Mnuchin, Powell Defend Borrower Requirements Under Emergency Lending Programs

Mnuchin, Powell Defend Borrower Requirements Under Emergency Lending Programs

ABI Bankruptcy Brief

June 18, 2020

ABI Bankruptcy Brief

Mnuchin, Powell Defend Borrower Requirements Under Emergency Lending Programs

Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell defended policy choices to invest in debts of riskier companies through emergency lending programs, and to provide loans without conditions that firms maintain payroll, in a letter to congressional overseers released today, the Wall Street Journal reported. At issue is how the Fed and Treasury Department are managing funds from the CARES Act, a major emergency-relief bill Congress approved in March to help workers and businesses cope with the coronavirus pandemic. While Congress directed the Treasury to impose specific payroll requirements for forgivable loans to small businesses under the Paycheck Protection Program, it didn’t mandate a similar requirement for loans extended through Fed programs that are backed by up to $454 billion to cover losses. The Fed has stipulated that small and midsize businesses that accept loans funded by its Main Street Lending Program should make “commercially reasonable efforts” to maintain their payrolls, but the Fed hasn’t set specific requirements that prevent firms from shedding workers as they navigate a downturn caused by the coronavirus. The Fed indicated it is taking a long-term view in interpreting that standard, according to comments released today that agency leaders provided earlier this month to a congressional oversight panel.(Subscription required.)

In related news, Congress and the Trump administration, in their bid to funnel more than $650 billion in forgivable loans to small businesses struggling through the pandemic, delivered a program that didn’t work for many that needed it, according to a Wall Street Journal analysis. The Paycheck Protection Program (PPP) sped through Congress within the $2.2 trillion CARES Act stimulus package to address the economic distress caused by the pandemic, and opened for business on April 3, just two weeks after it was drafted. The government has approved 4.6 million loans worth more than $513 billion as of Tuesday. Those have reached a fraction of the 31.7 million small businesses in the U.S., a figure that includes 25.7 million firms without employees, according to the Small Business Administration. “They made a number of weak choices in designing the program as a loan program, when they wanted it to be a grant program,” said Josh Gotbaum, a former senior official at Treasury and the Office of Management and Budget who has worked for five administrations of both parties. Treasury Secretary Steven Mnuchin, whose department oversees the program along with the Small Business Administration, said, “If you want to do something at large scale that helps the economy, it can’t be perfect in every micro fashion,” given the urgency. “Had we waited another month to get the program up and running, we may not have had some of the issues that we had when we launched the program,” Mnuchin said. “On the other hand, had we waited another month, you wouldn’t have had people to be able to get loans as quickly.” (Subscription required.)

1.5 Million Workers Filed for Unemployment Insurance Last Week

An additional 1.5 million workers filed for unemployment insurance for the first time last week, a drop of just 58,000 claims from the week before, the Washington Post reported. Since the coronavirus pandemic began earlier this year, there have been 13 straight weeks where more than 1 million people have filed for unemployment for the first time. Another 760,000 people filed initial claims for Pandemic Unemployment Assistance, a supplemental program created by Congress for self-employed and gig workers. And the total number of people receiving benefits edged down slightly, to 20.5 million. More than 45 million people have filed for unemployment at some point during the pandemic.

In related news, a new proposal issued by a group of top economists calls on lawmakers to replace the expiring $600 unemployment supplement for jobless workers with a maximum $400 a week, reported. The proposal comes as Democrats and Republicans debate the merits of extending the $600 weekly enhancement to unemployment checks, which is scheduled to end after July 31. Democrats want to extend the $600 checks past July to avoid a severe drop in household income at a time when unemployment is likely to remain elevated. Republicans want to end the payments outright or replace them with a back-to-work bonus that pays Americans to find new jobs. The proposal, published on Tuesday by the Aspen Institute, attempts to assuage both parties. The policy would continue weekly aid at a reduced amount. It would also offer a payroll subsidy, either via an extra tax credit or “hiring bonus,” to incentivize workers to rejoin the workforce. The four authors are: Jason Furman, former chair of the Council of Economic Advisers under former President Barack Obama; Timothy Geithner, former Treasury secretary during the Obama administration; Glenn Hubbard, who chaired the Council of Economic Advisers under former President George W. Bush; and Melissa Kearney, director of the Aspen Institute’s Economic Strategy Group. The current $600-a-week federal supplement, created by the CARES Act, replaces more than 100 percent of lost wages for about two-thirds of American workers, according to economists at the University of Chicago.

