By Nick Timiraos 

The Federal Reserve issued new guidance to banks Friday in an effort to improve access to new business loans through its $600 billion Main Street Lending Program.

The central bank is relying on banks to underwrite loans to qualified small and midsize businesses under the novel effort to reach firms that aren't large enough to access corporate funding markets, which the central bank has also backstopped.

The Fed is trying to encourage banks to make loans that might not otherwise be made to support businesses through the coronavirus pandemic. The program has faced limited uptake since the Fed began purchasing loans in July, with some banks saying they are selling 95% of eligible loans to the Fed because of concerns over how regulators might treat loans to firms whose revenues have been significantly harmed by the pandemic.

In response, the central bank said Friday it had agreed with bank regulators at the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to clarify that federal examiners will provide more flexibility in evaluating loans originated under the Main Street program.

Through Wednesday, banks have extended slightly more than $1.5 billion in loans under the program. The Treasury Department has provided $75 billion to cover loan losses, which will allows the Fed to extend up to $600 billion in loans. So far, large national banks have mostly shied away from using the program.

Unlike the Paycheck Protection Program, which made grants to eligible small businesses to cover payroll and other expenses, Main Street loans must be repaid. The loans have five-year terms; borrowers can delay principal payments for two years and interest payments for one year.

"Some lenders are concerned about the underwriting expectations," said Fed Chairman Jerome Powell at a news conference Wednesday. "What we want to do is make sure that they know that they should take" into account certain loan features, including payment deferrals, that could make it easier for certain businesses to eventually repay, he said.

Mr. Powell said the Fed wants to make sure the program is "available pretty much to any company that needs it and that can service a loan."

The Fed hasn't done anything like the Main Street program in many decades, and the program design, which requires the approval of the Treasury, has faced complications and delays. The terms of the program were first announced on April 9 and have been relaxed twice to include more potential borrowers and flexible repayments.

Write to Nick Timiraos at nick.timiraos@wsj.com

 

(END) Dow Jones Newswires

September 18, 2020 13:47 ET (17:47 GMT)

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