The Federal Reserve on Friday lowered the minimum loan size on its loans to small- and medium-sized businesses, in an effort to drive higher uptake of its Main Street Lending Program.
The smallest loan that businesses can get through the program is now $100,000, a significant reduction from the $250,000 minimum that the Fed had established in June.
The Fed says it has made almost 400 loans totaling $3.7 billion under the program. But the central bank’s facility can support up to $600 billion in total loans, raising questions about whether or not the Fed made the loan terms too restrictive.
In a statement, the Fed said the changes were designed “to better target support to smaller businesses that employ millions of workers and are facing continued revenue shortfalls due to the pandemic.”
The dining section is closed off at East Side Pockets, a small restaurant near Brown University, in Providence, R.I. The Federal Reserve is taking additional steps to provide up to $2.3 trillion in loans to suport American households and businesses as well as local governments as they deal with the coronavirus. (AP Photo/David Goldman, File)
The Fed will also adjust the fee structure for the new Main Street loans under $250,000. Lenders of the small loans will pay no transaction fee to the Fed’s facility, but will be allowed to charge the borrower up to 200 basis points to originate the loan.
For comparison, lenders of loans larger than $250,000 will pay up to 100 basis points in transaction fees to the Fed’s facility. Those lenders will be allowed to charge the borrower up to 100 basis points to originate the loan.
The Fed will also continue to offer incentives to continue servicing the loans, which remain five years in maturity. The Fed’s facility will pay lenders 50 basis points per year for servicing loans smaller than $250,000 and 25 basis points per year for loans larger than $250,000.
Large loans — those above $10 million — originated under the “expanded” version of the Main Street Lending Program have a separate fee structure, which remains unchanged under the announcement Friday.
The facility will be open for eligible loans for only another two months, through December 31, 2020. The Fed and the U.S. Treasury could extend the facility if needed.
No changes were made to the EBITDA requirements, despite calls from some members of Congress to use an asset-based standard.
Since announcing the novel Main Street facility in March, the Fed has regularly tweaked the terms and structure of the program — with varying degrees of success. In July, the Fed expanded the facility to cover nonprofits but as of September 30, not a single nonprofit had tapped the program.
U.S. Treasury Secretary Steven Mnuchin hinted weeks ago that the Fed could lower the minimum loan threshold as it did on Friday, telling the House Financial Services Committeeon September 22 that he would “be fine” lowering it to $100,000.
Fed Chairman Jerome Powell at the time had said there was little demand for loans below $1 million, suggesting that loans in “those small quantities would require a facility built from the ground.”
https://finance.yahoo.com/news/fed-lowers-minimum-loan-size-on-main-street-lending-program-150016390.html
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