Fed weighs changes to Main Street program to allay banks' concerns

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WASHINGTON — The Federal Reserve is considering changes to its middle-market business rescue program in order to make it more available to borrowers, but the law limits how much additional risk the central bank can take on, said Fed Chair Jerome Powell.

Only a fraction of the funds allocated for the $600 billion Main Street Lending Program have been put to use since the Fed started purchasing loans in July. Powell said Wednesday that about $2 billion in Main Street loans has been issued so far.

Many have speculated that part of the problem could be that, even though the Fed is taking on most of the risk, banks still hold on to a 5% stake of loans in the program. Financial institutions are wary of taking on that added risk.

“Lenders are concerned about the underwriting expectations,” Powell said at a press conference after a meeting of the Federal Open Market Committee. “So, banks, their approach is likely to be that they're going to underwrite this loan roughly the same as they underwrite any loan — they’re keeping part of it.”

“Lenders are concerned about the underwriting expectations,” Fed Chair Jerome Powell said of the limited participation in the Main Street Lending Program.
“Lenders are concerned about the underwriting expectations,” Fed Chair Jerome Powell said of the limited participation in the Main Street Lending Program.

The Fed “will be making some changes in that respect,” Powell added.

The 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. It was one of several facilities the Fed stood up using its emergency lending powers under Section 13(3) of the Federal Reserve Act.

But Powell said legal limits on who can receive assistance could be constraining the program.

“If you look at the law under Section 13(3), it's very clear that we are to make loans only to solvent borrowers and the CARES Act is quite specific in keeping all of the terms of Section 13(3) in effect, including the requirement that we gather good evidence that the borrower is solvent,” he said.

A recent Bloomberg report claimed that the Treasury Department has been instructing banks to take zero losses on Main Street loans, making lending through the program a risky venture for many financial institutions.

“Banks like to make good loans — that's what they do,” Powell said. “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.”

Powell also discussed a growing concern in commercial real estate, as delinquency rates among CRE borrowers have been on the rise.

With commercial real estate companies suffering during the pandemic, more bankruptcies could lead to increased defaults on CRE loans.

The Fed has said that fiscal support may be more beneficial for commercial real estate borrowers than backing from the agency, given that the central bank can only lend and that would saddle those borrowers with more debt. But as stimulus talks in Congress have stalled, more borrowers have been looking to the Fed for an answer.

“We're still working on it,” Powell said. “I would say it may be that further support for commercial real estate will require further action from Congress.”

However, Powell said, commercial real estate does benefit from several of the Fed’s existing emergency lending facilities, like the Term Asset-Backed Securities Loan Facility. And the Federal Reserve Bank of New York is purchasing commercial mortgage-backed securities.

“In addition, I would say Main Street helps businesses pay their rent, so we're helping real estate in a number of other ways,” Powell said.

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Main Street Lending Program Federal Reserve Jerome Powell CARES Act Commercial real estate lending Coronavirus Small business lending FOMC Treasury Department