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Federal Reserve Chairman Jerome Powell said the economic response to the coronavirus alleviated the fallout from the pandemic-induced recession but suggested Congress would likely need to spend more money to shore up parts of the economy that continue to struggle, the Wall Street Journal reported. “Our economy will recover fully from this difficult period,” Powell said in prepared remarks posted yesterday that are set for delivery at a congressional hearing today. The Fed will “do what we can, for as long as it takes, to ensure that the recovery will be as strong as possible, and to limit lasting damage to the economy.” Powell begins three days of hearings on Capitol Hill today, beginning with the House Financial Services Committee, where he will testify alongside Treasury Secretary Steven Mnuchin. Both men will also appear before the Senate Banking Committee on Thursday. Powell testifies tomorrow before a separate House panel overseeing the U.S. response to the coronavirus pandemic. Powell said that the economy had rebounded in recent months following the end of lockdowns imposed to slow the spread of the virus, and that gains in household spending likely reflected federal stimulus efforts that included expanded unemployment benefits. Powell has said the government will need to do more to support hard-hit businesses, state and local governments, as well as unemployed workers in those sectors to prevent deeper scars from slowing any rebound. Read more. (Subscription required.) 

To watch the House Financial Services hearing scheduled for 10:30 a.m. today, please click here. 

With the U.S. economy experiencing the worst contraction in years due to widespread shutdowns associated with the COVID-19 pandemic, struggling small businesses need debt relief more than ever. While the Small Business Reorganization Act (SBRA) is still relatively new, it has proven to be a useful tool for small businesses seeking to avoid liquidation, according to a New York Law Journal commentary. Not only have courts been lenient in approving retroactive petitions under subchapter V, but new filings also continue to increase, especially in those states most affected by the pandemic. The streamlined and relaxed plan confirmation requirements of SBRA have already proven useful. For example, Sustainable Restaurant Holdings, the parent company of a west-coast sushi restaurant chain severely impacted by the COVID-19 pandemic, successfully confirmed a plan that provided for a going-concern transaction in just over two months. (In re Sustainable Restaurant Holdings, Inc., Case No. 20-11087 (Bankr. D. Del. July 16, 2020). Despite a lack of impaired creditor support, the plan was confirmed pursuant to new section 1191, as it provided for all cash on hand and the revenues and proceeds of all assets of the debtors to be distributed to creditors over time. As companies seek to recover from the COVID-19 pandemic and chapter 11 bankruptcy filings continue to increase, small business debtors, which may not have been able to afford a typical chapter 11, have seemingly embraced the new, more cost-effective option afforded by the SBRA, according to the commentary. Read more.

*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.

SBRA will be one of the many important topics of discussion at the Insolvency 2020 Virtual Summit. Sixteen leading insolvency organizations are participating in the Virtual Summit to bring thought leaders from the worlds of restructuring, insolvency and distressed debt for insightful online programming and engaging networking via a state-of-the-art virtual platform. Click here for more information and to register. 

The Federal Reserve issued new guidance to banks on Friday in an effort to improve access to new business loans through its $600 billion Main Street Lending Program, the Wall Street Journal reported. The central bank is relying on banks to underwrite loans to qualified small and midsize businesses under the novel effort to reach firms that aren’t large enough to access corporate funding markets, which the central bank has also backstopped. The Fed is trying to encourage banks to make loans that might not otherwise be made to support businesses through the coronavirus pandemic. The program has faced limited uptake since the Fed began purchasing loans in July, with some banks saying they are selling 95% of eligible loans to the Fed because of concerns over how regulators might treat loans to firms whose revenues have been significantly harmed by the pandemic. In response, the central bank said on Friday that it had agreed with bank regulators at the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to clarify that federal examiners will provide more flexibility in evaluating loans originated under the Main Street program. Through Wednesday, banks have extended slightly more than $1.5 billion in loans under the program. The Treasury Department has provided $75 billion to cover loan losses, which will allows the Fed to extend up to $600 billion in loans. So far, large national banks have mostly shied away from using the program.

President Donald Trump said that he was open to more stimulus spending for pandemic relief in stalled talks with congressional Democrats, Bloomberg News reported. Trump, at a White House press conference yesterday, said that he liked “the larger numbers” in a compromise $1.5 trillion stimulus proposal from a bipartisan group of House lawmakers that was an effort to break a months-long deadlock over bolstering the U.S. economy amid the coronavirus pandemic. The plan from a 50-member group of House Democrats and Republicans has a bigger total spending figure than the administration previously endorsed. It’s also higher than what Senate GOP leaders say would be acceptable to Republicans. But Trump, on Twitter earlier yesterday, urged Republican lawmakers to accept a higher level of spending than the last proposal made by the Senate GOP. After initially proposing a $1 trillion stimulus at the end of July, Senate Republicans attempted to advance a bill providing $650 billion in economic aid, without the direct payments to individuals that the president — and Democrats — want.

