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Hot Topic: Fed’s loan program missing the mark
HOT TOPIC
Fed’s loan program missing the mark
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BY NANCY LAVIN | Lavin@PBN.com
ACROSS RHODE ISLAND and the country, the Federal Reserve’s Main Street Lending Program has not lived up to its potential.
The program sought to help small and medium-sized businesses manage pandemic-related troubles with low-interest, deferred-payment loans. Up to $600 billion was made available thanks to backing from the Fed and capital via the U.S. Treasury Department. But as of the Fed’s Oct. 8 report to Congress, just over $2 billion in loans have been approved across about 250 applicants nationally – none from Rhode Island. Neither were any loans approved by Rhode Island financial institutions, despite nine local lenders listed by the Fed as open to accepting applications.
Peter Nigro, Sarkisian chair in financial services at Bryant University, was not surprised by the lack of interest – nationally or within the state. The first-of-its kind program, in which the Federal Reserve set up a special purpose vehicle to purchase 95% of the loans with the remaining 5% taken on by lenders, has a number of constraints that make it unappealing to borrowers and lenders alike.
For one thing, the five-year term on the loans, with no interest or principal due for the first two years followed by growing payments that “balloon” in year five, are risky for businesses amid an uncertain economic climate. Whether revenue will return to preCOVID-19 levels when payments start coming due in two years is unclear for many, Nigro said.
And the alternatives are often better; under the U.S. Small Business Administration’s Paycheck Protection Program, smaller companies could see debt completely forgiven if used for the appropriate payroll costs. Larger companies might find better interest rates accessing capital markets, or even with a traditional 30-year loan.
That states such as Rhode Island have rolled out their own programs, such as the Restore RI small-business grant program, also makes the Fed’s program less attractive, said James Hagerty, The Washington Trust Co. executive vice president and chief lending officer.
The Westerly-based bank planned to register as a Main Street Program lender once it had a customer interested in applying. But no interest ever materialized, and the bank never registered.
From the lender’s perspective, the program is risky, too. If borrowers can’t pay up when the time comes and the program doesn’t get renewed, it’s up to the bank to refinance.
Eric S. Rosengren, CEO and president for the Federal Reserve Bank of Boston, said recently at the Boston Economic Club that a major limiting factor for the program has been the unwillingness of some banks to participate. None of the largest national banks have made more than six loans, Rosengren said.
Hagerty also noted that Rhode Island is a state composed largely of small businesses, and there are few midsize companies perhaps better suited to the program. But other states show similar lack of interest. In neighboring Massachusetts, three applicants and lenders each have participated, while in Connecticut, it was just one apiece.
Nigro wasn’t ruling out the possibility of an uptick, particularly if economic conditions worsen and federal stimulus relief is further delayed.
“It’s not the end of the program yet, but it’s not what the Fed had hoped for,” he said. n
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