WASHINGTON – The Federal Reserve will lower the minimum lending level in its small business lending program and waive some fees in an attempt to boost participation in a program that has so far provided little help to struggling businesses.
The Fed said Friday it would support loans as low as $ 100,000 in its Main Street lending program, from a low of $ 250,000 previously. The Main Street program aims to support small and medium-sized businesses by purchasing 95% of a loan from participating banks. This is intended to limit the risk for banks and encourage them to lend more.
Yet, so far, the program has only made 400 loans for a total of $ 3.7 billion, well below the $ 600 billion in total funding that the Fed has said it is ready to lend. The Treasury Department provided $ 75 billion to cover any loss.
Main Street’s shortcomings have fueled many critics who accuse the Fed of doing more to help Wall Street and big business than small businesses during the pandemic. Fed Chairman Jerome Powell responded that many small businesses, hit hard by the recession, are likely in need of grants rather than loans. Yet the Fed only has “lending powers,” said Powell, “no spending power.”
To encourage banks to make smaller loans, the Fed will remove the 1% transaction fee it charges banks for loans under $ 250,000. It will also double the fees the Fed pays banks to service loans at 0.5%, from 0.25%.
And the central bank said companies looking to borrow from the Main Street program may be able to exclude loans of up to $ 2 million that they have received from the Paycheck Protection Program, the lending program for individuals. small businesses established by the aid plan adopted by Congress. in March.
If a borrower has requested forgiveness of this loan, they can exclude it for the purposes of calculating their unpaid debts. This would allow him to borrow more under Main Street.
The Main Street program provides five-year loans to businesses and nonprofits with up to 15,000 employees or $ 5 billion in revenue. There is no principal payment for the first two years of the loan and no interest payment for the first year.
Members of Congress have pushed Powell in recent hearings to make the program more appealing. Still, Powell suggested in testimony last month that “creditworthy” small businesses might be able to borrow from banks without needing the Fed’s help.
William English, a finance professor at the Yale School of Management and a former senior Fed official, said the changes announced on Friday would likely help boost participation in the program.
English and Nellie Liang, another former Fed official, wrote in a study earlier this year for the Brookings Institution that the Fed should lower the minimum loan amount and raise fees.
Yet even if more loans are made, the smaller sizes now allowed suggest that the dollar amount of loans will not increase as much, English said.
Many small banks and businesses have been put off by the heavy paperwork required by the program, English said.
Main Street is for businesses that had healthy businesses before the coronavirus pandemic, according to the Fed, and will likely come back to full force once the pandemic is over.
But as the virus outbreak worsens again, with confirmed cases reaching record levels this week, many companies may not be able to take out a loan, English said. One option would be for the Fed to write off all or part of a Main Street loan, but that would require an act of Congress.
Under certain criteria – for example, if a state ordered business closings again – “it would be very helpful to be able to say that part of the loan would be canceled,” English said.