Designing the Main Street Lending Program: Challenges and options

• Published in: Policy File 2020
• Main Authors: English, William B, Liang, Nellie
• Format: Report
• Language: English
• Subjects: Business; The Brookings Institution

The Main Street Lending Program (MSLP), authorized by the CARES Act, provides loans to small and mid-size firms and large below-investment-grade firms that were financially sound before the onset of the pandemic. Extending credit can help some of these businesses manage the near-term drop in revenues, prevent unnecessary failures, and so support a recovery once the pandemic eases. The MSLP is a big step for the Federal Reserve and Treasury, given the risk of these loans and the legal constraints on Fed lending. Domestic borrowers with fewer than 15,000 employees and less than $5 billion in 2019 revenues are eligible to apply; they account for a significant share of aggregate employment. Loans will be made by banks, who will retain 5 percent of the loan and sell the remaining 95 percent to one of three Main Street facilities. All Main Street loans have a five-year maturity, defer interest payments for one year, defer principal payments for two years, and have a loan rate of LIBOR plus 3 percentage points. Borrowers have limits on executive compensation, shareholder distributions, and employment. The program has been revised twice in response to feedback. Still there are features that may limit take-up. We believe the current program would be more attractive and, thus, more effective if loan terms were more tailored to the characteristics of borrowers, the rigidity of fixed debt repayments was reduced, and lenders received more compensation for taking additional risks. These changes would pose additional risk to the $75 billion that the Treasury has provided to cover any losses. However, it is critical to support businesses now. The downturn is very deep, and the risk of permanent harm to labor markets because of protracted high unemployment is large. Thus, the Fed and the Treasury should move quickly to adjust the terms of the program if take-up is low. Even with the recommended changes, however, the program may have limited demand because many businesses need equity, not more credit. Congress should be prepared consider other types of programs, such as loan guarantees or insurance, which, combined with lending, would promote a more rapid recovery in employment and limit long-run damage to the economy.