FHFA Extends Moratorium on Evictions, Foreclosures for Two More Months

Federal foreclosure and eviction moratoriums set to expire at the end of June have been extended two months, a move aimed at helping homeowners and renters struggling financially because of the coronavirus pandemic, USA Today reported. Freddie Mac and Fannie Mae will extend the moratorium on foreclosures and evictions on single-family homes until at least Aug. 31, the Federal Housing Finance Agency said yesterday. The protections were scheduled to expire June 30. "During this national health emergency, no one should worry about losing their home," said Mark Calabria, director of the Federal Housing Finance Agency. The Department of Housing and Urban Development said yesterday that the Federal Housing Administration will extend its foreclosure and eviction moratorium through Aug. 31. This marked the second extension for the program after it began in March with a 60-day moratorium. It was extended until the end of June.

U.S. Retail Foot Traffic Rebounds, More Staff at Work as Lockdowns Ease

Retail foot traffic recovered to approach pre-lockdown levels last week, and businesses appeared to bring more employees back to the job, according to data from firms that collect cellphone location information and manage employee time for companies, Reuters reported. Cellphone data from Unacast showed that foot traffic at retail locations as of last Saturday was just 10 percent below the level of a year earlier. Similar foot-traffic estimates from Safegraph were over 90 percent of what they were on March 1, before a national state of emergency was declared and widespread lockdowns were imposed to curb the spread of the new coronavirus.

Commentary: If Zombie Companies Don't Die, We'll Pay a Price*

The Federal Reserve this week began buying individual corporate bonds, in addition to the bond exchange-traded funds it has bought already. Meanwhile, its Main Street Lending program has begun buying loans that banks make to small and medium-sized businesses at the Fed’s behest. These are in addition to a variety of other lending programs, all designed to keep corporate America afloat until the coronavirus pandemic passes, according to a Bloomberg commentary. And there’s evidence that these programs are having their intended effect: There has been no large wave of commercial bankruptcies so far. But there’s a growing worry in some quarters that all of this lending will create a wave of zombie companies (businesses that have to borrow to survive and don’t make enough profit to cover debt-service costs). The number of such companies has been increasing steadily in developed nations during the past 20 years, according to the commentary. The reason, presumably, is low interest rates, which allow zombies to sustain themselves on borrowed money rather than exit the market. In a healthy economy, bad companies die and good companies replace them, and new industries rise while old ones fade. But if the Fed keeps all of the bad companies on life support, neither of those necessary processes can happen, according to the commentary. If the moratorium on creative destruction lasts only a year, until COVID-19 is eliminated by treatments or vaccines, the amount of resource misallocation will probably not be too bad. The danger is if unprofitable companies are supported for years. The minute the Fed cuts off the spigot of cheap money, those companies and industries will shed workers and reduce investment, putting the economy in danger, according to the commentary. Until the pandemic is over, the Fed shouldn’t let up on its lending programs. But it would be useful to have a concrete plan for how to clear out the corporate deadwood once the coronavirus is no longer a threat.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

New Home-Equity Lines of Credit Declined After Pandemic Hit as Lenders Tightened Standards

Millions of Americans are out of work, but for many, tapping their home equity isn’t an option, the Wall Street Journal reported. New home-equity lines of credit dropped 19 percent from March through May compared with the same time last year, according to preliminary data from credit-reporting firm Equifax Inc. Many lenders are getting stricter about offering the credit lines, known as HELOCs. Both JPMorgan Chase & Co. and Wells Fargo & Co. have temporarily stopped accepting new HELOC applications, and other lenders have tightened standards. U.S. banks’ holdings of home-equity lines of credit were down more than 9 percent from a year earlier as of early June, the largest decline on record, according to Federal Reserve data. Originations of home-equity loans, another popular way for borrowers to pull cash out of their homes, fell 43 percent from March through May, according to Equifax. (Subscription required.)

