Board of Directors questions value of Fed’s medium-sized business lending program

WASHINGTON – Members of a commission appointed to oversee the Federal Reserve’s response to the coronavirus pandemic expressed frustration at the pace at which the central bank’s Main Street Lending program has been supported and the limited interest so far in the effort.

The Congressional Oversight Commission, created by the Coronavirus Aid, Relief and Economic Security Act to oversee implementation by the Fed and the Treasury Department, held its first hearing, despite not having a chairman.

Members of the Commission – Reps. French Hill, R-Ark., And Donna Shalala, D-Fla., Senator Pat Toomey, R-Pa., And Bharat Ramamurti, a former adviser to Senator Elizabeth Warren, D-Mass. – interviewed witnesses about limited participation in the Main Street program and how to prevent widespread business closures. A Fed report released on Thursday showed that by the end of July only eight companies had borrowed that the MSLP had bought.

“After three months of setting up the program, the Fed has been running it for about a month,” said Ramamurti. “During that time, it has supported only 18 loans totaling US $ 104 million. That’s 0.017% of the $ 600 billion loan capacity that the Fed touted for the program in April. … The Main Street program was a failure in every way. “

“Why [have] relatively few borrowers … participated in this program? ”said Senator Pat Toomey, R-Pa. He added that he was interested in knowing “why it doesn’t seem to be in huge demand”.

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Toomey repeated Ramamurti’s questions about the weak interest.

“Why [have] relatively few borrowers … participated in this program? ”said Toomey. He added that he was interested in knowing “why it doesn’t seem to be in huge demand”.

The Main Street Lending Program, established with funding under the CARES Act, provides loans of at least $ 250,000 to qualified companies with up to 15,000 employees or annual sales of $ 5 billion. The loans come from third-party banks, but the Fed finances the business by acquiring equity interests.

Although the Fed first announced the introduction of the program in April, banks were only able to register in mid-June. It was officially launched on July 6th.

Eric Rosengren, president and CEO of the Federal Reserve Bank of Boston, which administers the Main Street Lending Program, said one of the reasons the program took so long to set up was that it is so different from other programs that central banks have put in place.

“This institution is an institution that we didn’t have during the financial crisis and that is really trying to appeal to a different segment of the population, namely the companies that are bigger than them [Paycheck Protection] Program was designed and is smaller than what the corporate facilities were designed for, ”said Rosengren. “Bank loans are inherently difficult because they are an arrangement between a bank and a borrower. Banks take a long time to negotiate with borrowers and this facility has many complex elements. “

Hill focused on the limited involvement of banks.

“5,000 banks took the opportunity to help out under the CARES Act in the PPP environment, and we have very few banks involved,” said Hill.

While over 500 lenders had signed up for the program by Aug. 4, according to Rosengren, only 29 different lenders had submitted a total of 54 loans to the Fed’s portal, he said.

Lauren Anderson, senior vice president and associate general counsel at the Bank Policy Institute, which represents large banks, said it could be more difficult for smaller banks to participate.

“When you think about the complexity of the program, I think it’s difficult not only for small borrowers but also for smaller lenders,” she said.

Anderson said banks are often finding more suitable alternatives to the Main Street Lending Program for borrowers.

“A borrower who can meet a bank’s basic underwriting standards usually finds that there is a product that is better for them given their loan needs,” said Anderson. “Maybe a term loan, for example, is really not what they need, and they really need something like a flexible working capital facility. As a result, our banks actually often find better solutions for these borrowers when they inquire about the program. “

Hill also asked witnesses whether membership rules that determine eligibility for the program restrict access.

“The Fed here on the Main Street Facility has adopted these Small Business Administration 7 (a) borrowing restrictions. Are these membership rules a serious obstacle to this mid-market of non-super-small businesses, and certainly those who are not allowed to raise capital in the public markets? “

Tom Bohn, CEO of the Association for Corporate Growth, shared Hills concern that restrictions in the Main Street Lending Program have restricted access for midsize businesses.

“These companies were originally banned from the PPP, and there was initially hope that the Main Street Lending Provision would have opportunities for them to take advantage of Main Street benefits and loans not only to keep jobs, but also in some of them are investing the changes they need to do when people start turning based on the economy, “said Bohn. “We heard from them loud and clear that their inability to access them had a significant impact on their business.”

The hearing also highlighted concerns that the Main Street Lending Program will not support jobs during the coronavirus pandemic, as companies do not have payroll maintenance requirements when participating.

Ramamurti asked Gwen Mills, secretary-treasurer of UNITE HERE, a hospitality trade union, if she knew of “one job” saved by the Main Street Lending Program. Mills said it wasn’t.

“Do you think it will help workers in the future, even if more companies get involved?” Ramamurti added.

Mills countered that if there were no “mandatory requirements for workers to be reinstated from the first day of aid”, workers could be losers.

But Toomey rejected the idea that there should be payroll requirements for companies participating in the Main Street Lending Program, as there are for PPP. The latter program effectively provides companies with a subsidy to pay their employees.

“With the Main Street Lending program, the idea was that it was a loan, and while obviously everyone wants to maximize employment opportunities, who want to maximize jobs, … people who were out of work … because a business was closed, it seemed doesn’t make sense, ”he said.

Despite limited participation in the Main Street Lending Program, Toomey said he still hoped there would be an increase in future participation.

“It is far too early to conclude that all of this has failed,” said Toomey. “Let’s remember it took a long time to get this up and running. This has always been the case because of the complexity of this type of lending. There has been an acceleration in its use lately. If the acceleration continues, we can see a significant increase. “

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