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Senate Banking Committee Hearing on the Implementation of Title IV of the CARES Act

Senate Committee on Banking, Housing, and Urban Affairs

“Implementation of Title IV of the CARES Act”

Tuesday, June 2, 2020

Key Topics & Takeaways

  • Capital Markets: Toomey commended the strength of the capital markets throughout the COVID-19 pandemic and the positive response to the mere announcement of the Federal Reserve Lending Facilities.
  • Main Street Lending Facility: In responding to requests on how to improve the Main Street Lending Facility, Quaadman summarized the Chamber’s position that there was some muted enthusiasm for this facility from the start due to the lack of clear rules put forth by the Fed but that he expects loan demand to increase once parameters become clear. Specifically, Quaadman cited concerns regarding the length of the loans being too short, the penalty interest rate, affiliation rule, risk retention rules and advocated for increased flexibility for both borrowers and lenders. Holtz-Eakin added that in his view, the parameters governing this facility are too stringent and burdensome for borrowers. He recommended a decreased minimum loan size, fixed interest rates, increased loan length and increased funding.
  • Municipal Liquidity Facility: Crapo reiterated that the current threshold does not cover a single county or city in Idaho and Menendez stated that the terms are too stringent to be effective. Holtz-Eakin agreed that in its current form, he has no confidence that the Municipal Liquidity Facility (MLF) will remedy the problems of the smaller counties or municipalities. He added that the terms of the MLF should be longer and that there is no reason to rush the repayment in any way.

Witnesses

  • Thomas Quaadman, Executive Vice President, U.S. Chamber of Commerce, Center for Capital Markets Competitiveness
  • Douglas Holtz-Eakin, President, American Action Forum
  • Heidi Shierholz, Senior Economist and Director of Policy, Economic Policy Institute

Opening Statements                   

Chairman Mike Crapo (R-Idaho)

In his opening statement, Crapo focused on federal actions taken to mitigate the impact of COVID-19 on the economy, specifically Title IV of the Coronavirus Aid, Relief and Economic Stability (CARES) Act. He explained that Title IV provided an infusion of capital into the Federal Reserve’s (Fed) emergency lending facilities. Although this is a unique use of these lending facilities, Crapo noted the market reacted positively after the announcement of the infusion. Crapo highlighted the importance of their successful structuring and operation to provide lifelines to households, businesses, and communities during this difficult economic period.

Ranking Member Sherrod Brown (D-Ohio)

In his opening statement, Brown reiterated the need for strict oversight of the funds authorized by Congress in response to the COVID-19 pandemic and emphasized that more money should be provided to struggling families for necessities. Brown praised the millions of Americans who work without protection or recognition and stated that the response to this crisis must support the people who make the country work. Brown noted that this committee, as well as the Senate writ large, has the ability to ensure an even and just economic recovery for all.

Testimony

Thomas Quaadman, Executive Vice President, U.S. Chamber of Commerce, Center for Capital Markets Competitiveness

In his testimony, Quaadman spoke about Title IV of the CARES Act and the use of the Fed emergency lending facilities. He provided examples of these facilities and their successes; one of which demonstrated that the mere existence of the primary dealer credit facility, primary corporate credit facility and secondary corporate credit facility was sufficient to restart the corporate debt markets. Though he noted efforts created to protect small and large businesses have provided relief to millions, Quaadman expressed his concerns about mid-size organizations too small for private debt markets and too large for the Paycheck Protection Program (PPP). He suggested utilizing a main street lending program to tide them over through the slow economic reopening. Quaadman concluded by stating if the government approaches the distribution of funding in a political manner or in a way that prefers one industry over another, that would be against the intent of the Act.

Douglas Holtz-Eakin, President, American Action Forum  

In his testimony, Holtz-Eakin recognized that the historic downturn of the economy has led policymakers to take unprecedented action in response and to ensure liquidity in the markets, citing zero percent interest rates, the passage of the CARES Act, as well as the funding and establishment of the Fed’s emergency lending facilities. Citing the unemployment rate, the labor force participation rate, and a shrinking economy, he praised the work of Congress in passing the CARES Act, a measure he asserted as essential to supporting the economy by providing over $500 billion in one month. He highlighted that Title IV is “missing in action,” noting that less than one percent of the $500 billion allocated for the activities of the lending facilities has been put to use. Holtz-Eakin concluded that the Federal Reserve and the Treasury have exemplified the ability to act quickly on a large scale, and this pace must continue to be reflected in actions to make facilities available with attractive terms in order to provide critical support to mid-sized companies.