Many Delayed Medical Care Out of Fear of COVID-19, but Unemployment Is Now Making Care Unaffordable

While hospitals and doctors across the country say many patients are still shunning their services out of fear of COVID-19 — especially with new cases spiking — Americans who lost their jobs or have a significant drop in income because of the pandemic are now citing costs as the overriding reason they have not been seeking the health care they need, the New York Times reported.“We are seeing the financial pressure hit,” said Dr. Bijoy Telivala, a cancer specialist in Jacksonville, Fla. “This is a real worry,” he added, explaining that people are weighing putting food on the table against their need for care. The twin risks in this crisis — potential infection and the cost of medical care — have become daunting realities for the millions of workers who were furloughed, laid off or caught in the economic downturn. It echoes the scenarios that played out after the 2008 recession, when millions of Americans were unemployed and unable to afford even routine visits to the doctor for themselves or their children. Nearly half of all Americans say they or someone they live with has delayed care since the onslaught of coronavirus, according to a survey last month from the Kaiser Family Foundation. While most of those individuals expected to receive care within the next three months, about a third said they planned to wait longer or not seek it at all.

Latest ABI Podcast Examines Supreme Court Decision on Puerto Rico Oversight and Management Board

ABI Editor-at-Large Bill Rochelle spoke with experts about the June 1 decision by the Supreme Court that the appointment of the Puerto Rico Oversight Board did not violate the Appointments Clause. Prof. Stephen Lubben, the Harvey Washington Wiley Chair in Corporate Governance & Business Ethics at Seton Hall (Newark, N.J.); Prof. Juliet Moringiello, Associate Dean for Research and Faculty Development and Professor of Law at Widener University Commonwealth Law School (Harrisburg, Pa.); and Zachary Smith of Moore & Van Allen (Charlotte, N.C.), who has been involved in restructuring matters pertaining to Puerto Rico, joined Rochelle to examine the decision.

Monday: abiLIVE Webinar to Examine Bankruptcy Court Procedures During COVID-19 Pandemic

ABI will be holding a special abiLIVE webinar on Monday looking at changes in the process and practice of bankruptcy courts in the COVID-19 era. Speakers on the webinar will include Bankruptcy Judge Hannah L. Blumenstiel (N.D. Cal.; San Francisco), Clerk of the Court Una M. O'Boyle (D. Del., Wilmington), Brian L. Shaw of Fox Rothschild LLP (Chicago) and Matt Wapnick of CourtCall LLC (Los Angeles), with attorney Robert J. Ambrogi (Boston) moderating. Register for free.

SBRA, Consumer Hot Topics and More Featured at Central States Virtual Bankruptcy Workshop; Great Sessions, Networking at an Affordable Price from Your Home or Office!

While ABI had to cancel its in-person Central States Bankruptcy Workshop for 2020 due to the COVID-19 pandemic, sessions designed for this year’s program have been converted into a two-day virtual experience, to be held June 25-26. With two online educational sessions each day of the conference, ample networking opportunities both days and a price that is right ($100 for the entire program), it is easy to include the Central States Virtual Bankruptcy Workshop in your schedule this year! This year’s program sessions include:

• Small Business Restructuring Act of 2019
• Great Debates: The Ethical Response to Client Misconduct
• Hot Consumer Topics
• Liquidating Assets
• Judicial Round-and-Round

Click here to register.

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New on ABI’s Bankruptcy Blog Exchange: The Pandemic’s CRE Domino Effect

As revenue-starved retailers fall further behind on rent payments, landlords' cash flow will be strained and defaults on commercial real estate (CRE) loans could rise, according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

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