The Federal Reserve’s Main Street Lending Program — IF11632 (November 4, 2020)

Summary

This Congressional Research Service report IF11632 by Marc Labonte and Lida R. Weinstock, updated November 4, 2020, explains the Federal Reserve's Main Street Lending Program, under which the Fed purchases 95% of eligible loans that banks make to mid-sized businesses and nonprofits and the lender must retain the remaining 5%. Its comparison table sets an employee limit of 15,000 or fewer for the program against 500 or fewer for the Paycheck Protection Program, interest of LIBOR + 3% against 1%, and no forgiveness against PPP loans that will be forgiven if employee retention criteria are met. The program was announced as a $600 billion program, with Treasury pledging $75 billion in CARES Act funding to absorb losses; as of October 30, it had finalized nearly 400 loan participations worth $3.7 billion. The report sets out why critics call it too small to be effective.

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Updated November 4, 2020
The Federal Reserve’s Main Street Lending Program
In response to Coronavirus Disease 2019 (COVID-19), the businesses are eligible for both programs. However, there
Federal Reserve (Fed) created a series of emergency are differences in eligibility requirements, interest rates, and
lending programs, including the Main Street Lending loan terms, among others (see Table 1).
Program (MSLP). The MSLP supports lending to eligible
businesses and nonprofits and marks the first time the Fed Table 1. MSLP and PPP Comparison
has lent to nonfinancial businesses since the 1930s (though
it purchased commercial paper [short-term debt securities] MSLP PPP
issued by nonfinancial businesses in 2008 and 2009). Business/ 15,000 or fewer 500 or fewer
Nonprofit Size employees, or 2019 employees, or net
COVID-19 and Main Street Businesses Limits revenues of $5 worth is $15 million
Due to the effects of COVID-19, the U.S. economy has billion or less or less and average
experienced a sudden and deep recession. The
For nonprofits: net income for past
unemployment rate has reached its highest level since the two fiscal years is
Great Depression, and the decline in output in the second minimum 10
employees $5 million or less
quarter of 2020 was record-breaking. Normal commerce
was severely disrupted starting in March and has only Interest Rate LIBOR + 3% 1%
partially recovered in the following months. Social
distancing and fears of the virus hit many “main street Loan Term 5 years Prior to June 5:
businesses” in retail and hospitality industries particularly 2 years; after June 5:
hard. Many disrupted businesses, even if solvent prior to 5 years
COVID-19, began to experience cash flow problems and Loan Size $100,000 - $300 Up to $10 million
faced difficult decisions about how to stay in business. million or 2.5 times average
monthly payroll
One of the unique and problematic characteristics of the
current recession is that it is driven by a public health crisis. Payment Principal deferred 6 month deferral
When the public health crisis passes, surviving businesses Deferral/ for two years, and loans will be
may be able to fully reopen, but when that might occur is Forgiveness interest deferred forgiven if all
highly uncertain. It is therefore risky for a private lender to for one year; not employee retention
provide a loan to a “main street business,” as it is uncertain forgivable and other criteria
if and when that business would be able to pay the loan are met
back. Meanwhile, cash-strapped businesses need funds Amount $3.7 billion (as of $525 billion (when
quickly to remain in business and retain employees. In
Outstanding 10/30) program ended)
addition, many businesses may need to defer payments on
existing loans. Business closures would worsen an already Application December 31, 2020 August 8, 2020
historically high unemployment situation. For these Deadline
reasons, policymakers have implemented programs to help Sources: Federal Reserve and the Small Business Administration.
struggling businesses and maintain employment levels. The Notes: For brevity, the table omits some eligibility criteria.
MSLP is one such program intended to meet the needs of
businesses of a certain size. As shown in Table 1, some of the main features of MSLP
loans are eligibility based on firm size and deferment of
Main Street Lending Program principal and interest payments. The MSLP operates five
Under the MSLP, the Fed purchases loans with certain facilities based on whether the loan is new or refinanced,
characteristics that depository institutions, such as banks, whether the borrower is a business or nonprofit, and based
have made to businesses and nonprofits. The MSLP is on how indebted the borrower is. Each facility has different
targeted to “mid-sized” U.S. firms that were too large to be loan terms (such as maximum loan size, which varies from
eligible for the CARES Act’s (P.L. 116-136) Paycheck $35 million to $300 million). There is no minimum
Protection Program (PPP) but too small to issue bonds or business size. However, there are minimum loan sizes,
commercial paper, which the Fed is purchasing through which, depending on the facility, are between $100,000 and
other emergency programs. Although firms that do not fit $10 million. (To date, most loans have been over $1
this description can also be eligible, it was perceived that million.) On October 30, 2020, the Federal Reserve lowered
there was a gap in relief that the MSLP could fill. In the loan size requirement to $100,000 from $250,000 to
addition, there was little federal relief for nonprofits too better target support to small businesses that may have been
large for the PPP until the MSLP was expanded. The MSLP too indebted to meet leverage requirements previously.
and PPP are comparable in some ways, and some Certain businesses are ineligible if they are in industries

https://crsreports.congress.gov
The Federal Reserve’s Main Street Lending Program

that do not meet Small Business Administration eligibility
criteria, such as financial and gambling businesses.
Borrowers participating in certain other emergency relief
programs are also ineligible, but PPP participants are
eligible. Borrowers established since the pandemic or
expecting to file for bankruptcy are also ineligible. A
Goldman Sachs newsletter from July estimated that 40% of
all private workers work for eligible companies.

