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Report to Congress Pursuant to Section 13(3) of the Federal Reserve Act: Paycheck Protection Program Lending Facility

Summary

This Federal Reserve Board report to Congress under section 13(3) of the Federal Reserve Act describes the Paycheck Protection Program Lending Facility (PPPLF). On April 8, 2020 the Board, by unanimous vote and with the approval of the Secretary of the Treasury, authorized each of the 12 Federal Reserve Banks to establish the facility, which lends on a nonrecourse basis to depository institutions that make PPP loans, taking those SBA-guaranteed loans as collateral. Credit is extended at a rate of 35 basis points with no fees and matures with the pledged PPP loan, earlier if the loan defaults and is sold to the SBA or is forgiven. No new credit extensions are to be made after September 30, 2020 unless extended. It says the facility was not yet operational as of April 14, 2020 and, as PPP loans are fully guaranteed by the SBA, the Board expects no losses to the Federal Reserve.

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  Report to Congress Pursuant to Section 13(3) of the Federal Reserve Act:
                Paycheck Protection Program Lending Facility
Overview
       On April 8, 2020, the Board of Governors of the Federal Reserve System
(the Board), by the unanimous vote of its five members and with the approval of
the Secretary of the Treasury, authorized each of the 12 Federal Reserve Banks to
establish and operate the Paycheck Protection Program Lending Facility (PPPLF)
under section 13(3) of the Federal Reserve Act (12 U.S.C. § 343(3)). The PPPLF
offers a source of liquidity to the financial institution lenders who lend to small
businesses through the Small Business Administration’s (SBA) Paycheck
Protection Program (PPP).
       Under the PPPLF, each Reserve Bank will lend to eligible borrowers on a
nonrecourse basis, taking PPP loans as collateral. The PPP is a program
administered by the SBA to facilitate lending to small businesses by eligible
private sector financial institutions.
Background on the PPPLF
       The spread of the coronavirus disease 2019 (COVID-19) has halted
economic activity in the United States. The disruption has impacted many
different sectors of the economy, including small businesses. In general, the
availability of credit has contracted for small businesses while, at the same time,
the disruptions to economic activity have heightened the needs for small businesses
to obtain credit in order to sustain themselves and meet their payroll and other
expenses until economic conditions normalize.
        In these circumstances, the Board determined that unusual and exigent
circumstances existed and approved the establishment of the PPPLF to help
facilitate access to credit by PPP lenders so that they can lend to small
businesses, enabling them better to manage the economic dislocations related to
the pandemic.
Structure and Basic Terms
       The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
created the PPP to support lending to small businesses that have been affected by
the disruption caused by COVID-19. Under the PPP, lenders make loans to small
businesses for payroll-related and certain other purposes specified in the
CARES Act, and the SBA guarantees the PPP loans.
       Under the PPPLF, each Reserve Bank will lend, on a nonrecourse basis, to
eligible borrowers that have made PPP loans, taking the PPP loans as collateral.
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As of April 14, 2020, the PPPLF was not yet operational. At the Board’s request,
the Federal Reserve Bank of Minneapolis is assisting in managing operational
issues for the PPPLF.
      The term sheet for the PPPLF is available to the public on the Board’s
website. 1 The discussion below summarizes the terms and conditions of the
PPPLF. The Board and Reserve Banks continue to monitor the affected financial
markets and to consult with market participants and, accordingly, the terms and
conditions governing the PPPLF may be modified in the future as appropriate.
Eligible Borrowers. All depository institutions that originate PPP loans are
eligible to participate in the PPPLF. The Board is working to expand eligibility to
other lenders that originate PPP loans in the near future.
Lending Reserve Bank. Eligible borrowers participate in the PPPLF through the
Reserve Bank in whose District the eligible borrower is located. For depository
institutions, see Regulation D, 12 CFR 204.3(g)(1)–(2), for determining location.
Eligible Collateral. Only PPP loans guaranteed by the SBA are eligible to serve
as collateral for the PPPLF.
Maturity Date and Acceleration of Maturity. The maturity date of an extension
of credit under the PPPLF will equal the maturity date of the PPP loan pledged to
secure the extension of credit. The maturity date of the PPPLF’s extension of
credit will be accelerated if the underlying PPP loan goes into default and the
eligible borrower sells the PPP loan to the SBA to realize on the SBA guarantee.
The maturity date of the PPPLF’s extension of credit also will be accelerated to
the extent of any loan forgiveness reimbursement received by the eligible
borrower from the SBA.
Rate. Extensions of credit under the PPPLF will be made at a rate of 35 basis
points.
Fees. There are no fees associated with the PPPLF.
Collateral Valuation. PPP loans pledged as collateral to secure extensions of
credit under the PPPLF will be valued at the principal amount of the PPP loan.
Principal Amount. The principal amount of an extension of credit under the
PPPLF will be equal to the principal amount of the PPP loan pledged as collateral
to secure the extension of credit.
Termination Date. No new credit extensions will be made under the PPPLF
after September 30, 2020, unless it is extended by the Board and the Department
1
  For term sheets for all facilities, see the Federal Reserve’s website at
https://www.federalreserve.gov/funding-credit-liquidity-and-loan-facilities.htm.
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of the Treasury.
Requirements Imposed on Recipients. The PPPLF will not impose any new
requirements on borrowers with respect to employee compensation, distribution
of dividends, or any other corporate decision in exchange for accessing this
facility.
Expected Costs to Taxpayers. PPP loans under the PPP are fully guaranteed as to
principal and interest by the SBA, and these guaranteed loans will fully
collateralize extensions of credit under the PPPLF. As a result, the Board does not
expect that the PPPLF will result in losses to the Federal Reserve.




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