Main Street Lending Is Starting! ... Now What?

May 26, 2020 Jim Young

With Main Street Lending programs finally about to start, how should banks approach them? Will MSLP stimulate more activity? And how should banks think about risk with these deals?  Dallas Wells and Jim Young discuss all that and more in this week's episode of The Purposeful Banker.


Helpful Links


Jim Young: Hi, and welcome to the Purposeful Banker. The podcast brought to you by Precision Lender, where we discuss the big topics on the minds of today's best bankers. I'm Jim Young, Director of Content at Precision Lender. And I'm joined again by Dallas Wells, our EVP of strategy.

At the start of the COVID crisis. We began podcasting each week, because there was just so much going on and so much to discuss. Last week was the first time we didn't because, frankly, nothing was going on. And I mean that in almost a literal sense, virtually no commercial lending was getting done, as banks waited for the federal government to put the finishing touches on its Main Street Lending Program.

Finally, last week, the government announced that Main Street Lending would start by the end of May or the start of June, whichever, but the point is it's coming and it's coming soon. So Dallas, good news, we've got stuff to discuss.

Dallas Wells: Yeah, exciting stuff, right?

Jim Young: Try to contain your excitement, all right. But first off, without turning you into a political pundit, why did it take, why has it taken so long for Main Street Lending to go from, Hey, it's been announced to it's getting rolled out.

Dallas Wells: Yeah so, I think the big challenge here is that the Federal Reserve is taking credit risk and is effectively, now they've got a couple of vehicles in between that they are effectively now providing loans directly to small and medium-sized businesses. It's just a whole new ball game for the fed to be involved in.

They've got the mechanics of the facility itself, which has a special purpose vehicle sitting between the Federal Reserve and the borrowers. Te banks make a loan and then they sell a portion of their exposure back to the special purpose vehicle. So there's all the logistics of that, of how the vehicle is set up, how the equity portion is funded from the fed who actually operates it, how did they interact with the bank. And then I think, maybe, the trickier question is like, what happens in a default, where you've got a bank that actually originated it and holds the relationship and services it, but up to 95% of the exposure, actually sits on the Federal Reserve's balance sheet.

So they take the lion's share of the risk, and there are questions still outstanding about who gets to make decisions about what happens in a default. What sort of paths we can take in a workout, what sort of restructuring you can do, what are the orders of priority once you start selling collateral, if there is any, and personal guarantees. And just all sorts of messy stuff that happens in a workout that now the fed will be a party to.

So lots of new territory that, technically, the fed did some of this, like back in the Depression, but that's obviously a different era and a whole different set of circumstances. Since then, the fed has tried to operate in existing liquid markets, and they will provide some support to those markets by buying things where there's a clear exchange price. They will step in and provide support and liquidity, and they will provide loans to some of the players in those markets. But this is just a completely new thing for them to actually be buying pieces of bilateral small business debt, and so lots of stuff to figure out. And I think, also, just some wariness of what happens with the political fallout, from some of the inevitable messiness that comes from that.

Jim Young: All right. We talked before about, again, that drop in volume during this period, and I know it's something we've been continuing to update and to tweak. So what does it look like now? And I guess make sure also to differentiate between what we've seen in pricing, and what we've seen actually on the books.

Dallas Wells: Yeah. So, I'll focus on what we've seen actually land on the books, because there's been a lot of what we call pricing activity, which is deals being negotiated and structured. There's not as many of those actually hitting the books as the typical pull through rate that we would see and would expect.

So, when I'm talking volume, we'll talk about things that are actually being booked. What we've seen, and we've written about this, is a giant drop in volume when PPP started. Now, of course, that's... without PPP, banks had been plenty busy. It's not like they've just been sitting at home taking a break. The loan counts being processed by banks, went through the roof, starting in April, and especially the first couple of weeks as PPP was first live, and everybody knows the chaos that went along with that. As those have slowed down a little bit over the last couple of weeks, what we were looking to see is, would some of that PPP volume that's starting to go away, would it be replaced by going back to some traditional lending? Would banks be doing some of those non PPP loans? And that still has not happened.