Heidi Shierholz, Senior Economist and Director of Policy, Economic Policy Institute

In her testimony, Shierholz voiced her concern that the Title IV lending programs would take the form of loans as opposed to grants. She continued that while $500 billion of emergency relief has been provided to support liquidity, many businesses do not fear illiquidity, but rather bankruptcy. Shierholz outlined, in her estimation, the most important provisions to generating a rapid recovery, citing the need to provide direct fiscal aid to state and local governments to help pay back their three-year loans and avoid slashing spending or laying off employees, and to extend expansions of unemployment insurance (UI). She noted that the $600 per week in UI payments is the most effective part of the economic policy response to the pandemic and it is crucial to both extend the expiration date as well as expand eligibility criteria.

Question & Answer

Federal Reserve Lending Facilities

A number of committee members asked about the various liquidity facilities that have been stood up by the Fed in response to the crisis. Sen. Pat Toomey (R-Pa.) commended the strength of the capital markets throughout this period and the positive response to the mere announcement of the Federal Reserve Lending Facilities.

Sens. Mike Crapo (R-Idaho), Mark Warner (D-Va.), Martha McSally (R-Ariz.), Kyrsten Sinema (D-Ariz.) and Toomey focused on the Main Street Lending Facility and how to improve the utility of the facility. In response, Quaadman summarized the Chamber’s position that there was some muted enthusiasm for this facility from the start due to the lack of clear rules put forth by the Fed but that he expects loan demand to increase once parameters become clear. Specifically, Quaadman cited concerns regarding the length of the loans being too short, the penalty interest rate, affiliation rules and risk retention rules and advocated for increased flexibility for both borrowers and lenders. Holtz-Eakin added that in his view, the parameters governing this facility are too stringent and burdensome for borrowers. He recommended a decreased minimum loan size, fixed interest rates, increased loan length and increased funding. Holtz-Eakin also added that the Special Purpose Vehicle could take 100 percent of the loan. He concluded that the focus must remain on the larger economic goal as opposed to budgetary concerns.

Sens. Bob Menendez (D-N.J.), Doug Jones (D-Ala.) and Crapo raised concerns regarding the Municipal Liquidity Facility (MLF). Crapo reiterated that the current threshold does not cover a single county or city in Idaho and Menendez stated that the terms are too stringent to be effective. Holtz-Eakin agreed that in its current form, he has no confidence that this will remedy the problems of the smaller counties or municipalities. He added that the terms of the MLF should be longer and that there is no reason to rush the repayment in any way. Menendez also took the opportunity to encourage support for the State and Municipal Assistance for Recovery and Transition (SMART) Act.

Relief for State and Local Governments

Sens. Jack Reed (D-R.I.), Menendez, Jones and Crapo focused a variety of questions on how to best support state and local governments. Shierholz consistently reiterated the need for grants, not loans, from the federal government citing the huge decline in tax revenue and the need to make sure that budget shortfalls are made up. Holtz-Eakin stated that he is agnostic as to whether this relief takes the form of grants or loans but emphasized that without a robust state and local sector, there will be no robust economic recovery writ large.

Paycheck Protection Program

Sens. Jon Tester (D-Mont.), Thom Tillis (R-N.C.), Jones and Crapo asked the panelists a variety of questions regarding the PPP, specifically how it can be improved to better assist small businesses. Quaadman outlined that a major challenge is the fact that the PPP FAQs continue to “shift the goalposts” for small businesses to be in compliance with the forgiveness portion of the loan. He asserted that small businesses should be considered to be in compliance in accordance with the guidance in place at the time when they received the loan. Holtz-Eakin emphasized that the Treasury should be as quick as possible to provide access to these funds. Crapo specifically emphasized the pressing need to implement the 13(3) facilities as quickly as possible. In response to a question from Jones regarding the impact of COVID-19 on minority-owned small businesses, Quaadman referenced the Chamber’s support for a Community Development Financial Institution (CDFI) set aside in the latest round of PPP funding with Shierholz emphasizing the importance of ensuring the flow of assistance to these businesses.

Miscellaneous

Sen. Elizabeth Warren (D-Mass.) criticized the Occupational Safety and Health Administration (OSHA) for the lack of guidance throughout the COVID-19 pandemic. She also critiqued efforts to shield businesses from liability during this period.

Tillis discussed global supply chain resilience concerns and stated that this is the right time to incentivize companies to increase their presence in either the United States or a more reliable trading partner. Quaadman and Holtz-Eakin agreed that this process should be pursued via market incentives as opposed to burdensome and overly prescriptive restraints.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.