The battle of the Main Street program – which is in stark contrast to the popular Paycheck Protection program that offered hundreds of billions of dollars in forgiven small business loans – has raised concerns that many businesses will remain lifelong as the economy continues to more signs of relapse.
“The longer this pandemic lasts and the more hot spots occur – it’s not a very rosy picture,” said Brian Crawford, Executive Vice President of Government Affairs at the American Hotel and Lodging Association.
The program is one of nearly a dozen urgently put together by the Fed as the coronavirus pandemic has turned the economy upside down, shut down businesses across the country, and forced tens of millions of Americans to lose their jobs.
The central bank’s actions have largely received praise for stabilizing financial markets and sustaining credit. But some programs, such as Main Street and a separate loan facility for state and local governments, have barely gotten off the ground.
Part of the limitation with the Main Street program is that the Fed is legally prohibited from lending to insolvent companies, making it hesitant to intervene to help companies in difficulty. And it cannot provide subsidies, only loans.
“It is just too difficult to do this because of the restrictions imposed by the Fed by law,” said David Beckworth, a senior research fellow at George Mason University’s Mercatus Center.
Also, the Fed is not set to absorb losses in the event of loans defaulting, and has therefore partnered with the Treasury to cover any losses with funding from the CARES Act, the $ 2 trillion economic support package offered by Congress in March.
The Congressional Commission set up to oversee the Fed’s and the Treasury’s emergency efforts will hold a hearing on the program on August 7.
Under the program, which opened its doors earlier this month, the Fed buys 95 percent of a loan to a company with fewer than 15,000 employees or less than $ 5 billion in annual income. The minimum loan size is $ 250,000 for new credit, while extensions to existing loans add up to $ 300 million.
On Wednesday, the central bank had about $ 82 million in Main Street loans, while additional loans, about four times the size, were nearly completed. That suggests the program is showing gradual signs of momentum, but it’s still a fraction of the $ 600 billion that the Fed and the Treasury have set aside for the loans.
“We’re not talking about billions of dollars, but it’s a steady stream of small to medium-sized loans coming in from banks across the country,” a senior finance minister said in an interview.
The official and the banks say the demand from borrowers is not particularly high at the moment – either because companies can get loans through conventional means or because they are not currently seeking financing for new projects and equipment.
They also note that banks have much more room to extend new loans, unlike in March, when companies began to draw on credit lines en masse. That means banks will be less desperate for Fed loans for the time being.
An official in charge of Main Street’s efforts at a major U.S. bank expected the program to move closer when the end of the year stopped working.
“Borrowers need the money for 2021 and beyond, not just for tomorrow,” the official said. “I see demand for Main Street is increasing before the program ends, because there will be fear of missing out on something. … It’s a good deal if you need the money. ‘
The bank official said the program makes sense especially for otherwise healthy borrowers who are more unsure about when they will be able to function normally again, a type of business that banks hesitate to borrow on their own.
However, as the crisis continues or even worsens, demand for credit can increase rapidly. A major problem is that banks have little incentive to extend loans that they otherwise would not; the paperwork is extensive and banks must endorse it anyway.
That could cause lenders to reject companies that would otherwise be eligible for the program, especially since banks would still take a percentage of the loss if they lend to companies that are slightly more risky than their acceptance would normally allow.
Afsheen Afshar, the founder of Pilot Wave Holdings, has experienced this hesitation up close. Its long-term holding company invests in small businesses in areas such as retail, freight and pharmaceuticals, providing them with state-of-the-art technology. He said he has struggled to interest banks in loans to two companies with fewer than 30 employees who are going to buy his business.
“People with us were relatively clear, explicit and implicit that while we meet all of the Fed’s requirements, they are free to impose additional requirements that they would like,” he said, reaching out to more than a dozen banks. “The additional requirements are to some extent that our companies are certainly not going to meet them,” such as providing collateral worth 200 percent of the loan or real estate that has no other creditors’ claims.
“If I have that, what do I need Main Street for?” he said.
Without these loans, he said, his company may have to fall back on the technology it offers or completely rethink the transactions.
Groups representing both large and small banks recognize that there is no strong incentive to use the program.
“Why would you want to have such a prescriptive deal with dozens of pages of rules and regulations when banks have long been in lending and know how to provide credit?” said Paul Merski, executive vice president at the Independent Community Bankers of America. “Most [banks] watch this program and shake their heads that it is too complex for both the borrower and the lender. ”
He said that only three or four banks in his group had expressed interest in using the program.
Lauren Anderson, associate general counsel at the Bank Finance Institute with major lenders, said banks are getting directions from the Fed, which “tells them to use their existing processes and procedures.”
“You don’t want banks to provide a lot of terrible loans, exposing the taxpayer but also the banks,” she said.
“If the intention is to help companies that are less creditworthy, there must be some sort of downside protection against credit risks,” such as a government-backed guarantee or having the Fed take initial losses, she added. .
Companies with high debts / profit are also explicitly not eligible for the program.
Senate president Mike Crapo urged Fed chief Jerome Powell and Treasury Secretary Steven Mnuchin on Friday to extend the program to create a Main Street option for asset-based companies such as hotels, being disadvantaged by this requirement, something the senior Treasury official said, the government is considering.
“There are many companies that are rich in assets but lack sufficient cash flow,” the official said.
But the program is unlikely to expand for other debtors.
“What we’ve tried to do is set up a program with a specific goal, and the specific goal is to help companies that are victims of the crisis,” the official said. “We are not there to help companies that have harmed themselves by taking too much risk or borrowing too much or overpaying their executives and getting in trouble before Covid came.”