Volumes are well below half of their normal levels that we were seeing in January and February. We saw a decent amount of volume through March as a lot of these solid, bankable customers prepared for what was clearly coming and happening. But once PPP started, and I think as banks are seeing now the depth and the extent of the economic impact of all these shutdowns, the credit market has really shriveled to a fraction of its former size, when you take away those government programs. So continuing the same trends of lots of PPP still happening... We're still seeing some of those kind of float through the systems.

It was like this giant backlog of, the banks had to process them, they have to get them to the fed, they have to get them on their own books, they have to get them to our systems, right. It takes time. And we're still seeing some of those trickle in, but the business as usual stuff has stayed on about the same. There's not a backlog of that stuff that we can tell, and it just doesn't seem to be happening, at least not doing, to me, healthy level of volume.

Jim Young: So we talked a little bit along that, about whether some of that was simply a reflection of, part of that again, PPP focus, that sort of thing, but also a reflection of holding off for Main Street Lending or whether it was a deeper, more systemic sort of thing. And what does your gut tell you, then, what will happen once Main Street Lending doors are open? Do you expect to see things to spike back up, or do you think that this drop is going to be ongoing?

Dallas Wells: When they first announced the Main Street Lending Program, there was lots of skepticism about it from the industry. There was doubts about its viability and some of that was just the technical aspects of it, and a lot of those have been corrected. I think there's still some heartburn over the lingering things outstanding, especially around those defaults issues of what exactly happens, and what will that look like. And of course, there's the issue of all of this will be happening in the public, right? The details of this program are going to be transparent, which means, of course, borrower names, amounts, terms, but also probably, eventually some of the losses will show up as well, kind of which deal went bad and who lost how much. And I think there's some reluctance to participate because of that.

But, what we've also heard in talking from a lot of banks about this over the last few weeks is that even with those concerns, they're almost just kind of like, let's hold our nose and jump in because we don't have a lot of choice. There's some real credit ugliness bubbling up in inside of portfolios. Some of the stats are a little hard to come by, and they don't translate well bank to bank. And so what I mean by that is, you see some numbers, like from some of the FinTech lenders, which were doing things like unsecured loans to customers that probably got turned away at traditional banks. Doing things that would... 30 plus percent interest rates, and it's clearly kind of subprime debt, but the delinquency rates on those things are closing it on 50% in some of those portfolios, those deals are just toast.

And so while those don't translate directly to a bank portfolio, it does show you kind of the stress in the marketplace. And there were some stats that we saw over the last couple of weeks from publicly traded banks where, 10 plus percent of their commercial books are in some form of forbearance and that's growing by the day. So I think there was a lot of willingness and a lot of flexibility on the part of the banks to say, look, we get it. This is unprecedented. Let's just push, pause on everything. We're just going to defer payments. We're going to put you into some sort of forbearance, and we'll true it up on the other side of this. The problem is that's a liquidity response, which for many of these borrowers will be appropriate, but many of them are now coming to solvency issues, so that we're not sure we can actually survive this and that there's a viable business on the other side, wherever that other side may be.

So I think some of the credit risk has kind of been hidden by all of those forbearance requests, all the flexibility that the banks have provided. There are some borrowers who aren't making payments right now. Couldn't make payments if you asked them to, and won't be able to make payments six months from now. Those are the ones that I think banks now will have to sort through and say, maybe this is a candidate for Main Street Lending, and we buy them 12 months of no payments, and we let the fed take some of that risk. And maybe once we get a year down the road, we have a viable business, again. There's enough of those where there will be healthy demand for the Main Street program.

Jim Young: Yeah. Well, this gets me to my next question. I was just looking at a market watch article about the launch, and it's not a direct quote from Boston fed president, Eric Rosengren, but it's written as if it is paraphrasing the fed. It basically says the loans are aimed at institutions that were on sound financial footing at the end of last year and were only damaged by the pandemic.

And so I was wondering, are those stipulations, are there stipulations built into that or is that sort of a guidance that, "Hey, we would like for you to do these loans for only those people and not for people that ..." Basically, don't do this as an extend and pretend as we talked about before. So I'm wondering like if you're a bank, are you going, "Yeah, that's great. But I'm going to go ahead and do this anyway." Or is there some sort of a feeling that, yes, this should not be about rescuing bad credit. This should be about continuing to let otherwise sound credits, survive.

