Oversight panel questions value of Fed loan program for midsize firms

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WASHINGTON — Members of a commission appointed to oversee the Federal Reserve’s response to the coronavirus pandemic expressed frustration with the pace at which the central bank’s Main Street Lending Program was propped up 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 Treasury Department, held its first hearing despite not yet having a chairperson.

The commission’s members — Reps. French Hill, R-Ark., and Donna Shalala, D-Fla., Sen. Pat Toomey, R-Pa., and Bharat Ramamurti, a former adviser to Sen. Elizabeth Warren, D-Mass. — questioned witnesses about limited participation in the Main Street program and how to prevent widespread closure of businesses. A Fed report released Thursday showed just eight businesses had taken out loans as of late July that were purchased by the MSLP.

“After taking three months to set up the program, the Fed has now been operating it for about a month,” said Ramamurti. “In that time it has supported a total of only 18 loans for a total of $104 million. That is 0.017% of the $600 billion lending capacity that the Fed touted for the program in April. … By any measure the Main Street program has been a failure.”

“Why [have] relatively few borrowers ... participated in this program?” said Sen. Pat Toomey, R-Pa. He added that he was interested in knowing "why it appears not to have a tremendous amount of demand."
“Why [have] relatively few borrowers ... participated in this program?” said Sen. Pat Toomey, R-Pa. He added that he was interested in knowing "why it appears not to have a tremendous amount of demand."

Toomey echoed Ramamurti’s questions about the weak interest.

“Why [have] relatively few borrowers ... participated in this program?” Toomey said. He added that he was interested in knowing "why it appears not to have a tremendous amount of demand."

The Main Street Lending Program, which was established using funding from the CARES Act, makes loans of at least $250,000 available to qualifying businesses with up to 15,000 employees or $5 billion in annual revenue. The loans are originated by third-party banks, but the Fed funds the deals by acquiring participations.

Even though the Fed first announced the rollout of the program in April, banks were not able to register until mid-June. It officially launched on July 6.

Eric Rosengren, president and CEO of the Federal Reserve Bank of Boston, which is administering the Main Street Lending Program, said part of the reason it took so long to set up the program was that it is very different from other programs central banks have deployed.

“This facility is a facility we didn’t have during the financial crisis and really tries to get to a different segment of the population, which is those businesses that are bigger than the [Paycheck Protection] program was designed for and smaller than what the corporate facilities are designed for,” Rosengren said. “Bank loans are inherently difficult because they are an agreement between a bank and a borrower. They take a long time for banks to negotiate with the borrower and this facility has a lot of complex elements.”

Hill focused on the limited participation by banks.

“5,000 banks jumped on the opportunity to help in the PPP environment under the CARES Act and we’ve got very few banks that are engaging here,” Hill said.

While over 500 lenders had registered for the program as of Aug. 4, according to Rosengren, only 29 distinct lenders had submitted a total of 54 loans submitted 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 that it may be more challenging for smaller banks to participate.

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

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

“A borrower who can meet a bank’s basic underwriting standards is typically finding out that there is a product that is more suited to them given their credit needs,” Anderson said. “So, for example, maybe a term loan is really not what they need and they really need something like a flexible working capital facility. So our banks are actually many times finding better solutions for these borrowers when they inquire about the program.”

Hill also asked witnesses whether affiliation rules that determine eligibility for the program are limiting access.

“The Fed here in the Main Street facility has adopted those Small Business Administration 7(a) lending affiliation limitations. For this middle market of non-super small businesses and certainly those not eligible to raise capital in the public markets, are those affiliation rules a serious impediment?”

Tom Bohn, CEO of the Association for Corporate Growth, echoed Hill’s concerns that restrictions in the Main Street Lending Program have limited midsized businesses’ access.

“These businesses were originally excluded from the PPP and there was hope initially that in the Main Street Lending provision that there would be opportunities for them to utilize benefits and lending from Main Street in order to not only keep jobs, but also invest in some of the changes that they need to do as people start to pivot, based on the economy,” Bohn said. “We have heard from them loud and clear that their inability to access them has had a significant impact on their businesses.”

The hearing also highlighted a concern that the Main Street Lending Program isn’t supporting jobs during the coronavirus pandemic, because there aren’t any requirements for companies to maintain payrolls if they participate.

Ramamurti asked Gwen Mills, secretary-treasurer of UNITE HERE, a hospitality union, whether she was aware of “a single job” that has been saved because of the Main Street Lending Program. Mills said she was not.

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

Mills responded that workers may lose out if there are not "binding requirements that employees be rehired from the first day of the aid."

But Toomey pushed back on the notion that there should be payroll requirements for businesses participating in the Main Street Lending Program like there are for PPP. The latter program effectively provides companies with a grant to pay their employees.

“With the Main Street Lending program, the idea was that these would be loans and while obviously everybody wants to maximize employment opportunities, maximize jobs, ... the idea that we would require companies to borrow money for the purpose of maintaining a payroll for people who they didn’t have work ... because a business was closed, that didn’t seem to make sense,” he said.

Despite limited participation in the Main Street Lending Program, Toomey said he is still hopeful that there will be an uptick in future participation.

“It’s way premature to come to the conclusion that this has all been a failure,” Toomey said. “Let’s keep in mind, it took a long time to get this up and running. That was always going to be the case because of the nature of the complexity of doing this kind of lending. There has been a recent acceleration in use. If the acceleration continues, we may see significant pickup.”

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Main Street Lending Program CARES Act Coronavirus Federal Reserve Federal Reserve Bank of Boston Eric Rosengren