Fed’s Principal Road lending program is a lifeless finish for a lot of debtors

Fed's Main Street lending program is a dead end for many borrowers

Treasury Secretary Steven Mnuchin listens to a question during a House Financial Services Committee hearing on “Monitoring the Treasury and Federal Reserve’s Pandemic Response” at the Rayburn House office building in Washington on December 2, 2020.

Greg Nash | Pool | Reuters

Treasury Secretary Steven Mnuchin’s decision not to extend funding for the Federal Reserve’s Main Street Lending Facility after December 31st appears to have already led to a reduction in lending, according to bankers involved in the program.

CNBC has learned that some potential borrowers have been told that there is insufficient time to close their loans, leaving them without vital funds in a resurgent pandemic.

A borrower who asked not to be named because he didn’t want his customers or competitors to know that his company needed a government loan said his banker told him his application couldn’t be processed because time was running out has expired.

“It’s a huge impact on our ability to stay liquid and fund our business,” said the borrower. “It was a necessary lifeline for a professional service company like ours.”

The only option now is double digit interest rate loans if the borrower can find a lender.

Mnuchin announced on Nov. 19 that he would not extend the deadline for a number of Fed contingency programs funded by the CARES bill, including the Main Street facility. He said he believed Congress intended not to use the funds after December 31st. The Fed wanted the programs to remain open.

Due to Mnuchin’s decision, the Fed announced at the end of November that it would no longer accept any new applications after December 14th. However, the bankers say it takes about a month to draw the loans and from several days to a few weeks to get approval from the Fed. So Mnuchin’s decision ended the program right there and then for some banks and borrowers.

And it took just three weeks for the Fed and Treasury Department to dramatically open the program to more companies, allowing companies that had previously received a loan from the Payroll Protection Program to apply and reduce the minimum loan size to $ 100,000. Bankers say interest in the difficult program has increased.

“We made an average of four or five calls a day from good companies, but we had to turn them away,” said Dan Yates, CEO of Endeavor Bank in Carlsbad, Calif., Who took out 20 Main Street loans. “The program for them really is a lifesaver to get them on the other side of the economic deadlock.”

“The interest wasn’t in the charts. We couldn’t handle it,” said John Steinmetz, chairman of the board of Vista Bank, privately held in Dallas. As of last week, 42 ​​loans worth $ 463 million had been approved on Main Street. However, of the 100 loans in his pipeline, Steinmetz believes he will only have 30 time to fund them.

Troubled start

The Main Street Facility – an attempt to lend money to medium-sized businesses not covered by other programs – was troubled from the start. The Fed had never been involved in granting non-standardized bulk loans to individual companies. The terms have been criticized from the start as being too harsh for both borrowers and lenders. In the first two and a half months, Main Street made loans valued at less than $ 1 billion.

Yates said it took seven attempts to submit the Endeavor Bank’s first loan for Fed approval. “They kept throwing them back for the slightest spelling mistake,” he said. One such mistake: If the letter “L” in the word “Loan” is not capitalized in the application.

It quickly became clear that the Main Street facility would never keep its promise. The Treasury Department had allocated $ 75 billion from the Cares Act to offset $ 600 billion loan losses. The Fed and the Treasury Department have made further adjustments to the program, lowering the minimum credit level and introducing additional programs to help companies qualify. Vista Steinmetz said the real problem was not so much demand as “the lack of involvement from banks.” The banks had to keep 5% of the underlined loan and service the entire loan. For the bank, the underwriting process was not much different from a regular loan, except that they also required Fed approval.

Compared to its $ 463 million worth of 42 Main Street loans, Vista completed 2,063 PPP loans worth $ 167.6 million, a tremendous number for a $ 1.2 billion community bank.

Yates said the smaller PPP loans could “be drawn up in a few minutes”.

But according to several reports, interest in the program had increased. “We told borrowers about the program in the early days,” said Yates. “But the momentum picked up as the news spread.” Bankers and accountants, as well as the Boston Fed, which ran the program, became familiar with the process and were able to speed up the approval process.

The data show some increase. The program’s best two weeks were the two weeks before it ended by Mnuchin, where a total of $ 1.15 billion in new money had been spent by the Fed. The latest data shows that Main Street loans totaled $ 6.3 billion.

Jude Melville, president and CEO of B1Bank, said his $ 4 billion, Baton Rouge, LA-based institution stopped accepting applications as early as Nov. 20. She had previously turned away potential borrowers when it emerged that the program would not be extended.

Melville said he hopes to have completed about 40 $ 250 million worth of loans by the end of the program but will have to strive to meet upcoming deadlines. He said the program suffered from the government not taking enough risk to help financially troubled borrowers and to incentivize banks. This, in his opinion, should change when it resumes under the Biden administration. Like other bankers, Melville said the program forced his bank to rate a loan as it would be a regular commercial application. “It would be better to have than not, but at the scale it was intended to be, it’s not helpful because of its structure,” he said.

The Treasury declined to comment. Joel Werkema, a Boston Fed spokesman, said: “At the Fed, we will do absolutely everything to address the volume within the operational deadlines required to meet year-end requirements.”