Dallas Wells: So what he is talking about there, is there's actual, specific language in the term sheets that says for a borrower to be eligible, any loans that they have with the lender had to have at least a pass rating, as of the end of the year. So what they're saying is, you can do these to bad credits, because it's kind of the point of the program, but they need to be bad credits, very recently. You can't take last year's dregs and throw them into the mix here, and use this as a way to wipe the slate clean of all problems. So it should be businesses that were healthy as of the end of the year, and then because of what has happened, or even, just the timing is such that 12/31 healthy, now they need some help.

Dallas Wells: But I think there's some other interesting stuff buried in those term sheets and some of the fine print. And it says things like, the borrower cannot repay existing debt before they repay Main Street loans. So in other words, the Fed will make this loan to you, but you have to pay this one back first, before you pay back the other stuff, except you can make required principle payments.

So, if you've got scheduled, normal P & I amortization of any existing loans, so you can keep yourself current. You can keep other debt current. And it also says that the lender can refinance existing debt at the time of origination if it's somewhere else. So in other words, you've got a customer who comes to you and says, Hey, I need, I need money, and I need funding for whatever, or liquidity concerns, or for an opportunity. You can actually refinance some existing stuff from another bank at the point of origination. So you can kind of group some stuff together, do a little bit of cleanup, steal some business from someone else, if you're the one willing to go and extend some Main Street funds.

Jeff Marsico, from the Kafafian Group, who we've had on this podcast a couple of times, actually wrote a blog post about that just this week or just last week. Basically saying, I think this is an opportunity for community banks, in particular, where there's some negative feelings about big banks right now. And some of them have said, publicly, they're going to be slow to be involved with the Main Street Lending Program.

This is your chance, as a community bank, to go cherry pick some good customers that you've always wanted. Use the Main Street Lending Program as your way to kick that door open, and you can probably, actually, use it to refinance some stuff away from that existing bank and put it on your own books. So I think there will be some banks out there that, actually, don't just use this for the problem credits and again, the new problem credits, but also as a way to gain some market share, to use this as an opportunity to do some interesting things.

Jim Young: All right. And that's what I'm wondering about, because I know we had talked about before that, banks originally were telling us, look, I can't think about Main Street Lending. It's all PPP all the time, and now you're sort of saying that banks are sort of like, well, I guess we'll do it, not exactly a ringing endorsement. And I'm wondering... asking you to put on your oracle hat here, not the database software, but more of the Johnny Carson sort of thing here. And what's your feeling, after this program's been up and running for a week or so... What do you think we're discussing on this podcast? Are we sitting here going, well, nobody's doing anything, or, wow, volume spiked, or what do you think is... How do you think you... Let me try that again. How do you see this playing out, then?

Dallas Wells: I think there will be a fair amount of initial interest, and we know that some individual banks have already started prioritizing borrowers. They've already started sifting through their portfolios, and they basically have some that are ready to go. And when the program's live, they're going to put together a deal. So it's hard to get a feel for what that volume is going to look like. When the second round of PPP funding was approved, there was enough of a backlog from the first round and enough of still, kind of an uproar about who missed out, who got funds that shouldn't have.

There was speculation from some people who are pretty close to that market that, that second round might only last about 18 hours, like it wouldn't even last a full day. There's still funding out there. Right? And that's not just because of the bank's interest. It's, also, given the way that's happened, and, again, what's now becoming apparent is a really deep recession. Like pretty much, no matter what happens from the pandemic side at this point, a deep, painful recession is baked in. I think there's a lot of borrowers that are looking at that and saying, I don't want to take on more debt, and PPP slowed down because they're saying, well, maybe it's not going to be forgiven. Maybe I will actually have to pay this back. So given that, Main Street, no matter what, has to be paid back, right. It is additional debt.

So I think there's a lot of borrowers and business owners out there who are saying, I'm not sure this is really the time to lever up and put more on the line, when things seem really uncertain right now. I'm not sure I can service this debt on the other side of it, because I don't know what that looks like. You know? So, there will, definitely, be some initial, an initial block of stuff that gets done. And I think what we'll be talking about in a couple of weeks is trying to get a feel for, is that the start of some steady, sustained usage of this, which is my guess of what'll happen. I think there's just enough need for it, that it will happen, or is there like this initial wave, and then it just sort of goes away.

