on borrower certifications to confirm
eligibility for purchase, FRB Boston’s Legal Department and the Board’s Legal Division have established a
general but undocumented process to address potentially ineligible loans.8 According to an FRB Boston
employee, the stakeholders track potentially ineligible loans and follow this general process, as described
by Board and FRB Boston stakeholders:
1. FRB Boston’s Legal Department receives a referral of a potentially ineligible loan from sources
such as the SPV, lenders, the media, or oversight bodies.
7 Stakeholders in the Board and FRB Boston’s process to determine potentially ineligible loans—including the Board, FRB Boston,
and the Office of Inspector General—are aware of the three potentially ineligible loans in our sample. We did not confirm the
outcome of these instances because they could be the subject of an ongoing legal proceeding or investigation.
8 A loan purchased by the SPV is determined to be ineligible if at the time of purchase it does not meet CARES Act or other
program eligibility requirements.
2023-FMIC-B-011 15 of 24
2. FRB Boston’s Legal Department researches the
facts related to the referral. SPV REVIEW OF BORROWER ELIGIBILITY
3. Following the research, FRB Boston’s Legal
In April 2022, the SPV team completed a one-time
Department refers potentially ineligible loans to
review of borrower eligibility at the time of the loan
the Board’s Legal Division. The referral occurs
purchase. To conduct the review, the team
through a written memorandum that includes
evaluated 531 loan participations for borrower
information on the borrower’s potential violation
compliance with selected CARES Act requirements,
of program requirements or the CARES Act.
such as whether at the time of the loan purchase
4. FRB Boston’s Legal Department, in conjunction (1) a majority of the borrower’s employees and
with the Board’s Legal Division, determines operations were located in the United States;
whether additional information from the lender(s) (2) the borrower was not a covered entity in which
and borrower(s) is necessary; analyzes the covered individuals, such as certain elected or
circumstances of the case; identifies potential appointed officials, held a controlling interest in the
remedies, such as making the loan promptly due equity of the borrower; and (3) the borrower was
for repayment or taking legal action; and resolves incorporated or organized under the laws of the
the issue. In certain instances, including those of United States. To conduct the review, the SPV team
suspected fraud, FRB Boston and the Board will relied primarily on borrower-retained documents
refer the case to the Office of Inspector General or but also leveraged some public data. The SPV team
other appropriate authorities. did not identify any potentially ineligible borrowers
during this review.
Internal control standards note that documentation
provides the means to retain organizational knowledge
and mitigate the risk of having that knowledge limited to a few personnel. Effective documentation helps
capture the design of internal controls and communicate the who, what, when, where, and why of
internal control execution. Documentation also provides a means to communicate that knowledge to
external parties, such as external auditors, as needed.
According to a Board official, the agency had not formally documented the ineligible loan purchase
determination process because the current process had been well established and the process for
individual cases differed based on the specifics of each individual case.
Documenting a framework on the general process and the roles and responsibilities of key positions for
reviewing potentially ineligible loans can preserve institutional knowledge by reducing reliance on key
personnel and thereby reducing risks associated with turnover in key personnel. Further, documentation
can ensure consistency in a key process. In the case of potentially ineligible MSLP loans, consistency in the
process for addressing these loans is especially important considering that stakeholders are located
across the Board and FRB Boston.
Recommendation
We recommend that the Board’s Legal Division and FRB Boston’s Legal Department
1. Document a framework outlining the general process for identifying, determining, and pursuing
action on ineligible loans as well as the key roles and responsibilities for addressing potentially
ineligible MSLP loans.
2023-FMIC-B-011 16 of 24
Management Response
In their response to our draft report, the Board’s general counsel and FRB Boston’s general counsel
concur with our recommendation. The Board’s Legal Division, in coordination with the Reserve Bank, has
begun documenting the process for addressing potentially ineligible loans and the key roles and
responsibilities. The Board and FRB Boston anticipate that they will document the process by the end
of 2023.
OIG Comment
The actions described by the Board and FRB Boston appear to be responsive to our recommendation. We
will follow up to ensure that the recommendation is fully addressed.
2023-FMIC-B-011 17 of 24
Matter for Management Consideration:
The SPV Can Document Certain Elements
of the Loan Purchasing Process to Help
Retain Institutional Knowledge and Protect
Against Reputational Risks
At initiation, the SPV began with one standard loan participation purchase review process for all loans.
During 2020, the SPV created two deviations from its standard loan review process—expedited reviews
and streamlined reviews—to help manage loan applications. FRB Boston implemented the expedited
review process in August 2020 for lenders with a history of loan submissions that passed legal review of
documentation without the need for document resubmissions. The SPV also implemented a streamlined
review process in December 2020, which changed three times that month, to implement efficiencies and
help the SPV address an increasing backlog of loan participation purchase requests.
Given the rapidly evolving circumstances, the SPV team did not clearly document the SPV’s various loan
participation purchasing processes. Specifically, the SPV team summarized the different review processes
in various documents; however, elements of these processes were not fully documented.
• Standard review process: A user guide documents the credit administrator role as well as the SPV
review and approval processes. The prepurchase legal review of loan documents is documented
in a checklist template used during review of the loan documents; however, the roles and
responsibilities of the different legal stakeholders in the legal review process is not documented.
• Expedited review process: The SPV has two documents that describe the expedited review
process, a presentation and a procedural document, as well as a checklist template that is used to
complete the postpurchase review of expedited loans. However, the prepurchase review of
accounting data was not completed as part of the expedited review process presented to the
EOC and is not documented in the procedural document. The SPV team did not define how the
credit administrator should document the prepurchase review for the expedited loans.