Main Street loans cannot be used to pay off private debt
because they are meant to be used to maintain payroll.
MSLP borrowers must make “commercially reasonable
efforts to maintain its payroll and retain its employees.”
This is not a legally binding requirement, and the Fed and
Treasury stated to the Congressional Oversight Commission
that they are not verifying that firms maintain payroll after
receiving the loan.

The Fed purchases 95% of the loans; the lender must retain
the remaining 5%. Profits or losses accrue proportionately
to holdings. This gives lenders an incentive to perform
sound underwriting when making loans. Purchasing 95% of
the loans frees up space on the lender’s balance sheet to
make additional loans. Lenders may also charge fees to
borrowers. By purchasing private loans instead of making
loans directly, the Fed avoided the need to develop loan
underwriting expertise before rolling out the program.

The Fed created the MSLP under its emergency authority
(12 U.S.C. §343), which has several requirements.
Programs must be temporary and approved by the Treasury
Secretary. Actions taken must also provide security (e.g.,
collateral) that is sufficient to protect the taxpayer and is
based on sound risk management practices. And interest
rates charged must be above normal market rates. (In the
case of the MSLP, however, the interest rate is comparable
to the market rate that banks offer to their best customers.)

To absorb potential losses, Treasury has pledged $75 billion
in CARES Act funding—protecting the Fed but still
exposing taxpayers to potential future losses. Likewise,
potential profits from the facility ultimately accrue to
taxpayers. A number of CARES Act conditions apply to the
borrowers (but not the lenders), including restrictions on
executive compensation, stock buybacks, and dividends.
Both borrowers and lenders cannot have ownership
relationships with certain elected and public officials. In
addition, the CARES Act does not permit debt forgiveness.

The MSLP was announced as a $600 billion program,
although the Fed’s other facilities have proven to be much
smaller or larger than their originally announced size. The
program took several weeks to create because of the
complexity and novelty involved and was not fully
operational for business loans until July 6. As of October
30, the MSLP had finalized nearly 400 loan participations
worth $3.7 billion.

Policy Issues
Various stakeholders and policymakers have criticized the
MSLP as too small to be effective. There are three broad
possibilities why: (1) it is still too new and may eventually

grow to the desired size; (2) it is not attractive to lenders; or
(3) too few borrowers qualify or find it attractive.

The second or third problem could be addressed by
changing the program’s terms. However, because MSLP is
set up to share profits and risks between the Fed and
lenders, any changes to terms that are more favorable to the
borrower or lender will make the other party or the Fed (or
both) worse off. For example, a lower interest rate or laxer
eligibility terms may entice more borrowers to participate
but would reduce expected profits (or increase expected
losses) for lenders and the Fed. Conversely, a higher
interest rate or shorter deferment period would make the
program more attractive to lenders but less attractive to
borrowers. Given the zero sum nature of these changes, one
would need to know whether the program was unattractive
to lenders or borrowers in order to make changes that
successfully stimulated activity; the current absence of
lending is consistent with either scenario. (As of October
21, 602 banks, with a majority of industry assets, had
registered with the MSLP. That does not mean that all are
making Main Street loans, especially to new customers .)

Alternatively, the Fed could subsidize lending in a way that
would make it more attractive to lenders and borrowers, but
such a subsidy would raise the expected cost to the Fed
(and taxpayers). Subsidized lending might be difficult given
statutory restrictions. Some have argued that Congress did
not intend for CARES Act funding to the Fed to be repaid,
but particular provisions of the act seem to contradict this
view. The Fed has made several modifications to the MSLP
to make it more attractive to borrowers and lenders.

One factor limiting the MSLP’s size is that it was designed
to address one specific problem, whereas businesses
currently face diverse credit problems. The Boston Fed
president testified that the MSLP “was designed to provide
credit support for business or nonprofit borrowers that have
temporary cash-flow problems due to the pandemic—and
given the uncertain outlook might otherwise have difficulty
in obtaining credit from a lender.... Main Street can provide
a loan to bridge the borrower over this current challenge.”

The MSLP was not designed to help businesses facing
permanent declines in demand for their products or,
conversely, businesses wanting credit that are experiencing
robust demand—ideally, the latter could find credit in
private markets. Policymakers may consider creating
alternative relief programs for borrowers (e.g., highly
indebted companies, startups, or hard-hit industries) that do
not fit well with the MSLP’s purpose.

Policymakers may also consider whether the program
adequately addresses the policy goal of employee retention,
although a stronger retention requirement would likely
make the program less attractive to borrowers.

CRS Resources
CRS Report R46411, The Federal Reserve’s Response to
COVID-19: Policy Issues, by Marc Labonte.

Marc Labonte, Specialist in Macroeconomic Policy
Lida R. Weinstock, Analyst in Macroeconomic Policy

https://crsreports.congress.gov
The Federal Reserve’s Main Street Lending Program

IF11632

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