Nonprofits disappointed by changes to Fed lending program
Nonprofit groups said Friday that several modifications to the Main Street Lending Program announced by the Federal Reserve may not be enough to provide access to credit for most of their financially stressed members.
The changes are “disappointing,” Charles Samuels of Mintz Levin, counsel to the National Association of Health & Educational Facilities Finance Authorities, said Friday.
“It seems like a fairly high hurdle for those that are going to want to use it,” he said.
The colleges, hospitals, and social service organizations most in need of access to the lending program may not qualify, Samuels said, while those that do qualify may not need it.
“It’s questionable how much this will be used by nonprofits in general, and hospitals and colleges in particular,” Samuels said. “The terms do not seem very favorable for nonprofits.”
The Fed’s final guidance “appears to be very similar to the original proposal,” said Liz Clark, vice president for research and policy for the National Association of College and University Business Officers.
“It’s likely that a lot of colleges and universities will find access to capital with better terms elsewhere,” Clark said.
Federal Reserve Chairman Jerome Powell, on the other hand, said in a press statement, "We have listened carefully and adapted our approach so that we can best support [nonprofits] in carrying out their vital mission during this extraordinary time.
"Nonprofits provide vital services across the country and employ millions of Americans," Powell said.
Based on public feedback to proposals released for comment on June 15, the Fed said the minimum employment threshold for nonprofits was lowered from 50 employees to 10, the limit on donation-based funding was eased, and several financial eligibility criteria were adjusted to accommodate a wider range of nonprofit operating models.
Additionally, the Fed said each organization must be a tax-exempt organization as described in section 501(c)(3) or 501(c)(19) of the Internal Revenue Code.
The Fed said its Main Street nonprofit loan terms generally mirror those for Main Street for-profit business loans, including the interest rate, principal and interest payment deferral, five-year term, and minimum and maximum loan sizes. Nonprofits will be eligible for two loan options.
Nonprofit organizations will be able to obtain loans of at least $250,000 and up to $300 million.
Like the other facilities in the Main Street program, the Nonprofit New Loan Facility and the Nonprofit Expanded Loan Facility will make loans available to eligible borrowers through third-party banks. The Fed, through the Main Street program, will then purchase a 95% stake in the loans.
The borrowing rate of Libor plus 3 percentage points is the same for for-profit and non-profit organizations.
The Government Finance Officers Association said it was “pleased to see the Federal Reserve respond to comments in a productive way.”
“We hope though that the sufficient fallbacks to Libor are built into terms for the borrowers as many nonprofit issuers across the country prepare for Libor’s cessation,” Emily Brock of GFOA said in an email.
Earlier in the week, New York Federal Reserve President John Williams said in a joint presentation with Bank of England Governor Andrew Bailey that the transition away from Libor “continues to be of paramount importance.”
The No. 1 priority, according to Williams, “is to stop writing Libor contracts.”
Both the American Hospital Association and the American Council on Education had urged the Fed to offer nonprofits a lower borrowing rate.
The American Council on Education suggested in a June 22 letter to Powell “a level sufficient to cover the costs of the program without generating a net gain for the Federal Reserve.”
The American Hospital Association, in a separate letter to Powell and Treasury Secretary Steve Mnuchin, pointed out that the CARES Act passed by Congress “provides that the Treasury Secretary should endeavor that such direct loans be subject to an annualized interest rate that is not higher than 2% per annum.”
Both letters had a list of recommendations that the Fed did not adopt in the modifications announced Friday.
The AHA, for instance, said the requirement for an organization to have been in business as of Jan. 1, 2015 does not take into account the significant changes in the nonprofit health care sector in recent years that “has often resulted in the creation of new subsidiaries, affiliates and stand-alone entities to house the continued operation of acquired enterprises.”
The ACE letter, meanwhile, cited the limitation against employers with more than 15,000 employees.
“Some nonprofit institutions or systems of higher education will not qualify under the current threshold,” ACE wrote. “This includes large institutions of higher education which may be among the top five employers within their states, such as the public flagship universities or the major private research universities.”
Similar complaints about eligibility restrictions about the Municipal Lending Facility has led to changes in that program to broaden the qualifications and it could happen to the new nonprofit lending program.
“These things do get changed over time,” Samuels acknowledged. “I don’t know if this is the final-final forever, but who knows. I understand all the factors the Fed is balancing, but I think their lack of familiarity with nonprofits is showing here.”