Fed’s $600 Billion Lending Program Not Reaching Businesses in Need

The Federal Reserve allocated $600 billion towards the Main Street Lending Program as part of the CARES Act, the sweeping stimulus relief package passed by Congress and signed by the President on March 27.

So far, only 0.2 percent of the allocated funds have been loaned out, meaning that 99.8 percent of the $600 billion Main Street Lending Program funds are sitting unused.

The government intended for the program to assist businesses with fewer than 15,000 employees or less than $5 billion in annual revenue, companies too large to receive Small Business Administration Paycheck Protection Program (PPP) loans.

As for the loans themselves, companies could receive between $250,000 and $300 million, with the Fed purchasing 95 percent of the stake while the lending bank would retain 5 percent of the loan.

However, American Banker reported that smaller banks were taking up most of the loans through the program (which they then lend to businesses that request them) instead of bigger banks with bigger customers.

“The loans that we’ve seen through our portal on the Main Street facility are disproportionately community banks and those banks under $10 billion, which highlights that they’re adapting very quickly,” said Boston Fed President Eric Rosengren.

Although small banks make up the majority of those willing to give out loans, Bloomberg reports that businesses are being denied loans or receive strict terms, which has kept the program from taking off in the same way the PPP loans had.

Rosengren recently told The Washington Post that Congress should consider making the regulations around the Main Street Lending Program relaxed so banks can issue riskier loans. Reducing restrictions would widen the number of eligible borrowers. However, it would leave taxpayers to cover borrowers that ultimately don’t pay back the loans.

“It’s important for Congress to make clear how much risk they want,” Rosengren told The Post. “Right now, it’s easy to say, ‘We want lots of loans.’ But a year and a half from now, people are going to want to know why those loans went bad.”

Congress was likely looking to prevent taxpayers from footing the bill for risky loans that went south, but Rosengren’s idea may result in more benefit than harm in the long run.

Virginia-based data analytics firm IDM tried taking a loan out with JP Morgan Chase, but the bank asked IDM to put up real estate the company didn’t have as collateral.

“We can’t even get out of the box and submit an application,” John Chung, chief operating officer at IDM, told Bloomberg. “This whole thing is kind of a joke.”

Still, the hope is that small community banks can help small to medium-sized businesses in their communities get these loans in a way that large banks may not.

“One of the advantages of being a community bank is you know who’s in distress,” Rosengren said. “If you’re a universal bank that has national coverage, I think you’re trying to put in standards and processes in place that extend across all your branches and all the bank offices that you have, and so that process takes more time.”

In the meantime, banks are lending less. According to several Bloomberg sources, the Treasury Department advises banks to take on as little credit risk as possible, likely to avoid losses, further complicating an already troubled economy.

The Senate Banking Committee recently took up the subject of the Main Street program in a hearing on Sept. 9 but did not reach a consensus.

Senator Patrick Toomey (R-Pa.) said that main street businesses could be finding credit in other ways. He remained optimistic that the current program cannot be counted as a failure yet but instead noted the importance of banks taking on less risk.

“[The current structure is] meant to create an incentive for the banks to do proper underwriting so that there is some limit to the amount of risk that is being taken here,” Toomey said. “The idea was never to lend money to fundamentally insolvent businesses.”

However, the idea of this money not being used, despite banks taking on less risk, undercuts the need for small to medium-sized businesses. These businesses make up as much as one-third of the private sector and, with relief, could continue operations and pay or hire employees, which also directly benefits the economy.

“We are going about this backwards,” said Sen. Sherrod Brown (D-Ohio). “Every dollar we give to working families goes directly to supporting the real economy.”

Only time will tell if the program picks up steam, leaving more local businesses afloat to benefit consumers.

“I am not sure the verdict on Main Street is fully in yet,” said Jeremy Stein, chairman of the Harvard University economics department. “But I do think it will be a problem if the economy continues to suffer, corporate bankruptcies go up, and the program still has little take-up.”

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