Three months after the聽initial聽announcement of the Main Street Lending Program, the Federal Reserve聽is聽making some聽changes to the program, with the intention to reach more small-to-midsize businesses.聽
Financial institutions have much to聽consider聽as . Federal Reserve聽Chairman Jerome Powell claims that the program is 鈥溾�澛爐he Fed has faced during the coronavirus pandemic and ensuing recession because of how the central bank must balance loan terms that are strict enough to ensure most companies pay the money back, but not so strict that businesses are deterred from participating.鈥疶he changes made to the program聽not only aim to provide relief to businesses, but聽also聽to聽take some of the burden聽off lenders.
What lenders should know
Here聽are five聽key聽takeaways聽in the changes to the Main Street Lending Program that should be top of mind as financial institutions navigate through this crisis.
- Target audience 鈥斅燭he聽changes aim to provide aid to struggling businesses that are too big for new emergency programs like the Paycheck Protection Program (PPP), but too small to access capital markets by issuing bonds or equity.
- Company size 鈥斅燭he expanded Main Street Lending Program is now open to companies聽with less than 15,000 employees or annual revenue of less than $5 billion in 2019. Companies that have received Paycheck Protection Program loans are聽still聽eligible to participate, though unlike PPP loans, Main Street loans will not be forgivable. Standard due diligence by bank lenders applies.
- Loan thresholds 鈥� The minimum loan amount was lowered to $250,000 from $500,000; and the maximum loan amount was raised to $300聽million聽from $200聽million.聽These聽changes allow both lenders and borrowers more flexibility.
- Repayment 鈥斅燭he loan repayment period has increased from four years to five years.聽Additionally, borrowers are not obligated to make principal payments for the first two years.
- Loan ownership 鈥斅燭he Federal Reserve will take on even more risk by increasing the portion of certain loans it buys from banks from 85% to 95%.
Another important note is that new lender/borrower relationships are permitted, and specifically addressed. In its 聽(FAQs) about the Main Street Lending program, the Fed confirms a lender can make a loan to a new customer (FAQ B.4); however, the lender is still required to conduct its traditional onboarding process, including normal Know Your Customer (KYC) procedures.
The FAQ section also points out that eligible lenders are expected to conduct an assessment of each potential borrower鈥檚 financial condition and apply underwriting standards in evaluating the financial condition and creditworthiness of the potential borrower. “Supporting small and mid-sized businesses so they are ready to reopen and rehire workers will help foster a broad-based economic recovery,” Chairman Powell said in a . “I am confident the changes we are making will improve the ability of the Main Street Lending Program to support employment during this difficult period.”
Update on Main Street nonprofit loans
In short, the program provides opportunity to those lenders who can capitalize on fast but effective onboarding and underwriting for new and existing commercial borrowers. Lenders should also be aware of the potential to serve nonprofit borrowers as well.
While broadening the program鈥檚 reach, these changes still leave out the nonprofit sector, which has also experienced significant financial hardship. On June 15, the Fed announced consideration to expand relief to nonprofit organizations in addition to businesses. “Nonprofit organizations are critical parts of our economy, employing millions of people, providing essential services to communities, and supporting innovation and the development of a highly skilled workforce,” Chairman Powell said in a . “Nonprofits provide vital services across the country and we are working to help them through this difficult time.”
The proposed loan terms for Main Street nonprofit loans are the same as the Main Street business loans, although borrower eligibility will be modified to account for the operational and structural differences between nonprofit and for-profit organizations.
Program kick-off
As the pandemic continues to wreak havoc, economists are hoping that programs such as this are the temporary solution needed to ride out the storm.
As of now, the聽聽is available online, but the program has not yet been opened to borrowers. With intentions to have the program operating in June, it is expected that borrowers will be able to access the program by the end of this month.
You can about how best to keep up with increased due diligence demands.
