Why bankers remain unsold on Fed's Main Street program

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WASHINGTON — Although the Federal Reserve’s loan program aimed to help small and medium-sized businesses weather the coronavirus pandemic has been months in the making, many bankers are still on the fence about participating.

The Fed announced the $600 billion Main Street Lending Program in April, saying the central bank would backstop coronavirus relief loans for middle-market firms with up to 15,000 employees or $5 billion in annual revenue.

The Federal Reserve Bank of Boston, which is administering the program, opened up registration to lenders June 15. But some banks —particularly community banks — are still trying to decide if it’s worth their while to sign up.

“We’re still talking about it,” said Bob Fisher, president and CEO of the $485 million-asset Tioga State Bank in Spencer, N.Y., and incoming chairman of the Independent Community Bankers of America. “I would have to say we're leaning towards not participating just because we really haven't had a lot of demand from our customers.”

Eligible businesses that were in sound financial condition before the pandemic are eligible to receive loans of at least $250,000 through one of three component facilities. The Fed through the MSLP will then purchase 95% of each loan made under the program’s terms.
Eligible businesses that were in sound financial condition before the pandemic are eligible to receive loans of at least $250,000 through one of three component facilities. The Fed through the MSLP will then purchase 95% of each loan made under the program’s terms.

Still, the head of the Boston Fed said Friday that over 200 financial institutions of varying asset sizes had registered as of Thursday.

"These are still early days in the program, and we are seeing a steady stream of interest," Eric Rosengren, president and CEO of the Boston Fed, said in a speech to the Greater Providence Chamber of Commerce. He added: "The institutions that have registered so far are geographically dispersed, representative of all 12 Federal Reserve districts. I am encouraged, too, by the interest of many smaller financial institutions like community banks.”

Eligible businesses that were in sound financial condition before the pandemic are eligible to receive loans of at least $250,000 through one of three component facilities. The Fed, through the Main Street program, will then purchase 95% of each loan made under the program’s terms.

But part of the quandary for community banks is determining whether they will have loan demand from business customers.

Jim Donovan, the head of commercial and industrial lending at Bryn Mawr Trust in Pennsylvania, said the $4.9 billion-asset bank has had “very little inquiry” from potential borrowers. The institution is still trying to decide whether or not it wants to participate in the Fed program after receiving high demand for loans under the Small Business Administration’s Paycheck Protection Program.

Yet Donovan did not rule out his bank participating if they get more requests from customers.

“We want to support our clients in the program if needed,” he said.

The Paycheck program, unlike the Main Street program, offers loans to small businesses with fewer than 500 employees. The loans can ultimately be forgiven if the borrower meets certain conditions.

“As much energy and excitement as there was and has been around the PPP, we've not seen or felt that around the Main Street program,” Donovan said. “Yeah, I know [the Fed] has been adjusting it and making revisions along the way. But literally, the inquiries I've received have been two or three.”

Rosengren said the central bank is still trying to communicate with financial institutions to clarify aspects of the program.

"We continue to do widespread outreach and field significant numbers of inquiries," he said. "Lenders have a vested interest in the resilience of the businesses in their market, and this program gives them a way to help bridge those businesses that were sound before the pandemic to better days. Of course there is a learning curve, but we are seeing tremendous interest in the loans from businesses.”

But for smaller community banks, one deterrent is that most of their customers wouldn’t even qualify for a loan under the Main Street Lending Program. The maximum loan amount is partially determined by a borrower’s "earnings before interest, tax, depreciation and amortization," and for small businesses, that number is often lower than the minimum loan amount of $250,000.

Brad Bolton, president and CEO of Community Spirit Bank in Red Bay, Ala., and vice chairman of the ICBA, said that, while the $152 million-asset bank serves 116 customers for the Paycheck program, only about 10 of those customers would also qualify for the Main Street program based on the EBITDA requirement.

“I didn't think that I would have anyone to need the facility based on the loan amount being too high, which I still think it's too high at $250,000,” he said. “In reality, living in rural America, it should have been put at $50,000 because I've got small-business customers that their gross sales per year may only be $50,000 to $70,000 a year. And I don't think that people inside the Beltway really understand that that happens.”

However, Community Spirit decided to register as a lender in the program after a customer inquired about it and the bank determined that he qualified.

“When I have a customer who has called up, I feel like I've got to pursue it or he's going to go pursue it somewhere else,” Bolton said.

Still, some observers say calling the Main Street program a small-business lending initiative is misleading.

“When you think small business, you think mom and pop,” said Cynthia Romano, global director of CohnReznick’s Restructuring and Dispute Resolution Practice. “And they wouldn't qualify for a loan that size, no matter what their situation was, nor would they need that.”

The Fed has committed to making further adjustments to the Main Street Lending Program as necessary after it begins purchasing loans. Fed Chair Jerome Powell told Congress June 16 that the Fed is “very open to learning and adapting.”

“We have made repeated changes to these facilities to make them better structured to achieve their goals, and we’ll continue to do that,” Powell told the Senate Banking Committee. “If we’re hearing about companies for whom a loan is the right answer who do not for some reason qualify for the Main Street loan facilities and should, then we’ll be adapting to that.”

Lowering the minimum loan amount to $100,000 — which a number of trade groups have pushed for — would make the program more applicable to smaller businesses, said Fisher.

“I truly feel that this obviously is geared towards larger businesses … and not really Main Street, so I do think it's kind of it's a misnamed product that the Fed's putting out there,” he said. “Lowering that threshold to $100,000 would greatly target it towards a different audience.”

However, some feel that the Paycheck program provided smaller businesses with an option if they were seeking loans below $250,000.

“If companies are in need of something less than $250,000, that's really not what this program is,” said John Lanza, a partner at CohnReznick, referring to the Main Street program. “That was the PPP. This program wasn’t intended to provide liquidity to the smaller companies.”

But although Paycheck program was a “lifeline” for customers, said Fisher, many still have a need for more financing and could use something like the Main Street Lending Program. Many borrowers who obtained Paycheck loans are still eligible to receive a Main Street loan.

“They're going to need some ability to either recapitalize or get some cash flow going again, because they're going to have to gear up, they've got to bring employees back, and so I really think that there's going to need to be some other facility that's more geared towards small business,” Fisher said. “I don't think they're looking necessarily for forgiveness, but I think they may need some capital to kind of get reinvigorated.”

Some smaller lenders are also worried about the onus that might be placed on them to determine whether a Main Street borrower is complying with the guidelines of the program. Borrowers in the program are required to adhere to restrictions on compensation, stock repurchases and dividend payments as specified in the Coronavirus Aid, Relief and Economic Security Act.

Bolton called on the Fed to provide a “safe harbor” for lenders, much like the Paycheck program, in which businesses can rely on a borrower’s attestation without liability.

“It raises concerns to us about the responsibilities of the lender, and at what extent is a lender going to have to monitor those activities,” he said.

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Main Street Lending Program Federal Reserve Small business lending Community banks Jerome Powell Federal Reserve Bank of Boston Coronavirus CARES Act ICBA