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Lawmakers urge Fed, Treasury to let CRE borrowers tap Main Street loans

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WASHINGTON — Pressure is growing on the Federal Reserve and Treasury Department to enable commercial real estate borrowers to access government relief tools such as the Main Street Lending Program.

At a hearing of the House Financial Services Committee, members pressed Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin on the need to help small hotels and other indebted companies that pledge real estate and other collateral to obtain financing. Such borrowers are typically barred from taking on new debt, and therefore have been unable to use the government's pandemic relief programs.

“As a result of COVID-19 and subsequent travel shutdowns and through no fault of their own, family-owned and operated hotels in Texas and across the country are facing an unimaginable economic crisis, with no ability to access a lifeline to the Main Street Lending Program,” Rep. Vicente Gonzalez, D-Texas, said at the hearing Tuesday.

Rep. Ted Budd, R-N.C., said his office has been hearing from business-owner constituents who were unable to secure short-term financing from the private sector and were instead using working capital to fund their operations.

Fed Chairman Jerome Powell said the central bank had previously concluded that asset-based borrowers were able to secure financing elsewhere. Treasury Secretary Steven Mnuchin said “small hotels do not fit into [the Main Street Lending Program] because they already have other indebtedness.”
Fed Chairman Jerome Powell said the central bank had previously concluded that asset-based borrowers were able to secure financing elsewhere. Treasury Secretary Steven Mnuchin said “small hotels do not fit into [the Main Street Lending Program] because they already have other indebtedness.”

“They were too large to take advantage of the PPP, and they don't have access to the capital markets,” he said. “So how could the Fed use its 13(3) authority to provide assistance to these companies [that] provide services and supplies all up and down the supply chain are critical to our nation's economy?”

Restrictions on lending to CRE borrowers also led to frustration over their inability to access the Paycheck Protection Program.

The Coronavirus Aid, Relief and Economic Security Act provided $500 billion to the Treasury’s Exchange Stabilization Fund to provide loans to distressed sectors of the economy, including the hospitality industry. But in order to quality, a business had to have between 500-1,000 employees

The Fed and Treasury on Sept. 18 released updated guidance on the Main Street Lending Program in which they said that they had considered expanding it to allow loans for companies pledging real estate or other collateral — known as asset-based borrowers — but determined that “conditions do not warrant such changes at this time.”

“In many of the cases these small hotels do not fit into Main Street because they already have other indebtedness, and in many cases they're either not allowed to take additional loans or they're too levered to begin with to qualify,” Mnuchin said to Gonzalez.

Powell said that the Fed had previously concluded that asset-based borrowers like those Budd mentioned were able to secure financing elsewhere, which was why the Fed and Treasury chose not to stand up a facility directed at serving those businesses.

“I'm surprised and it's not a good thing that I'm hearing that it's difficult for some, so we'll go back and look at that,” he told Budd.

The Main Street Lending Program, which is being funded by the Fed and Treasury through congressional appropriations in the CARES Act, is available to businesses with fewer than 15,000 employees or less than $5 billion in annual revenue.

Eligible companies can receive a loan of up to $300 million through the program. But participation has been slow since the Fed started purchasing participations in Main Street loans in July, which has resulted in lawmakers urging officials to retool the program.

Lawmakers said such an expansion could offer much-needed assistance to a growing number of borrowers, including those in the cash-strapped CRE sector.

“I do think there's interest among potential borrowers to participate in this program, but many businesses and lenders are reporting to us in Congress that the program is not working for them,” said Rep. Andy Barr, R-Ky.

Mnuchin and Powell were also asked about lowering the minimum loan size in the Main Street program from $250,000 to $100,000. Mnuchin said he would be "fine" with that, but Powell was skeptical.

“There isn't much interest at all below a million dollars, so this would have to be a different kind of facility. It wouldn't look like Main Street,” Powell said. “I think extending credit in those small, small quantities would require a facility, built from the ground, that would be quite different than Main Street.”

Powell added that for businesses looking for smaller loans, the PPP — which offered forgivable small-business loans until the program closed in August — might already have been a better option than Main Street.

But Barr said that even if Congress were to restart PPP, some smaller businesses with limited payroll and larger amounts of debt would be better served by the Main Street program if only they could be granted a loan under the minimum loan size of $250,000.

“Lending at the very small end under $100,000, it tends to involve a lot of personal guarantees,” Powell said. “That's ... not a facility that we currently have. We'd have to start from scratch to develop that.”

Powell also took questions on bank supervision after the Fed’s release of hypothetical scenarios for supplemental stress tests. The largest banks will undergo an additional test of their capital strength this year in light of the uncertain economic environment. The Fed plans to publish bank-specific results of those tests by the end of this year.

“I appreciate this transparency and believe it is very important for markets, policymakers and the banks themselves to have this information be public,” said Rep. Bill Foster, D-Ill.

Those midcycle stress tests will likely inform the Fed’s future stance on dividend payments and share repurchases. The Fed will “probably” take a bank-by-bank approach to that decision rather than have all the banks be subject to the same restrictions, Powell said.

Foster also asked Powell about the potential for failures of smaller banks, “given that the fates of small banks are more closely tied to the fates of small and medium-sized businesses, which are often most at risk of business failure due to the failed response to this pandemic.”

“So far, we don't see the kinds of problems you're talking about, I think, with smaller banks,” Powell replied, but added, “I do think that smaller banks are going to probably bear too much the burden here … so I think we'll be watching carefully to make regulatory adjustments, supervisory adjustments to make sure that we give those banks every chance to serve their customers and to make it through this difficult time.”

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Main Street Lending Program Federal Reserve Treasury Department Jerome Powell Steven Mnuchin House Financial Services Committee Coronavirus Commercial real estate lending CARES Act