By Howard Schneider and Jonnelle Marte
WASHINGTON (Reuters) – The U.S. Federal Reserve eased the terms of its “Main Street” lending program on Monday, cutting the minimum loan size in half to $250,000 and lengthening the term by a year to encourage more businesses and banks to participate.
The central bank also said registration for the program will begin soon and that lenders will be able to start making the loans to small and medium-sized businesses shortly thereafter.
The changes, which the Fed said was based on outreach with potential lenders and borrowers, address some of the concerns raised by lenders, lawyers and small business consultants that the previous minimum loan amount of $500,000 was too large to help many businesses affected by the coronavirus pandemic.
“Supporting small and mid-sized businesses so they are ready to reopen and rehire workers will help foster a broad-based economic recovery,” Federal Reserve Chair Jerome Powell said in a statement.
The Fed is further minimizing downside risks for banks and credit unions by purchasing 95% of all loans issued through the program, rather than a range of 85% to 95%.
The new borrowing minimum may still not be low enough as some businesses need loans smaller than $250,000, Jill Castilla, president and CEO of Citizens Bank of Edmond in Oklahoma said on Twitter after the Fed announced the changes.
The Fed also extended the repayment period to five years from four, with no principal due until year two rather than after year one, which could help small businesses struggling due to the crisis.
The adjustments may not lead to increased demand from borrowers who previously qualified, said Matt Kulkin, co-chair of the financial services group at Steptoe & Johnson.
Some companies may be deterred by the Fed’s disclosure of borrower information, or by limits on executive compensation, dividends or stock buybacks, said Kulkin.
(Reporting by Howard Schneider and Jonnelle Marte; Editing by Cynthia Osterman and Andrea Ricci)