The Federal Reserve’s Main Street Lending Program

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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
COVID-19 and Main Street Businesses
Nonprofit Size
employees, or 2019
employees, or net
Limits
revenues of $5
worth is $15 mil ion
Due to the effects of COVID-19, the U.S. economy has
bil ion or less
or less and average
experienced a sudden and deep recession. The
net income for past
unemployment rate has reached its highest level since the
For nonprofits:
two fiscal years is
Great Depression, and the decline in output in the second
minimum 10
$5 mil ion or less
quarter of 2020 was record-breaking. Normal commerce
employees
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 mil ion
faced difficult decisions about how to stay in business.
mil ion
or 2.5 times average
monthly payrol
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 wil be
may be able to fully reopen, but when that might occur is
Forgiveness
interest deferred
forgiven if al
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 bil ion (as of
$525 bil ion (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 Smal 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
Main Street Lending Program
loans are eligibility based on firm size and deferment of
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
targeted to “mid
on how indebted the borrower is. Each facility has different
-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
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The Federal Reserve’s Main Street Lending Program
that do not meet Small Business Administration eligibility
grow to the desired size; (2) it is not attractive to lenders; or
criteria, such as financial and gambling businesses.
(3) too few borrowers qualify or find it attractive.
Borrowers participating in certain other emergency relief
programs are also ineligible, but PPP participants are
The second or third problem could be addressed by
eligible. Borrowers established since the pandemic or
changing the program’s terms. However, because MSLP is
expecting to file for bankruptcy are also ineligible. A
set up to share profits and risks between the Fed and
Goldman Sachs newsletter from July estimated that 40% of
lenders, any changes to terms that are more favorable to the
all private workers work for eligible companies.
borrower or lender will make the other party or the Fed (or
both) worse off. For example, a lower interest rate or laxer
Main Street loans cannot be used to pay off private debt
eligibility terms may entice more borrowers to participate
because they are meant to be used to maintain payroll.
but would reduce expected profits (or increase expected
MSLP borrowers must make “commercially reasonable
losses) for lenders and the Fed. Conversely, a higher
efforts to maintain its payroll and retain its employees.”
interest rate or shorter deferment period would make the
This is not a legally binding requirement, and the Fed and
program more attractive to lenders but less attractive to
Treasury stated to the Congressional Oversight Commission
borrowers. Given the zero sum nature of these changes, one
that they are not verifying that firms maintain payroll after
would need to know whether the program was unattractive
receiving the loan.
to lenders or borrowers in order to make changes that
successfully stimulated activity; the current absence of
The Fed purchases 95% of the loans; the lender must retain
lending is consistent with either scenario. (As of October
the remaining 5%. Profits or losses accrue proportionately
21, 602 banks, with a majority of industry assets, had
to holdings. This gives lenders an incentive to perform
registered with the MSLP. That does not mean that all are
sound underwriting when making loans. Purchasing 95% of
making Main Street loans, especially to new customers .)
the loans frees up space on the lender’s balance sheet to
make additional loans. Lenders may also charge fees to
Alternatively, the Fed could subsidize lending in a way that
borrowers. By purchasing private loans instead of making
would make it more attractive to lenders and borrowers, but
loans directly, the Fed avoided the need to develop loan
such a subsidy would raise the expected cost to the Fed
underwriting expertise before rolling out the program.
(and taxpayers). Subsidized lending might be difficult given
statutory restrictions. Some have argued that Congress did
The Fed created the MSLP under its emergency authority
not intend for CARES Act funding to the Fed to be repaid ,
(12 U.S.C. §343), which has several requirements.
but particular provisions of the act seem to contradict this
Programs must be temporary and approved by the Treasury
view. The Fed has made several modifications to the MSLP
Secretary. Actions taken must also provide security (e.g.,
to make it more attractive to borrowers and lenders.
collateral) that is sufficient to protect the taxpayer and is
based on sound risk management practices. And interest
One factor limiting the MSLP’s size is that it was designed
rates charged must be above normal market rates. (In the
to address one specific problem, whereas businesses
case of the MSLP, however, the interest rate is comparable
currently face diverse credit problems. The Boston Fed
to the market rate that banks offer to their best customers.)
president testified that the MSLP “was designed to provide
credit support for business or nonprofit borrowers that have
To absorb potential losses, Treasury has pledged $75 billion
temporary cash-flow problems due to the pandemic—and
in CARES Act funding—protecting the Fed but still
given the uncertain outlook might otherwise have difficulty
exposing taxpayers to potential future losses. Likewise,
in obtaining credit from a lender.... Main Street can provide
potential profits from the facility ultimately accrue to
a loan to bridge the borrower over this current challenge.”
taxpayers. A number of CARES Act conditions apply to the
borrowers (but not the lenders), including restrictions on
The MSLP was not designed to help businesses facing
executive compensation, stock buybacks, and dividends.
permanent declines in demand for their products or,
Both borrowers and lenders cannot have ownership
conversely, businesses wanting credit that are experiencing
relationships with certain elected and public officials. In
robust demand—ideally, the latter could find credit in
addition, the CARES Act does not permit debt forgiveness.
private markets. Policymakers may consider creating
alternative relief programs for borrowers (e.g., highly
The MSLP was announced as a $600 billion program,
indebted companies, startups, or hard-hit industries) that do
although the Fed’s other facilities have proven to be much
not fit well with the MSLP’s purpose.
smaller or larger than their originally announced size. The
program took several weeks to create because of the
Policymakers may also consider whether the program
complexity and novelty involved and was not fully
adequately addresses the policy goal of employee retention,
operational for business loans until July 6. As of October
although a stronger retention requirement would likely
30, the MSLP had finalized nearly 400 loan participations
make the program less attractive to borrowers.
worth $3.7 billion.
CRS Resources
Policy Issues
CRS Report R46411, The Federal Reserve’s Response to
Various stakeholders and policymakers have criticized the
COVID-19: Policy Issues, by Marc Labonte.
MSLP as too small to be effective. There are three broad
possibilities why: (1) it is still too new and may eventually
Marc Labonte, Specialist in Macroeconomic Policy
Lida R. Weinstock, Analyst in Macroeconomic Policy
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The Federal Reserve’s Main Street Lending Program

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