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Mnuchin to the Main Street Lending Program: Drop Dead

Mnuchin to the Main Street Lending Program: Drop Dead

Great expectations, dashed. That's the overwhelming sentiment from the business community after Treasury Secretary Steve Mnuchin withdrew support

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One thing in your business that should always be up for debate? Your budget.

Great expectations, dashed. That’s the overwhelming sentiment from the business community after Treasury Secretary Steve Mnuchin withdrew support for several emergency loan programs created with the Federal Reserve. The programs are set to expire at the end of this year.

In a letter to Fed Chairman Jerome Powell on November 19, Mnuchin requested the central bank return unused Cares Act funds from facilities, including the Main Street Lending Program, which launched on June 15 with $75 billion provided by Treasury. The facilities “have clearly achieved their objective,” Mnuchin wrote in the letter.

That’s not entirely true. While the Fed’s bond buying activities have been a raging success, the Main Street Lending Program elicited a tepid response from business owners. The response from banks was also weak. While more than 550 banks signed up for the program, very few made a significant number of loans. Even so, the missed potential of the program, which still has billions available for struggling small businesses, stings.

What’s more, the Federal Reserve doesn’t agree with shutting the programs down any time soon. At a virtual Q&A on Tuesday, Powell said the central bank would continue to use all of the tools at its disposal to support the economy amid the ongoing surge in coronavirus cases. “When the right time comes, and I don’t think that time is yet or very soon, we will put those tools away,” he said.

The MSLP was expected to underwrite up to $600 billion in low-interest loans for companies with up to $5 billion in revenue or fewer than 15,000 employees. As of November 6, the Main Street program has made 420 loans totaling $4 billion, with an average loan size of $9.6 million. The Federal Reserve Bank of Boston, which is overseeing the MSLP, did not answer a request for more recent information. 

Great Expectations 

The chilly response to the program wasn’t unexpected. When a working proposal was unveiled on April 9, it was widely hailed as a so-called Plan B for small companies who had been shut out of the first round of the Paycheck Protection Program–the forgivable loan program for small businesses that had exhausted its first round of funds in two weeks.

“This will be probably the most popular program of all the crisis programs that are being put forward because it does involve Main Street,” Joe Brusuelas, chief economist at RSM, a Chicago consultancy focused on midsize businesses, told Inc. in early April. It never managed to live up to that hype, however.

Even before it launched, the Fed program had been subject to countless nips and tucks, including expanding it to more and larger companies; reducing the available loan size for eligible borrowers; tweaking its guidance to banks; dropping transactions fees; and more. Still, remaining problems continued to dampen enthusiasm. While the interest rates are low at the benchmark Libor rate plus 300 basis points, or 3 percent, that’s still not that low. By contrast, unforgiven PPP loans have a 1 percent interest rate. The repayment terms, which got extended to five years from four years, are still tight–especially for companies unsure of whether they’ll even be solvent in 2021.

While there are also compensation restrictions attached to MSLP loans, the biggest barrier for companies trying to get these loans has been the guidance offered to banks, which encouraged them to follow their normal lending protocols–despite clearly abnormal circumstances. That essentially rendered any troubled business out of the running. The Fed on October 30 moved to address this snafu by giving lenders permission to take into account a company’s post-pandemic plans in its underwriting process, but borrower enthusiasm never recovered.

“The program is too complicated and cumbersome for the smaller loan requests,” Ami Kassar, the founder and CEO of MultiFunding, a small-business loan adviser, said in a statement. The Fed should bring the program back, raise the minimum loan amount to $1 million, from $100,000, and rename it the Middle Market Lending Program, he adds.

Shock and Awe

The MSLP’s imminent demise is a surprise, especially since at the end of July the Fed extended the program through December 31 from its previous end date of September 30. And the time needed to get a Main Street loan–which goes through a traditional underwriting process–is not inconsequential. So some had hoped, if not outright expected, the Fed would simply give the program more time to catch on and for loans to get processed. And there’s plenty of money left, which is particularly noteworthy given the rapid trajectory of the coronavirus and the stalled stimulus talks on Capitol Hill.

“With the coronavirus surging in communities around the nation and American businesses facing mounting challenges, we need the government’s full support by providing the resources necessary for broad-based economic recovery,” the U.S. Chamber of Commerce’s chief policy officer, Neil Bradley, said in a statement. “A surprise termination of the Federal Reserve’s emergency liquidity programs, including the Main Street Lending Program, prematurely and unnecessarily ties the hands of the incoming administration, and closes the door on important liquidity options for businesses at a time when they need them most.”

You can argue, as Karen Kerrigan has, that the lending program was a flop and should be allowed to expire. Kerrigan is the president of the Small Business & Entrepreneurship Council, a nonpartisan advocacy group in Vienna, Virginia, where she is encouraging lawmakers and the Fed to “pivot like so many small businesses are doing” and put money into other, potentially better vehicles. Specifically, her group is urging the Fed to set aside $20 billion of its unused capital to launch a co-investment fund, aimed at spurring crowdfunding opportunities. “The fund would be ‘broad-based,’ tied to debt-type instruments, and used to aid Main Street businesses to fund the gap until restrictions are lifted on consumer behavior,” said Sherwood Neiss, principal at consulting firm Crowdfund Capital Advisors in a statement. 

Of course, if the Treasury wants the money back, this scenario is DOA, too. Ultimately, fixing the MSLP to be both more inviting to struggling small businesses and more appetizing for banks may have been the best strategy. And even if, in the end, the Fed finally got it right, the fixes themselves may have been too little, too late.

This article is from Inc.com

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