On April 30, 2020, the Federal Reserve announced that it is expanding eligibility to participate in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (the “PPPLF”) to all lenders eligible to originate Paycheck Protection Program loans.[1]  The PPPLF permits eligible PPP lenders to pledge PPP loan notes to the Federal Reserve in exchange for a low interest, non-recourse loan from the Federal Reserve in the amount of the pledged PPP loan note. 

Program Update

When originally announced, the PPPLF was only available to PPP lenders that are depository institutions.  Now, all PPP lenders approved by the SBA, including banks, credit unions, Community Development Financial Institutions, members of the Farm Credit System, small business lending companies licensed by the SBA, and some financial technology firms, are eligible to participate in the PPPLF. 

In addition, purchasers of PPP loans may also participate in the program if they can provide documentation from the SBA demonstrating that the PPP loan purchaser is the beneficiary of the SBA guarantee for the loan.

Program Summary

Under the PPPLF, the Federal Reserve will supply liquidity to participating PPP lenders through term financing backed by pledged PPP loans.  Eligible PPP lenders must pledge the PPP loans as collateral for PPPLF loans.  Even if an eligible PPP lender used its own form of promissory note to document PPP loans, such PPP loan notes can be pledged as collateral for PPPLF loans.  According to available Federal Reserve guidance, Reserve Banks will accept PPP loan notes with electronic signatures (i.e., loans that are electronically originated or loans that have electronic copies of “wet ink” signatures, such as faxed or scanned copies of “wet ink” signed documents). 

Each of the PPPLF Letter of Agreement for depository institutions^[2] and the PPPLF Letter of Agreement for non-depository institutions[3] provides that PPP loans having the same maturity date may be combined into pools funded via a single advance at the discretion of the Reserve Bank in its sole discretion.

Pledged PPP loans will be valued at the face value of the outstanding principal amount thereof.  The interest rate on PPP loans will be 35 basis points (0.35% per annum), which is due in connection with any payment or prepayment. There is no cap on the amount to be advanced to any eligible PPP Lender other than the principal amount of PPP loan collateral that it can pledge to the Federal Reserve. 

The PPPLF Letter Agreements also specify, and the April 30 Term Sheet confirms, that the maturity date of an Advance under the PPPLF will be the maturity date of the pledged PPP loan note.  The April 30 Term Sheet provides that the maturity date of a PPPLF loan will be accelerated (a) if the underlying PPP loan goes into default and the PPP lender sells the PPP loan to the SBA to realize on the SBA guarantee and (b) the extent of any loan forgiveness reimbursement remitted by the SBA to the PPP lender. 

PPP lenders seeking PPPLF loans must agree to the applicability of the Federal Reserve Bank’s Operating Circular No 10 (Lending) (the “Circular”)[4] to PPPLF loans, except that the Reserve Banks waive their rights to require repayment on demand under Section 5.1(a) of the Circular.^[5]

In the event that the PPP lender fails to repay a PPPLF Loan on its maturity date, the Reserve Bank must first seek repayment from realization upon pledged PPP loan note, including any proceeds of payments by the SBA in connection with loan forgiveness or loan guarantees with respect thereto.  Thereafter, the Reserve Bank may pursue any remedies it may have to recover the remaining outstanding amount a PPP loan note.  PPPLF Loans shall become a recourse obligation if, in the sole discretion of the Reserve Bank, the PPP lender “(i) has breached any of the representations, warranties, or covenants made under the [PPPLF Letter Agreement] or (ii) has engaged in any fraud or misrepresentation in connection with any [PPPLF Loan] or any request to obtain [a PPPLF Loan] under the PPPLF.”^[6]

Notwithstanding the foregoing, the Reserve Bank, in its sole discretion, may void the non-recourse provisions and any related provisions, such that it shall have full recourse against a PPP lender, or disqualify a PPP lender from the PPPLF, if it determines that a PPP lender has failed to meet its PPPLF Letter Agreement requirements or that a pledged PPP loan note fails to satisfy the requirements of the PPP.  The Reserve Bank’s determination that any pledged PPP loan note fails to conform to the requirements of this PPPLF Letter of Agreement, the Circular or the PPP shall be conclusive absent manifest error.^[7]

In accordance with the general requirements of Section 13(3) of the Federal Reserve Act, PPP lenders seeking a PPPLF loan will be required to certify that (i) they are not insolvent and (ii) they cannot obtain adequate credit accommodations from other banking institutions.  The forms of such certifications, as well as other required documentation and PPPLF contact information, for depository institutions can be found at on the Federal Reserve discount window web site at https://www.frbdiscountwindow.org/generalpages/emergency%20credit%202020.  Forms of certification, required documentation and PPPLF contact information for non-depository institutions can be found on the Federal Reserve discount window web site at https://www.frbdiscountwindow.org/generalpages/nondi_ppplf