Federal Reserve Chair Jerome Powell said that the Fed will be making some changes to its Main Street Lending Program, which is aimed at helping small- to mid-sized companies and nonprofits that have struggled during the pandemic, Bloomberg News reported. Despite many private businesses struggling economically because of shutdowns or a drop in customers during the pandemic, the fund hasn’t seen a large take-up. Currently banks that make the loans in the program, and subsequently sell 95 percent of each loan to the Fed, are applying the same underwriting standards that they would to their regular loans, Powell said. The Fed is working to make sure that banks understand the terms of the program clearly and that it’s meant for borrowers that don’t have access to borrowing under normal terms right now. “We expect that they will do some underwriting; we also want them to take some risk, obviously because that was the point of it. The question is how do you dial that in? It’s not an easy thing to do,” Powell said in a press conference following the Fed’s September policy meeting on Wednesday. “We’re continuing to work to improve Main Street, to make it available pretty much to any company that needs it and can service a loan.” Powell said that the program has now bought about $2 billion in loans, which still represents just 0.3 percent of the total capacity of $600 billion. He added that companies are not citing credit constraints as a top problem right now. The Fed is also constrained, under Section 13(3) of the Federal Reserve Act, to only lending to solvent companies. “For many borrowers, they’re in a situation where their business is still relatively shut down and they won’t be able to service a loan so they may need more fiscal support,” Powell said. Read more.

In related news, the Federal Reserve yesterday announced that it would keep interest rates near zero percent amid growing concern about the slowing pace of the recovery from the coronavirus recession, The Hill reported. The Fed’s policymaking Federal Open Market Committee (FOMC) said yesterday that it would leave the baseline interest rate range at zero to 0.25 percent, the level set in March as the economy buckled due to the pandemic. Read more.

Many House Democrats are raising pressure on party leaders to break the logjam with the White House on coronavirus aid, eager to pass a bill before Election Day even with further concessions to Republicans, the Wall Street Journal reported. There is no vote on coronavirus-related aid scheduled for the House’s current three-week session. Anxious Democratic lawmakers, including incumbents defending competitive seats, want negotiators to return to the table to strike a deal before Congress takes a monthlong break for campaigning. Moderate Democrats have sent letters to their leadership, encouraging House Speaker Nancy Pelosi (D- Calif.) to resume negotiations with the White House. Pelosi has held firm that Democrats should support an expansive package that includes money for state and local governments, schools and extends unemployment assistance and food programs. The top two House Democrats, who are rarely at odds, are in disagreement about the next steps. House Majority Leader Steny Hoyer (D-Md.) has expressed a desire to be more flexible on negotiations and pass legislation during the September session, according to aides. Democrats currently have 232 seats in the House, compared with 198 for Republicans and one independent. Pelosi had told White House negotiators she would come down to $2.2 trillion on a bill and hasn’t ruled out a deal. Some Democrats have said that they would be willing to discuss a smaller package, potentially moving closer to the $1.5 trillion the White House has said it could accept. Last week, Senate Democrats blocked Senate Republicans’ whittled-down $300 billion coronavirus aid package, which included $300 in weekly federal jobless payments and aid for small businesses among other items. Even the most impatient Democratic lawmakers don’t see value in taking up the Senate bill, citing the need for more money for state and local governments, public schools and people facing food insecurity that the Senate bill left out. Read more. (Subscription required.) 

In related news, JPMorgan Chase & Co. Chief Executive Jamie Dimon said the economic recovery from the coronavirus recession could be derailed by a lack of additional economic stimulus, the election and a second wave of infections, Reuters reported. Dimon made the comments on Friday to stock analyst Brian Kleinhanzl of Keefe, Bruyette & Woods, who wrote about their meeting in a report. Dimon added that earlier government stimulus had delayed the full effects of the recession. As it hits, customers who have borrowed from the banks will feel the impact, the note said. Consumers are spending less. “Based on their data it is unclear if that trend is getting better or worse,” Kleinhanzl wrote. Read more.

Investigations of possible fraud in the federal Paycheck Protection Program are prompting some loan recipients to seek legal counsel, some lawyers say, the New Jersey Law Journal reported. Some of those cases involve clear-cut allegations of fraud, along the lines of the New Jersey lawyer charged earlier this month with fraudulently obtaining $9 million in PPP loans. But many investigations appear to focus on the more nebulous issue of whether the businesses really needed the money, lawyers said. Defense lawyers say they are getting calls from PPP loan recipients who have been contacted by investigators, or fear they may face charges in connection with the aid program. “What people don’t understand is that there is tremendous political pressure to get the money out the door,” said Christopher Porrino, chairman of the litigation department at Lowenstein Sandler. Knowing whether a PPP recipient will face trouble for taking aide it didn’t need is difficult, Porrino said. Applicants were required to certify that they needed the money to make payroll, “a pretty mushy standard,” he said. Adams said the PPP application process was fairly simple, although the specific requirements changed repeatedly while applications were being taken. The Small Business Administration, which runs the PPP program, apparently did not conduct a lengthy review of each application due to a desire to distribute the funds promptly. “If you sacrificed the speed at which this relief went out to the public for greater due diligence and verification, you may exacerbate an economic collapse. The speed at which this went out helped these businesses,” Adams said. Timothy Anderson, a criminal defense lawyer in Red Bank, said Congress made the application process “as easy as possible,” and when applicants made representations about their finances, “took their word for it.” In making the process so easy, though, the government “assumed a certain amount of fraud,” said Anderson. Read more. 