• Streamlined review process: The SPV documented the streamlined review process primarily in
risk acceptance memorandums and emails. In addition, according to a Board employee, the SPV
team communicated changes to the streamlined review process in daily meetings. The Board
employee further stated that written guidance on the changes discussed in daily meetings would
have been helpful to reference when conducting their review of checklists completed by external
legal stakeholders.
Further, the SPV team did not clearly document some of its key decisions in establishing the purchasing
process, such as the SPV’s decision to work with lenders to update incomplete applications rather than
rejecting the loan package or the SPV’s decision to give the credit administrator the authority to approve
expedited loan participation purchases.
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In addition, although the SPV team made changes as the program evolved, the team has not assessed
program successes and challenges from the loan participation purchasing process. Documenting these
successes and challenges can help retain organizational knowledge, as this knowledge is currently limited
to the employees who actively participated in the purchase of the loan participations.
According to an SPV official, the SPV team has not performed a comparative analysis between the three
processes because each process was created and used to help maximize the number of loans that the SPV
team could review and accept into the program at that point in time. Finally, according to a Board
employee, documenting successes and challenges may not be necessary, as the Board can only establish
and operate the MSLP with congressional approval.
The Consolidated Appropriations Act, 2021, ended Treasury’s ability to provide funds to reestablish
emergency lending programs that received CARES Act funding, such as the MSLP.9 Given that the loan
purchase participation process is complete and the Board cannot reauthorize the MSLP without
additional congressional approvals, we are not formally recommending that the SPV retroactively
document its loan participation purchasing process or identify program successes and challenges.
However, the SPV should consider doing so. As of April 30, 2023, FRB Boston has approximately
$10.3 billion in outstanding loans to the SPV and actual loan losses totaling $136 million. In addition to
actual losses, in April 2023 the SPV’s estimated loan loss allowance was $1.0 billion.10 Although the
current actual and anticipated loan losses would be covered by Treasury’s equity investment in the MSLP
and the Board does not expect losses to the Federal Reserve System, there is the potential for public
scrutiny in loan participation purchases as paydown continues on the lending portfolio. In addition, the
MSLP has lost key personnel since its establishment, reducing institutional knowledge necessary to
recreate the loan purchasing process. Documenting the loan purchasing process as well as related key
takeaways can help the SPV reduce reputational risks related to the purchase of MSLP loan participations
and help retain institutional knowledge of the program.
9 Pub. L. No. 116–260, § 1005, 134 Stat. 2146, 2147.
10 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.
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Appendix A: Scope and Methodology
Our objective was to assess the design and operating effectiveness of the Board and FRB Boston’s process
for purchasing MSLP loan participations. The scope of our evaluation included loan participations
purchased through the three MSLP for-profit facilities from December 1, 2020, to January 8, 2021.11
Approximately 1,172 loans totaling $11.1 billion and accounting for 64 percent of the total MSLP loan
purchases were issued from December 1, 2020, through January 8, 2021.
To assess the design of the Board and FRB Boston’s process for purchasing MSLP loan participations, we
reviewed relevant applicable laws, FRB Boston’s internal documentation, and publicly available
information, such as the MSLP’s frequently asked questions and term sheets. We also conducted
interviews with relevant officials from the Board’s Legal Division, the Division of Reserve Bank Operations
and Payment Systems, the SPV team, and FRB Boston’s Legal Department.
To assess the operating effectiveness of the loan participation purchase process, we judgmentally
selected a sample of 35 loan participations purchased by the SPV. Our sample includes loans that ranged
in value from under $5 million to over $140 million, as well as loans purchased through each of the three
loan participation purchase review processes. Three of the loans selected were identified as potentially
ineligible. We also used data analytics to identify additional loans based on eligibility factors. We tested
these loans for compliance with the SPV’s loan participation purchase process by reviewing the
completeness of the six required MSLP loan documents as well as evidence of SPV team, credit
administrator, and legal stakeholder prepurchase and postpurchase reviews, as applicable. Because this is
a nonstatistical sample, we are unable to project the results to the population of MSLP loan participation
purchases.
We assessed the SPV’s loan participation purchasing process 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 from November 2021 to April 2023. At the end of our scoping phase, in
July 2022, we split the original evaluation into two phases. Phase I focuses on the loan participation
purchase process and is the subject of this report. Phase II focuses on the credit monitoring process for
the loan portfolio and will be reported on separately. This evaluation was conducted in accordance with
the Council of the Inspectors General on Integrity and Efficiency’s Quality Standards for Inspection and
Evaluation.
11 We did not include the two nonprofit MSLP lending facilities in the scope of our evaluation because one did not produce any
loans and the other produced loans that accounted for $42 million, or less than 1 percent of the total number of loans made and
dollars loaned.
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Appendix B: Management Response
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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
John Galvin, Senior Auditor
Michael Rivera, Senior Auditor
Alain Habimana, Auditor
Jennifer Venzor, Auditor
Darren Rector, Auditor
Olaiya Adeyemi, Auditor
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 Media and Congressional
Office of Inspector General OIG.Media@frb.gov
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
OIG Hotline
Hotline OIG Hotline
Board of Governors of the Federal Reserve System
Report fraud, waste, and abuse. 20th Street and Constitution Avenue NW
Those suspecting possible Mail Center I-2322
Washington, DC 20551
wrongdoing may contact the
OIG Hotline by mail, Phone: 800-827-3340
web form, phone, or fax. Fax: 202-973-5044
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