Fed, Treasury clarify underwriting rules for Main Street loans

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WASHINGTON — The Federal Reserve and the Treasury Department clarified underwriting expectations for lenders participating in the Main Street Lending Program in a set of frequently asked questions Friday in an attempt to assuage bank concerns of taking on added risk.

The $600 billion Main Street Lending Program was established using money from the Coronavirus Aid, Relief and Economic Security Act to help businesses with up to 15,000 employees or $5 billion in annual revenue that were in sound financial shape before the pandemic, and offers loans of $250,000 to $300 million.

Only a fraction of the funds allocated for the program have been put to use since the Fed started purchasing loans in July. Fed Chair Jerome Powell said Wednesday that about $2 billion in Main Street loans has been issued so far, and acknowledged that lenders were concerned about keeping 5% of those loans on their books. The Fed is purchasing the other 95% through a special-purpose vehicle.

But some banks have been nervous about having skin in the game on Main Street loans, and recent reports allege that Treasury has instructed banks to not let borrowers default, potentially scaring banks from taking on the risk.

“Banks like to make good loans — that's what they do,” Powell said during a press conference. “They're trained to make good loans, so you should expect that they, and we expect, that they will do some underwriting. We also want them to take some risk, obviously, because that was the point of it, and the question is, how do you dial that in? It's not an easy thing to do.”

The Fed and Treasury looked to soothe some of those fears on Friday, emphasizing in the new FAQs that lenders should not make Main Street loans based on a borrower's current financial state, which may have been damaged by the coronavirus, and should instead evaluate potential Main Street borrowers’ pre-pandemic financial condition and post-pandemic prospects. Lenders should also factor in the payment deferral features available to Main Street loans, the Fed said.

The FAQs were also developed in consultation with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, the two other banking regulators, and offered more information on how bank examiners will treat Main Street loans.

Supervisors will not rebuke banks for Main Street loans that were made in compliance with the program’s requirements, the Fed said, including loans that could be considered “non-pass” at the time of the origination, as long as the weaknesses in those loans derive from the COVID-19 pandemic.

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Main Street Lending Program Federal Reserve Treasury Department Lending Coronavirus CARES Act Jerome Powell OCC FDIC