Banks barely touched the Fed’s Main Street lending program. Except this one.
Most banks have shied away from the Federal Reserve’s loan program designed to support midsize businesses. Florida lender is getting started.
Miami-based City National Bank of Florida adopted Fed policy Main Street Loan Program, who made his first loan this summer. Of the 252 loans made under the program in its first three months, City National has made nearly 100, granting loans of up to $ 50 million to businesses in states as far away as California and Wyoming.
But if not, the program, which allows banks to provide business loans and then sell most of the loan to the Fed, received a warm welcome at best. By the end of September, less than 100 banks had used it, issuing about $ 2 billion in loans under a $ 600 billion program. More than $ 500 million has been donated by City National. None of the biggest banks in the country have made any of these loans.
City National, subsidiary of the Chilean bank
said he was confident in his loans. “We are in the business of risk management,” City National chief executive Jorge Gonzalez said in an interview. The terms of the program, he said, seem more than reasonable, and the bank has made the loans largely to existing customers.
Using the Main Street program leaves a bank with less additional debt on its books and free to extend more loans to other borrowers. Banks also collect commissions from borrowers for granting loans.
City National made the early decision to enroll in the program, translating the Fed’s lengthy details into easy guides for customers. Bank loan officers at 30 branches spoke frequently to Fed employees over the summer.
The bank has grown aggressively since Mr. Gonzalez took the helm in 2009, its assets having tripled to nearly $ 17.5 billion. It expanded to new growing markets in South and Central Florida and launched new businesses, including a nationwide equipment finance subsidiary. He also bought a rival Florida bank in 2018 and is in the process of buying another.
Mango’s Tropical Café, a Florida nightclub with locations in South Beach and Orlando, recently received a $ 10 million loan on Main Street through City National. Owner Joshua Wallack remembers the exact date the clubs sold their last mojitos, March 16.
Before that, the company was making around $ 50 million a year, more than enough to employ around 450 people and cover mortgage payments of nearly $ 50 million.
The loan allows him to stay up to date on his mortgages in the hope of a possible reopening. Yet Mr. Wallack had to put most of his staff on leave.
“Closing this loan was a credit to us,” Wallack said. “It bought us two more years.”
The Fed introduced the Main Street program to fill a gap in coronavirus relief, inserting itself between the Paycheque Protection Program for small businesses and a The Fed’s program to buy debt issued by large companies.
The Main Street Lending Program works like this: Companies with sales of $ 5 billion or less than 15,000 employees can apply for loans of at least $ 250,000 from participating banks. Banks can then generally sell 95% of the loan to the Fed, putting the central bank largely on the hook if the loan goes bad. Businesses have five years to repay loans, and they can defer principal payments for the first two years.
The Fed navigate difficult terrain. Some observers say the Fed risks becoming a dumping ground for bad debts. The program plunges the Fed directly into lending in a way the central bank has rarely ventured into.
Other lawmakers and economists say the Fed could do more for the economy by making the program more generous, such as offering to buy 100% of every loan.
“Banks are generally unwilling to give loans to borrowers who are not creditworthy on their own terms … without a subsidy much larger than what the Fed is offering to provide,” said Karen Petrou, Managing Partner by Federal Financial Analytics. “They ask themselves, ‘Why not give 100% of the loans I want rather than 5% of the loans I don’t want? “”
Mango’s, like many businesses that received Main Street loans, also got a P3 loan earlier in the year. But PPP, unlike the Main Street program, has attracted a wide range of banks, including the largest US lenders. Many lenders have stated that PPP will not be a net money generator given its low interest rates and fees. But the government was prepared to guarantee all loans, largely protecting banks against defaults.
With the Main Street program, lenders assume some of the risk if a borrower cannot repay the loan.
Some companies have said the Main Street loan terms are too onerous. For example, they are generally prohibited from using Main Street loans to pay off certain types of debt, increase executive compensation, or pay dividends. Unlike PPP loans, they are not forgivable.
Many companies that have obtained loans through Main Street fit a narrow profile: strong credit and a clear path to restart their operations, said Hal Scott, director of the Committee on Capital Markets Regulation, a research group. Firms with weaker financial bases, which could benefit the most, are unlikely to get Main Street loans, he said.
Vista Bank in Texas provided Main Street loans to 15 companies in the first three months of the program. But hundreds more applied, said Jared Craighead, the bank’s chief of staff. Currently, the bank is limiting applications to state-owned companies and retaining its underwriting criteria.
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“We are not going to give a loan to someone who cannot repay it,” Craighead said.
Scott’s group recommended changes, including 100% Fed liability for loans and a 1% fixed interest rate. Current rates hover around 3.2%.
The Fed has been tinkering with the program since its deployment. But the central bank is unlikely to make major changes and have done “basically all the things we can think of,” Fed Chairman Jerome Powell told Congress in late September.
Write to Orla McCaffrey at [email protected]
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