U.S. Fed's Main Street lending facility likely to start with a whimper

With Congress ramping up scrutiny of bailout funds, the Main Street program has already attracted controversy. In April, lawmakers accused the Fed of bowing to the oil and gas lobby after the central bank changed the facility's terms to better accommodate highly indebted industries.

Since then, many companies have grown wary of the scrutiny that comes with tapping federal aid, especially after many publicly-listed companies were widely criticized for taking PPP loans, according to bankers and lobbyists.

The Fed plans to publish the names of lenders and borrowers, the amounts borrowed and interest rates charged, along with other details.

"There's the potential for future scrutiny with hindsight that we don't have today," said Matt Kulkin, co-chair of the financial services group at Steptoe & Johnson.

He added that some businesses may also hold off from applying until they get clarity on the conditions the Fed will impose on borrowers, in particular a requirement that companies make "a reasonable effort" to retain workers.

Other limits on executive compensation, dividends or stock buybacks will also put some companies off, said Kulkin.

 

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The Fed expanded the program in April after receiving more than 2,200 comment letters by lowering the minimum loan amount to US$ 500,000 from US$ 1 million and by raising the cap on employees and revenue. On Monday, it slashed the floor again to US$ 250,000 but some small banks took to Twitter to protest that floor as still too large.

The ICBA and American Bankers Association had pushed for the minimum loan size to be no more than US$ 100,000.

"The @federalreserve lowers Main St Lending min to US$ 250k, but #smallbiz needs it even lower," Tweeted, Jill Castilla, President and CEO of Citizens Bank of Edmond in Oklahoma. She has advocated for scrapping the floor altogether.

Banks are also worried about the risks they could face. The Fed will purchase 95% of qualifying loans and the bank will keep the rest of the loan on its balance sheet. But some contend holding even 5% of a loan in a troubled business may be too much.

"Most small businesses have a probability of failure in the 50% range...No bank is gonna underwrite an unsecured working capital loan to a small service business," tweeted Christopher Whalen, Chairman of Whalen Global Advisors LLC on Monday.