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Fed Eases Terms on Main Street Lending Program to Encourage Small Business Loans

  • Federal Reserve reduces minimum loan size and adjusts fees for its Main Street Lending Program
  • Paycheck Protection Program loans may also be excluded when lenders determine loan size
  • Fed program has $600 billion capacity but has loaned just $3.7 billion

In a move intended to open up its Main Street Lending Program to smaller businesses, the Federal Reserve has announced that it is easing the terms for borrowers.

The minimum loan size for the three Main Street entities available to small and midsize businesses and nonprofits has been reduced from $250,000 to $100,000, and fees have been adjusted to encourage smaller loans. The Fed also updated its guidance on the program to say lenders can exclude Paycheck Protection Program loans of up to $2 million when determining the size of a Main Street loan, addressing business owners’ complaints that PPP debt has been counted against them even though those loans are forgivable under most circumstances.

The change marks a stronger move toward small business support as any congressional action on new economic stimulus for business owners has been postponed until after Election Day. The Main Street Lending Program is open to any businesses or nonprofits with fewer than 15,000 employees and less than $5 billion in 2019 revenue, but has generally skewed toward larger enterprises. Federal Reserve Chairman Jerome Powell previously said that there has been little interest in loans of less than $1 million through the program, and that it would be difficult for the Fed to underwrite hundreds of thousands of smaller loans.

The Main Street Lending Program has been criticized on several fronts. Although it has a lending capacity of $600 billion, it has only disbursed $3.7 billion. Potential borrowers have also been deterred by high fees, stringent conditions, and the fact that the loans still require businesses to take on new debt (albeit with lenient terms such as deferred principal and interest payments). There have also been concerned about the Fed assuming 95 percent of the risk of every loan, putting the burden on taxpayers for any defaults.

Analysts have pointed out that the Fed has few remaining options for assisting economic growth. It has the ability to take actions such as buying more Treasury and mortgage-backed securities to drive down longer term interest rates, but these are unlikely to have much effect given that rates are already very low.

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