Fed to offer liquidity to Lehigh Valley lenders, small businesses

With a little more than $100 billion still available in the Paycheck Protection Program (PPP) fund as of Tuesday morning, the Federal Reserve is working to provide an additional $2.3 trillion in economic support loans for struggling communities.

“Our country’s highest priority must be to address this public health crisis, providing care for the ill and limiting the further spread of the virus,” said Federal Reserve Board Chair Jerome H. Powell in a statement at the end of last week. “The Fed’s role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible.”

Additional funds would ease the strain of capital and liquidity constraints on banks originating PPP loans, but midstate financial institutions said in interviews this week that guidelines for the additional funds and the PPP as a whole are still pending from the Fed and the Small Business Administration.

Main Street Lending Program (MSLP)

The Federal Reserve said the Main Street Lending Program will enhance support for small and mid-sized businesses that were in good financial standing before the crisis by offering four-year loans to companies with up to 10,000 workers, or with 2019 revenues less than $2.5 billion. Principal and interest payments will be deferred for up to one year.

The Fed will work to ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans through the MSLP. Lenders can either use MSLP funds to originate new Main Street loans or increase the size of existing ones. Lenders can retain a 5% share and sell the remaining 95% to the Fed’s Main Street facility.

In contrast to the strict guidelines of the PPP stipulating how loan funds can be used by business owners, the latest MSLP guidelines are broader, saying borrowers have to “make reasonable efforts to maintain its payroll and retain its employees” with the loan and can’t use it to repay another outstanding loan.

Most significantly, Main Street loans have to be paid back with an interest rate that’s adjustable based on the secured overnight financing rate plus 250 to 400 base points. That amounts to an interest rate between 2.5% and 4%

“If you follow the rules of the PPP, it basically becomes a grant; in this case, there is not expected to be any kind of a grant component to this,” said Ryan Hurst, a partner with the business consulting services group of Lancaster-based RKL. “This is a bridge loan to make it through this, but monies are ultimately expected to be repaid just like with any other loan.”

Paycheck Protection Program Liquidity Facility (PPPLF)

The Fed’s Paycheck Protection Program Liquidity Facility seeks to “bolster the effectiveness” of the Small Business Administration’s Paycheck Protection Program by supplying liquidity to lenders originating PPP loans while neutralizing the effects on their regulatory capital. The facility will extend credit to eligible financial institutions that originate PPP loans, taking such loans as collateral at face value.

Eugene Draganosky, president and CEO of York Traditions Bank, said the PPPLF will remove significant barriers for lenders by making critical funds available to small businesses, although administrative capacity is the most significant barrier for lenders working to provide critical funds in a timely fashion.

“When we put a loan out, we have to have cash to lend out to our borrowers, and this Federal Reserve lending fund will allow banks to borrow from the Federal Reserve to fund those loans,” Draganosky said. “The alternative for a bank would be to use depositors’ money or take out other loans to fund those PPP loans. When we’re talking about the size of the loans, that could potentially be a drain on a bank’s liquidity except for the fact that [the Fed] has put this program in place.”