Main Street Loan Demand Increases; SEC Opines on ‘True Sale’ Treatment
The $600 billion Main Street lending program was announced with great fanfare in April, but demand so far has been slow. Two recent events may make the program more attractive to both borrowers and lenders:
- For borrowers, additional aid from the federal government looks increasingly unlikely until after the November election. Small and midsize businesses continue to struggle as Democrats and Republicans differ broadly on the amount and types of aid needed and the House of Representatives is scheduled to recess on October 2, 2020. The U.S. Small Business Administration’s Paycheck Protection Program (PPP) stopped taking applications on August 8, 2020. For companies seeking liquidity, the Main Street program may now seem more attractive.
- For lenders, the SEC released its position on true sale accounting treatment for Main Street loans. Uncertainty over potentially unfavorable accounting treatment held some financial institutions back from lending under the program.
On September 6, 2020, the Federal Reserve released its second required status update. Through August 31, 2020, 13 financial institutions have distributed 119 loans totaling $1.2 billion. The first status report, as of July 31, 2020, indicated six lenders distributed $80 million to eight borrowers. For additional borrower details, see BKD COVID-19 Webinar Series: Main Street Lending – What Borrowers Need to Know.
Sale Accounting Treatment
As of August 7, 2020, only 509 financial institutions have registered for the Main Street program compared to the PPP’s 5,461 registered lenders. One of the holdbacks to greater lender participation has been uncertainty around true sale accounting treatment. The Federal Reserve Bank of Boston (Fed) set up a special purpose vehicle to buy a 95 percent participation in each eligible Main Street loan with lenders retaining the remaining 5 percent of each loan. Even with the Fed’s best intentions, the program’s structure, and participation documentation, without the proper accounting treatment, banks would have been forced to reflect the entire Main Street loan on their balance sheet, despite the Fed’s 95 percent participation.
Accounting guidance in Accounting Standards Codification (ASC) 860, Transfers and Servicing, outlines the criteria for a transfer of financial assets to be accounted for as a sale. Under those strict rules, if an entity has continuing involvement in a transaction, it cannot remove the transaction from its balance sheet. A 5 percent loan stake could still meet the criteria for continuing involvement; however, if an entity can prove the transferred financial asset is legally isolated, even in bankruptcy, the transfer can be accounted for as a sale. Supporting the claim that an asset is legally isolated often requires an attorney’s true sale opinion, which can be costly, especially for a Main Street loan with a narrow profit margin.
The American Bankers Association submitted an inquiry to the SEC’s Office of the Chief Accountant seeking clarity on the legal isolation criteria related to the Main Street program. On September 11, 2020, the SEC responded with a preclearance letter, which stated that the SEC would not object to the conclusion that a bank has met the criteria of legal isolation. The conclusion relates solely to the legal isolation criteria for qualified and approved Main Street transactions and not any other aspects of the evaluation of sales accounting under ASC 860.
BKD will continue to follow this developing situation. As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. Visit BKD’s COVID-19 Resource Center to learn more. If you have questions, contact your BKD Trusted Advisor™ today.