Main Street Lending Program: what changes did Federal Reserve make to small business loans?

Today the Federal Reserve made crucial adjustments to its Main Street Lending Program. What exactly are they and how will they affect access to loans?

Main Street Lending Program: what changes did Federal reserve make to small business loans?
Kevin Lamarque REUTERS

The Federal Reserve Board on Friday adjusted the terms of the Main Street Lending Program to extend access to the scheme that has been little used since its launch this summer, following the coronavirus-induced economic crisis.

The US central bank expanded the program in two important ways, it says “to better target support to smaller businesses that employ millions of workers and are facing continued revenue shortfalls due to the pandemic.”

How has the Federal Reserve expanded Main Street Lending Program?

The Fed has lowered the minimum loan size for three Main Street facilities available to for profit as well as non profit borrowers from $250,000 to $100,000 and the fees have been adjusted to boost the supply of these smaller loans.

The Treasury also issued a new FAQ clarifying that Paycheck Protection Program loans of up to $2 million should be excluded when determining the maximum loan size under the Main Street Lending Program, if certain requirements are met, which should also widen access to more small businesses.

What is the Main Street Lending Program?

The Fed says that the Main Street Lending Program facilitates loans to small and medium sized for profit businesses and non profit organisations that were in sound financial condition before the covid-19 pandemic but now can’t access credit on reasonable terms.

According to the Fed’s press release Friday, the Main Street program has made almost 400 loans totalling $3.7 billion. The average loan size was $9 million. The program was established with the approval of the Treasury Secretary and with $75 billion in equity provided by the Treasury Department from the CARES Act.

According to Reuters analysis fewer than 100 banks have made loans through the program to date. One barrier is that the program requires banks to take most of the risk for losses on the loans. Main Street loans became available to non profit organisations over the summer but as of 30 September the non profit program had no borrowers, Fed documents show.

Fed Chair Jerome Powell, who has been urging Congress to pass a second significant stimulus bill to support the US economy, said at a press conference last month he was interested in changing the terms of the program but that the Fed is tied by certain legal limitations as to what it is able to do.

"If you look at the law ... it's very clear that we are to make loans only to solvent borrowers," he said at that time. "Having said that, we're, we're continuing to work to improve Main Street, to make it more broadly available — make it pretty much to any company that needs it and that can service a loan." Reported CNN Business.

To give borrowers time to recover from the coronavirus pandemic, the program offers several five-year loan options, with deferred principal and interest payments for qualified businesses and non profits. Loan documents reflecting the new terms are expected to be available to registered lenders within the next week.

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