In related news, U.S. Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell will testify on Sept. 24 before the Senate Banking Committee on coronavirus relief, the committee said in a statement yesterday. 

More than 225,000 PPP loans worth nearly $23 billion were approved in Illinois alone. Without additional federal relief, some experts project a flood of small-business bankruptcies this fall as the PPP money runs dry, the Chicago Tribune reported. “The PPP money kept people out of bankruptcy this summer,” said Brian Shaw, a bankruptcy attorney at Cozen O’Connor in Chicago. “You’re going to see a wave of closures after Labor Day. Businesses just are not going to be able to continue.” The Small Business Administration wrapped up the PPP Aug. 8 after approving more than 5.2 million loans totaling $525 billion. The program, which was tweaked several times after its April launch, offered businesses with fewer than 500 employees forgivable loans of up to $10 million, if 60 percent of the money went toward payroll. Part of a broader coronavirus relief package, the $659 billion paycheck program has been beset by problems. It initially came under fire after banks allegedly prioritized larger clients ahead of smaller businesses. Extended for a second round, demand for the loans fell off, leaving about $130 billion of funds on the table. A Sept. 1 House subcommittee report found that billions of dollars in PPP loans may have been diverted to “fraud, waste and abuse” through lack of oversight from the SBA and the Treasury. The loans covered 24 weeks of payroll, but with no end in sight to the pandemic, the money is looking increasingly like a bridge loan to nowhere. “I think you’re going to see the wave of bankruptcies in September for reasons totally separate from the PPP loan,” said Tom Salerno of Stinson.. “You’re going to see it because they’ve got to right-size their balance sheet anyway. They’ve got to renegotiate their leases. They’re going to want to take whatever long-term debt they have and dig themselves out of this hole.” For some small businesses, getting a PPP loan and then filing for bankruptcy may have been the plan all along. The SBA barred bankrupt companies from applying for PPP loans, causing banks to deny applications and precipitating dozens of lawsuits by small businesses. The policy was ultimately upheld by the U.S. Court of Appeals in New Orleans.

Senate Republicans were confident yesterday that most GOP colleagues would vote to support a narrower coronavirus aid package, a move aimed to highlight party unity as lawmakers grew increasingly pessimistic about any deal with Democrats before the election, the Wall Street Journal reported. The GOP’s $300 billion scaled-back version of their earlier $1 trillion stimulus plan includes jobless aid, liability protections for businesses and school funding, among other measures. But facing Democratic opposition, the “skinny” bill wasn’t expected to clear its first procedural hurdle in the Senate today or spur any immediate breakthrough in stalled negotiations with Democratic leaders and the White House. Senate GOP leaders hadn’t held a vote on their earlier proposal, which divided Republicans. The less-expensive bill, which lawmakers said should bolster vulnerable party senators during the final stretch of fall campaigning, is expected to get support from at least 51 GOP senators. Republicans currently have a 53-47 majority in the Senate, but control is seen as up for grabs in the November election. Democrats have said the earlier GOP plan came up short of the needs raised by the pandemic’s health and economic effects, and the new one even more so. The new bill includes about $650 billion in spending, offset by $350 billion in savings elsewhere for a total cost of around $300 billion, according to GOP aides. The new GOP bill includes $300 in weekly federal unemployment payments through Dec. 27, establishes legal protections for businesses and health-care facilities, provides $29 billion in health-care funding, $105 billion for schools and permits the U.S. Postal Service to not repay a $10 billion loan set up in a previous aid package. It also includes a second round of the popular Paycheck Protection Program for businesses that have demonstrated a revenue loss. The proposed bill aims to resume assistance to small businesses under the PPP, which expired on Aug. 8. Under the plan, businesses with 300 or fewer employees can apply for a second PPP loan if they can demonstrate a reduction of at least 35% in their quarterly revenue from the same quarter in 2019. Such loans will be equal to 2.5 times the company’s average monthly payroll cost, with a maximum loan value of $2 million. As under the previous rule, at least 60 percent of the funds must be used on payroll. Read more. (Subscription required.) 

With the Senate poised to vote today on a slender GOP coronavirus relief bill that’s certain to fail, chances for a bipartisan deal on new economic stimulus look more remote than ever. This impasse has prompted top White House officials to consider a new round of executive actions that they hope could direct funding to certain groups amid fears that the nascent economic recovery could fail to gain momentum, the Washington Post reported. White House officials have discussed efforts to unilaterally provide support for the flagging airline industry while also bolstering unemployment benefits, according to two people aware of the deliberations who spoke on the condition of anonymity to share internal policy discussions. The White House has also discussed moving without Congress to direct more money for school vouchers and changing President Trump’s recent payroll tax changes to make it more effective. Typically, such actions require congressional approval. In August, Trump signed four executive actions meant to provide more unemployment aid, eviction protections, student loan relief and to defer payroll tax payments. The moves have had mixed success and came as political talks faltered on Capitol Hill. Read more.