Student blog: Is the Fed’s Main Street Lending Program Too Little Too Late?

By Ranie Lin
Research Intern
McNair Center for Entrepreneurship and Economic Growth

As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Federal Reserve launched the Main Street Lending Program (MSLP), a $600 billion loan program to support struggling small and medium-sized businesses. Under the MSLP, commercial banks provide loans to firms with under 15,000 employees or less than $5 billion in annual revenue and sell large portions of the loans to the Federal Reserve.^[1] In contrast to the Paycheck Protection Program run by the Small Business Administration, the MSLP provides low-cost loans rather than grants through loan forgiveness and extends eligibility to larger companies.

Although the MSLP was announced in late March, participation in the program did not begin until June 15. Since then, bank executives have noted a lack of interest from borrowers; several institutions have reported less than 200 interested borrowers each.^[2]

Limitations of the MSLP

The stringent requirements and complexities of the program may be turning away potential borrowers. For starters, the minimum loan size that can be taken out under the MSLP is $250,000, an amount that already precludes many small businesses from participation.^[3] While this threshold has already been adjusted downwards twice from the initial requirement of $1m, some community bankers are asking for another reduction. In contrast to the Paycheck Protection Program, an extensive amount of paperwork is also necessary to secure a loan under the MSLP, a process that can be difficult and costly for small businesses to navigate.^[4]

With the Federal Reserve purchasing 95% of loans, the MSLP is designed as a low-risk program for lenders. However, the terms of the loan allow borrowers to defer principal payments for the first two years; if businesses are unable to make the lump-sum payment after two years, banks would have to either refinance the loan or force borrowers into default.^[5] Some banks have indicated that they will only be lending to their existing clients, which could serve as an additional obstacle for small businesses.^[6]

A Potential Solution

In response to these challenges, a recent paper by English and Liang from the Brookings Institution suggests a series of changes to encourage greater participation in the MSLP. Among these suggestions are incentives for earlier loan repayment, a further reduction in the minimum loan size, clarification of complex regulations, and provisions allowing banks to lend to riskier borrowers.^[7] One possible explanation for the burdensome process of acquiring MSLP loans is that the Fed is prepared to lend up to $600 billion, whereas the Treasury Department has set aside just $75 billion to cover potential losses if businesses cannot repay their loans.^[8]

With coronavirus cases now rising again in many parts of the country, many businesses have been forced to make a second round of layoffs.^[9] Yet as of June 30, zero loans have been made under the MSLP.^[10] English and Liang succinctly posit that even if reducing regulations and expanding participation may pose “additional risk to the $75 billion” provided to cover losses, “it is critical to support businesses now.”[11]