The Committee on Capital Markets Regulation (the “Committee”) believes that small and medium sized businesses (“SMEs”) will need continued financial support for a prolonged period to recover from the impact of the COVID-19 pandemic. A key part of this support should come from the Treasury-Federal Reserve’s Main Street Lending Program (“MSLP”) authorized by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The MSLP comprises five facilities, three of which are targeted at for-profit business and two of which are targeted at non-profits. This statement is focused on the three for-profit facilities. So far these facilities, which have been operating for almost two months, have not delivered the anticipated results.

We therefore recommend that the MSLP be significantly restructured to: take on more credit risk, by providing that the Federal Reserve make 100% of the loans, leaving banks and other financial institutions as processors; and provide below market terms for borrowers. For clarity, the Fed would be the lender; banks or other financial institutions would not underwrite loans or extend credit under the revised MSLP; they would just be processors. However, to the extent feasible, the Fed’s Main Street facilities could lend to borrowers directly. This would be preferable since it would speed up the process by eliminating the need for detailed and ongoing instructions from the Fed to the processors, and the concerns of processors with liability.

The MSLP must be on first-come first-serve basis to ensure that the government is not picking winners and losers. Policymakers must also reach out to the hardest hit and underserved communities so that businesses in these communities can take advantage of the program. Clearly our approach would lead to more credit risk—but it is necessary to take such risk for the program to reach needy borrowers, and the funds have already been appropriated by Congress to support such risk. However, the Fed should not lend to businesses that are beyond salvation. That risk can be mitigated by borrower certifications of solvency and borrower certification that the funds will be used in their business, together with the use of objective metrics by the Fed to identify firms that can and cannot benefit by additional borrowing.

The impact of the COVID-19 pandemic on SMEs has been, and will continue to be, far-reaching. There is no guarantee that the changes to the MSLP that we recommend here will succeed in meeting the financial needs of SMEs that have been jeopardized by the pandemic. But the current approach has clearly fallen short and, in our view, the reforms that we propose here are worth an attempt. Moreover, our recommendations can be enacted now under the CARES Act, as SMEs continue to suffer while Congress debates further appropriations for the Paycheck Protection Program (“PPP”).

However, extraordinary federal intervention such as the MSLP must end as soon as the need for such a program has dissipated. We therefore support the current end-date of December 31, 2020, which can be reevaluated in the coming months.

The full report can be found here.