That's another one of these unknowns. This is just a brand new situation, and we have no idea how both the banks and the borrowers will collectively react to this, and what the sort of media storylines will be once this thing goes live. Who's going to make a scandal out of this, and how will people react to that? I think all of that will be what will help drive what the actual ending volume of this is going to be. I don't think it's going to be the same stampede that we saw, like with the first round of PPP where you got to be teed up and ready to go, or you're going to miss your chance. I don't think it's that.

And instead, I think there's an initial, decent sized block of stuff. One tell there was that, one of the adjustments which the fed made is they actually increased the size on the upper end of what deals are allowed now. So you can do now $200 million expanded loans with what's called Main Street Expanded Facility. So, a couple hundred million bucks here and there, and all of a sudden you're talking about real money.

That's part of why PPP has started to last a while is those loans have just gotten progressively smaller and smaller and smaller. Now a lot of banks are processing, literally, five and $10,000 PPP loans.

These are going to go in at least half a million dollar at a time chunks up to $200 million. So at that pace, even $600 billion can go reasonably quickly.

Jim Young: So $200 million, help me out with this, does that still qualify as a middle market loan for that amount?

Dallas Wells: It does. That's certainly at the upper end, but the requirements are basically, either $5 billion and less in revenues or under 15,000 employees. So you don't have to meet both of those criteria, you only have to meet one of the two. Those are pretty decent sized businesses. And when you look at things happening in the airline industry, with some of the big chain hotels, and the energy markets, there's some speculation that a lot of the demand for Main Street will come from oil and gas companies. That's a really capital intensive business, and, especially, with the carnage that's taken place in that market over the last couple of months.

Jim Young: Yeah.

Dallas Wells: Some of those can come in at needing $200 million, and banks being deep enough in with them to say, yeah, we're willing to put in our 5% of that to keep this thing afloat. It's technically middle market. It is the upper end of it, and I don't think we'll see a ton of deals of that size, but again, it doesn't take that many.

Jim Young: Gotcha. All right. Well, we'll see. It should be interesting. I would expect that we will probably be podcasting again next week, although I don't know. We'll see, because we've been told that Main Street Lending was right around the corner before, and it wasn't. So it is possible, if it hasn't launched by the time our next podcast comes around, we might not have a podcast next week, so we'll see. But we will have, definitely, some things to discuss coming up in the very near future.

And, again, if you've got a question, something you'd like for us to take a look at in our data, or topic you want us to tackle on this podcast, feel free to reach out and just send me an email to And again, that email address will be in the show notes as well, and that'll do it for this week show. So thanks so much for listening. A few friendly reminders, if you want to listen to more podcasts or check out more of our content, you can visit the or you can head over to our home page to learn more about the company behind the content. If you like what you've been hearing, make sure to subscribe to the feed in iTunes, Google play, or Stitcher. Give us ratings and feedback on any of those platforms. Until next time, this is Jim Young for Dallas Wells, and you've been listening to the Purposeful Banker.


About the Author

Jim Young

Jim Young, Director of Content at PrecisionLender, is an award-winning writer with experience in a range of positions in media and marketing, from reporter to website editor to content marketer. Throughout his career Jim has focused on the story – how to find it, how to understand it, and how best to share it with others. At PrecisionLender, he manages the many ways in which the company shares its philosophy on banking and the power of relationships. Jim graduated Phi Beta Kappa from Duke University and holds a masters degree in journalism from Columbia University.

Follow on Linkedin More Content by Jim Young
Previous Article
How the COVID Crisis Is Impacting Banking M&A
How the COVID Crisis Is Impacting Banking M&A

M&A has become problematic for banks during the COVID crisis. Why are some banks pulling the plug on planne...

Next Article
Questions Banks Should Keep Asking During COVID-19
Questions Banks Should Keep Asking During COVID-19

Even in the midst of the PPP frenzy, banks still need to step back and consider some big questions, like ho...