Small banks are dominating the Fed's Main Street Lending Program

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WASHINGTON — Recent data from the Federal Reserve shows that community banks have been far more eager to participate in the central bank's Main Street Lending Program aimed at stemming losses related to the COVID-19 pandemic, a trend that is likely to continue even as the middle-market business rescue program gains steam.

The Fed started purchasing majority stakes in loans made under the Main Street Lending Program in early July, and although the program has been slow to start, recent data has shown that more lenders are beginning to originate loans.

As of last week, the Fed had purchased participations in 32 loans amounting to about $250 million, with another 55 loans totaling $574 million under review, according to the Federal Reserve Bank of Boston, which is administering the program.

But the Fed’s data shows all the banks behind those loans have less than $16 billion of assets.

“The loans that we've seen through our portal on the Main Street facility are disproportionately community banks and those banks under $10 billion, which highlights that they're adapting very quickly,” said Boston Fed President Eric Rosengren, speaking Aug. 12 to the South Shore Chamber of Commerce in Massachusetts.

The $600 billion Main Street Lending Program, which is being funded by the Fed and the Treasury Department through congressional appropriations in the Coronavirus Aid, Relief and Economic Security Act, is available to businesses with fewer than 15,000 employees or less than $5 billion in annual revenue. Eligible companies can receive a loan of between $250,000 and $300 million through the program.

Under the terms of the program, the Fed will purchase a 95% stake in Main Street loans, while the lender retains 5% of the loan on its books.

The program was intended to cater to businesses that may have been too large to tap into the Small Business Administration’s Paycheck Protection Program, which offered forgivable loans to businesses with up to 500 employees. Many bankers anticipated that the PPP was better suited to larger banks serving larger customers than smaller banks serving smaller ones.

“You'd almost think would be the other way around: the larger, more leveraged banks are able to take on this risk rather than the small ones,” said Tim Stretton, a policy analyst at the Project on Government Oversight.

But that has not proved to be the case. The $16 billion-asset City National Bank of Florida in Miami is the largest lender by far of the five the Fed has disclosed in its loan-level transaction data.

“Helping small and midsized businesses sustain themselves and keep people employed has been a top priority,” Jorge Gonzalez, CEO and vice chairman of City National Bank of Florida, said in a statement. “Our team worked diligently to prepare for the program, educate clients and accept and process loan applications as soon as the eligibility window opened in early July.”

Community banks may have been able to get loans out the door and to their customers more quickly than their larger national counterparts simply because they “know their borrowers better,” said Ben Frank, executive vice president at Sunwest Bank in California, which is a registered lender in the program.

“They know the individuals [and] the management teams better than they understand the drivers for those businesses,” he said. “Those are all qualitative factors you can't put on an underwriting matrix and make a decision as to whether or not a Main Street loan is a good fit or not.”

It might take more time for larger banks to get involved in the program, Rosengren conceded in an interview.

“One of the advantages of being a community bank is you know who's in distress,” he said. “If you're a universal bank that has national coverage, I think you're trying to put in standards and processes in place that extend across all your branches and all the bank offices that you have, and so that process takes more time.

“It's the difference between navigating with a canoe and navigating with an ocean liner,” Rosengren added. “It just takes more time to turn the ocean liner.”

Additionally, the CARES Act’s dividend, bonus and share repurchase restrictions, which are applicable to Main Street loans for the duration of the loan term plus one additional year, may have incentivized larger borrowers at larger banks to obtain other forms of financing.

For creditworthy borrowers, larger banks "are applying their standard lending and would probably write a non-Main Street loan for those customers,” said Matt Kulkin, co-chair of the financial services group at Steptoe & Johnson.

Many bigger banks have also declined to disclose whether or not they will grant Main Street loans to new customers, and several — including Wells Fargo, Citigroup and U.S. Bancorp — have said they are only serving existing customers.

That may have opened an opportunity for smaller banks as well. Most of the applications the $2 billion-asset Sunwest Bank has received for Main Street loans are from new customers, said Frank.

“I think we'll definitely acquire new customers through the Main Street Lending Program,” he said. “Because these loans are a little bit more complex, we're probably not going to be doing nearly as many MSLP loans as we did PPP loans, but I definitely anticipate that we will acquire new customers.”

Customers with an existing line of credit at a participating bank are able to tap the Main Street Expanded Loan Facility, which allows a borrower to expand an existing loan up to $300 million. In theory, that facility would be most appropriate for large banks and their larger customers, but that facility has yet to purchase participations in any loans.

“The data that at least I saw last week that showed … really a strong dislike for the expanded loan facility is consistent with what our clients have experienced working with different lenders,” said Kulkin.

Those loans may take longer to negotiate because they often involve negotiation between additional parties, said Rosengren, who also noted that some lenders have been lukewarm about accepting the terms of the Expanded Loan Facility.

“I would say in addition that one of the characteristics of those loans is that [lenders] in effect have to share the collateral with the Federal Reserve, and there does seem to be a reluctance among some large banks to do that,” he said.

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Main Street Lending Program Federal Reserve Federal Reserve Bank of Boston Coronavirus CARES Act Small business lending Eric Rosengren Community banking Stock dividends