Two former Federal Reserve economists said the Fed and Treasury Department should ease terms and increase bank fees to boost participation in the central bank’s new effort to lend directly to small and midsize U.S. businesses, the Wall Street Journal reported. After last week revamping the Main Street Lending Program to offer more favorable loan terms, the Fed this week formally opened the initiative. Elected officials, bankers and industry lawyers have warned the program may see tepid demand because of its design. The Main Street program is open to companies with up to 15,000 employees or less than $5 billion in revenue last year. The Fed will purchase up to 95 percent of loans made by banks that meet certain standards, freeing banks up to make more loans. n a paper published by the Brookings Institution on Thursday, Nellie Liang and William English, who previously led the Fed’s divisions of financial stability and monetary affairs, respectively, suggest further changes to the program:
• Longer terms: Under the latest terms, principal payments can be delayed for two years, and loans must be repaid within five.
• Different rates: They say that the program should be changed so that loans to less risky borrowers carry lower rates and have more streamlined documentation. Currently, all loans must pay a spread of 3 percentage points above a widely used short-term borrowing rate.
• Smaller loans: The Fed has twice reduced the minimum loan amount, to $250,000 most recently from earlier thresholds of $500,000 and $1 million. Ms. Liang and Mr. English suggest allowing even smaller loans, which could encourage smaller banks to participate and reach businesses that can’t qualify for the Paycheck Protection Program or need additional support.
• Riskier borrowers: The first set of changes to the program allowed businesses with more debt to participate if banks held on to a larger piece of the loan, but the latest terms changed this so that banks retain a 5 percent stake in all loans. The economists suggest allowing banks to extend loans to riskier firms if they hold a larger portion of the loan.
• Higher bank fees: To encourage banks to participate in the program, Liang and English say that the Fed may need to offer a higher level of fees as well as additional compensation to handle loan workouts should borrowers default.
The Main Street initiative, announced in March, is designed to fill a hole left by the government’s economic-crisis relief efforts by assisting companies too large to qualify for loans under the PPP and too small to borrow in corporate-debt markets, which are being supported with another Fed backstop.
