A liquidity facility created by the Federal Reserve to undergird the Paycheck Protection Program is set to expire on March 31, threatening to remove funding for a number of lenders that are originating and buying PPP loans.
The Fed has been offering loans with low interest rates to lenders through the Paycheck Protection Program Liquidity Facility in an effort to promote more lending under the massive rescue program administered by the Small Business Administration and the Treasury Department. The PPPLF has provided nondepository institutions their first access to Fed financing.
Several PPP participants, including community development financial institutions and nonbank SBA lenders, are lobbying the Fed for an extension of the facility. They are hoping legislators will do the same for the PPP, which is also set to end in less than four weeks.
“It will be very important to extend the facility,” said Jeannine Jacokes, CEO of the Community Development Bankers Association. The group represents CDFIs, many of which have been using the PPPLF to fund originations in underserved communities.
“This program may have not gotten as much PR as the PPP, but it’s one of those critical tools to lenders,” Jacokes said.
The facility can be extended without congressional approval. That has
A Fed spokesman declined to comment. The Treasury Department did not immediately respond.
Facility helps nonbanks
Lenders are relying less on the PPPLF than they did during the first iteration of the Paycheck Protection Program. Outstanding balances, which peaked at $70.7 billion in late July, have since fallen by more than a third, to $46.5 billion, according to Fed data.
But lenders who account for those outstanding loans said they are still counting on the facility to fund new originations or to buy portfolios from banks looking to move beyond the emergency loan program.
Nonbank CDFI loan funds have been a source of PPP lending for many small businesses that lacked a bank relationship. These lenders, which have made $478 million in PPP loans, have tapped the liquidity facility by working with banks or deposit-accepting CDFIs that have served as correspondents with the Fed.
An end to the liquidity facility would likely take those lenders out of the game if the PPP is extended.
More than $318 million in PPPLF funding went to CDFI loan funds as of September, according to recent analysis from Michael Eggleston, a senior community development adviser at the St. Louis Fed. Roughly half of the CDFI loan funds that have made PPP loans have relied on the liquidity facility, Eggleston observed in his Feb. 24 report.
“There’s an open-ended question about how these types of institutions, these mission-driven lenders can access low-cost capital,” Eggleston said in an interview. “There’s now a precedent.”
Getting the funding wasn’t easy at first. While CDFI loan funds were eager to access the facility, it was difficult to find a correspondent bank with Fed accounts to help get the money to them.
“Our cost of capital is significantly more expensive than a depository institution,” Sam Walls, president of Arkansas Capital Corp., said during a recent interview with the St. Louis Fed. “We were underwater on our cost of capital, not knowing how long we were going to keep those loans out.”
Big banks scoffed at first because of concerns about the risk of providing financing to CDFI loan funds, Jacokes said.
There were questions about whether the correspondent banks would get credit under the Community Reinvestment Act if they participated. That question remains unanswered and may not be fully addressed until regulators conduct their next CRA exams.
After several briefings facilitated by regional Fed offices, banks like Wells Fargo and Bank of America began facilitating financing through the PPLF.
“If they keep PPP going, they ought to extend the liquidity window,” Jacokes said.
PPPLF fueling secondary market
Another group eager to see the facility extended includes nonbank SBA lenders that have been using PPPLF funds to support the purchase of loan portfolios. Those lenders have been looking to profit off the narrow margin between the 1% interest they can charge and the 0.35% cost of funds that goes to the Fed.
Banks have been selling loans to those lenders to avoid navigating the complexities of the forgiveness process. Nonbanks said they are still keen on buying loans even if PPP ends at the end of March.
An end to the facility would essentially dry up the market for buying and selling PPP loans.
“It’s possible the PPPLF window will stay open longer than the sunset date for the PPP,” said Rick Wayne, president and CEO at the $1.2 billion-asset Northeast Bank in Portland, Maine. “I would guess that they would, just based on their prior behavior.”
Northeast recently disclosed that it sold nearly $1.7 billion in PPP loans to The Loan Source, a nonbank small-business lender in New York, which should result in an $18.2 million gain in the first quarter. The $1.2 billion-asset bank also sold $458 million of PPP loans to The Loan Source last summer.
The Loan Source has been an active buyer of PPP loans. Working with ACAP, a firm created to service the loans, and Northeast, which acts as the correspondent bank, The Loan Source has purchased about $6.3 billion of originations.
Northeast has also received about $11 million from fees and a portion of the servicing income for its work with The Loan Source and ACAP.
Wayne has several reasons to push for an extension of the PPPLF.
“There’s more borrowers who need PPP money … and it’s good for our earnings,” Wayne said. “I like the PPP a lot.”
Liberty Small Business Finance, a nonbank commercial lender in Philadelphia, would also like an extension to the PPPLF as it looks to buy PPP loans on the secondary market.
“We will buy PPP loan assets … once those loans have been disbursed,” said Alex Cohen, Liberty’s CEO. “We can act as a servicer on those loans, both in terms of managing the forgiveness process … and servicing any assets that aren’t forgiven.”
Liberty, which has direct access to the PPPLF, has been encouraged by early discussions with banks. It would use the facility to shore up assets it holds between purchase and a borrower’s loan forgiveness.
“We have executed a trade with a regional bank that’s over $1 billion of assets, however the largest response we’ve gotten has been from smaller institutions, depository banks and credit unions,” Cohen said.
The pitch is “most well received and most relevant to banks that are under $1 billion of assets,” Cohen added. “It’s an economies-of-scale play.”
While Cohen said an extension of PPPLF would be beneficial, he isn’t counting on it.
“There’s no way of determining” if the program will be extended, Cohen said. “For any bank that is contemplating [selling a PPP portfolio], I think doing this in early March is an ideal timeline.”
Northeast plans to keep lending as long as the program lasts. It is marketing to farmers and trying to reach out to nonprofits while expanding its dealings in minority communities.
“We’re going to try and fund everything humanly possible,” Wayne said. “We hope PPP goes beyond March 31.”
