US banks call for term changes as Fed finalizes Main Street loan program

WASHINGTON (Reuters) – U.S. banks are pushing the Federal Reserve to change the terms of a $ 600 billion loan program for small and medium-sized businesses, including reducing minimum loan amounts and allowing more flexibility on underlying benchmark rates, industry groups said.

Over the past few days, Washington-based banking groups have given the Fed comments on the terms of the Main Street loan program designed to help mitigate the economic impact of the coronavirus outbreak. The program was unveiled on April 9 and is expected to launch in the coming weeks.

Under this program, banks will provide loans to qualifying small and medium-sized businesses and the Fed will then purchase 95% of the loan via a special-purpose vehicle. The Fed has sought public input and said it could change conditions if necessary.

Making the program operational for lenders is essential for federal funds to flow quickly into the real economy, but the terms of this program and other aid programs are increasingly under scrutiny due to fears that conditions may arise. insufficient funds are imposed on borrowers and banks may distribute funds unevenly.

Reuters reported on Friday that some funds from a separate program to cover small business payrolls appeared to have gone to some states and businesses with less need for the cash. [nL1N2C40K3]

Industry groups including the Independent Community Bankers of America (ICBA), the Consumer Bankers Association (CBA) and the American Bankers Association (ABA) this week told the Fed that the minimum loan amount of $ 1 million of the program is too large and will exclude many small businesses. who need to borrow a smaller amount.

“The minimum loan amount should not be more than $ 100,000. Otherwise, main street businesses and community banks will not participate, ”the ICBA wrote in a letter released Friday.

The ABA said in its letter released on Saturday that the floor is expected to be $ 50,000.

The Fed has said banks are to price loans using the Guaranteed Overnight Funding Rate (SOFR), a new benchmark that is expected to replace the London Interbank Offered Rate (Libor) next year. But some lenders want to use Libor or other benchmarks because many have yet to adopt SOFR, the ABA said.

The ICBA also said that requiring lenders to keep a 5% interest in the loan would likely not make lenders more careful in taking out the loan, but it would complicate the sale of the loan and the accounting treatment of the loan. the transaction.

Other industry demands include greater flexibility over the term of authorized loans and the maximum loan amount, as well as greater latitude for lenders on how to apply capital distribution restrictions imposed on companies. borrowers as a condition of the loan.

The Fed, which has received around 2,000 letters about the program, declined to comment.

Reporting by Michelle Price in Washington; Editing by Matthew Lewis

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