By Jon Hill

Law360 (September 22, 2020, 6:50 PM EDT) -- Federal Reserve Chairman Jerome Powell told House lawmakers on Tuesday that to help small businesses weather the coronavirus pandemic, expanding the central bank's Main Street Lending Program may be less effective than reauthorizing the Paycheck Protection Program.

At an oversight hearing with Powell and Treasury Secretary Steven Mnuchin, House Financial Services Committee Chairwoman Maxine Waters, D-Calif., called it "unacceptable" that only about 0.2% of the Main Street program's $600 billion lending capacity has been used to date. She also raised the idea of cutting the program's minimum loan size to reach more small and minority-owned businesses.

But while Mnuchin said he would be on board with lowering that minimum from its current $250,000 level to $100,000, Powell suggested that such a change might not have much impact on utilization of the Main Street program, which was originally designed to support lending to mid-sized businesses.

"There's very little demand in the facility below $1 million," Powell said. "Extending credit in those small quantities would require a facility built from the ground that would be quite different than Main Street. It wouldn't have the same requirements."

Although Powell declined to rule out making additional adjustments to the emergency lending program's terms, he argued that smaller-scale businesses may be better served by loans like those offered through the PPP, which stopped processing new loan applications in August after hitting a statutory deadline.

"Trying to underwrite the credit of hundreds of thousands of very small businesses, it would be very difficult, and I think PPP is a better way to approach that space in the market and I think you were well advised to use that," Powell said.

The PPP was a creation of the Coronavirus Aid, Relief, and Economic Security Act and allowed millions of businesses with 500 or fewer employees to take out forgivable loans, with the average size borrowed through the $660 billion program clocking in at a little more than $100,000.

Run by the U.S. Small Business Administration and Treasury Department, the PPP expired Aug. 8 with nearly $134 billion in lending capacity left untapped, but the pandemic's continued economic toll since then has spurred interest in reviving the program and potentially replenishing it with more funding.

Although the deadlock between Democrats and Republicans over an additional coronavirus relief package has clouded the prospects for another round of PPP, Mnuchin said at Tuesday's hearing he sees "broad bipartisan support for extending the PPP to businesses that have had revenue drops," allowing them to go back to the program "for a second check."

Mnuchin also voiced support for topping up the program with $200 billion in funding reallocated from unused CARES Act money that was designated for the Treasury to backstop Fed emergency lending facilities like the Main Street program, though he acknowledged such a move would require approval from federal lawmakers.

To that end, House banking panel member Rep. Ann Wagner, R-Mo., called on her Democratic colleagues to promptly bring up a narrow PPP extension bill for a vote in the House, blaming "partisan politicking and partisan wishlists" for holding up relief.

"And that could be passed today and signed into law today," Wagner said.

"The president would very much support signing into law additional PPP money immediately," Mnuchin replied.

Mnuchin and Powell also addressed the possibility of revising the terms of the Fed's Main Street program to include an alternative to its current EBITDA-based leverage requirements, which commercial real estate companies and other asset-based borrowers have argued are poorly suited for gauging their riskiness and effectively shut many of them out of the program unnecessarily.  

In guidance issued Friday, the Fed said that while expanding the Main Street program to allow for "lending based on collateral values" has been considered, officials decided that "conditions do not warrant such changes at this time."

Pressed to elaborate by Rep. Andy Barr, R-Ky., Powell said at Tuesday's hearing that the Fed and Treasury have struggled "to find places where we could have much of an impact" for the commercial real estate sector.

"We look for places where the lending system is not working for commercial real estate, and a big part of that, of course, is the [commercial mortgage-backed securities] market," Powell said. "We don't have an answer to that … there are a couple problems with commercial mortgage-backed securities that make it impossible to make additional loans, for example."

Mnuchin echoed Powell's point, saying the Treasury has "spent a lot of time internally trying to figure out if there is a way we could structure a program with the Fed" in light of the challenges facing commercial real estate.

"Unfortunately, there's a structural problem with limitations on additional debt and prepayment penalties," Mnuchin said. "I think the best way to help many of these is with additional PPP funds so that people can pay rent, so that owners can pay their mortgage."

--Editing by Amy Rowe.

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