Fed, Treasury clarify underwriting rules for Main Street loans

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WASHINGTON – The Federal Reserve and Treasury Department on Friday released a series of FAQs to clarify actuarial expectations for lenders participating in the Main Street Lending Program to allay banks’ concerns about taking additional risk.

The $ 600 billion Main Street Lending Program was set up with funds from the Coronavirus Aid, Relief and Economic Security Act to help businesses with up to 15,000 employees or $ 5 billion in annual revenue who were facing the Pandemic were in solid financial shape, offering loans ranging from $ 250,000 to $ 300 million.

Since the Fed began buying loans in July, only a fraction of the funds allocated to the program have been used. Fed chair Jerome Powell said Wednesday that about $ 2 billion in Main Street loans have been lent to date, admitting lenders are concerned about keeping 5% of those loans on their books. The Fed buys the other 95% through a special purpose vehicle.

But some banks have been nervous about being involved in Main Street loans, and recent reports claim that the Treasury Department has ordered banks not to default borrowers, which may deter banks from taking the risk.

“Banks like to make good credit – that’s what they do,” Powell said during a news conference. “They are trained to make good credit, so you should expect them, and we expect them to do some underwriting. We also want them to take some risk, of course, because that was the point, and the question is, how do you choose that one? It’s not an easy thing. “

The Fed and Treasury Department attempted to allay some of those fears on Friday, stressing in the new FAQs that lenders should not lend Main Street loans based on a borrower’s current financial condition, which may have been damaged by the coronavirus, and instead Potential Main Street should assess the financial condition of street borrowers prior to the pandemic and prospects for the post-pandemic. Lenders should also consider the deferment features available on Main Street loans, the Fed said.

The FAQs were also made in consultation with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, the other two banking regulators, and provided more information on how bank auditors will handle Main Street loans.

Regulators will not blame banks for Main Street loans granted in accordance with the program’s requirements, the Fed said, including loans that may be considered “failed” at the time of granting as long as those loans are weak can be attributed to this from the COVID-19 pandemic.

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