Fed expands Main Street loan program with lower minimums, extended terms

The Federal Reserve moved on Monday to expand the scope of its Main Street Lending Program by lowering the minimum loan size to $250,000 and extending the loan terms to five years.

The Fed says it will also take on 95% of all the Main Street loan risk, to incentivize lenders to offer credit.

The Fed says the program will allow the central bank to offer credit to more small and mid-sized businesses as they continue to work through the COVID-19 crisis. Originally, the minimum loan size was $500,000 and the loan terms were four years.

“I am confident the changes we are making will improve the ability of the Main Street Lending Program to support employment during this difficult period,” Fed Chairman Jerome Powell said in a statement.

The Main Street Lending Program was originally announced on March 23 but the Fed has spent over two months working on the design of the program, which Powell has described as a “complex undertaking.” The Fed’s institutional knowledge is in financial markets, not loan underwriting, and Fed officials have therefore sought public comment as it tweaked the terms of the facility.

In addition to the new minimum loan size and term lengths, the Fed has raised the maximum loan size as well.

The program will offer three different types of loans: new, priority, and expanded.

Maximums for each type will be $35 million, $50 million, and $300 million, respectively (compared to the previous maximums of $25 million, $25 million, and $200 million). Loans will also face a cap based on the outstanding credit and adjusted EBITDA of the borrower.

The loans will be not be originated by the Fed but by bank lenders, who will only be required to take on 5% of the loan while shopping the rest of the risk to a facility set up jointly by the Fed and the U.S. Treasury. Before Monday’s announcement, the Fed would only take on 5% of the loan for two of the three types of Main Street loans.

The Fed says the facility will open registration to potential lenders “soon.”

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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