Fed announces it will provide financing against new US “payroll protection” loans

FILE PHOTO: The Federal Reserve Building on Constitution Avenue is pictured in Washington, United States, March 19, 2019. REUTERS / Leah Millis

WASHINGTON (Reuters) – The Federal Reserve on Monday decided to bolster a new small business lending program by allowing banks to turn these loans over to the U.S. central bank for cash, easing banks’ concerns over low interest rate loans.

The Fed said it would announce details later this week of a new term financing deal for loans made under the so-called Wage Protection Program, as part of the response. federal government to the economic effects of the coronavirus pandemic.

Term finance facilities have been a critical part of the Fed’s response to the crisis, encouraging banks to extend loans for a variety of purposes, with the understanding that they could hand it over to the central bank, obtain liquidity and continue. to lend.

The program is similar to the deal the US government has made with mortgage agencies like Fannie Mae and Freddie Mac, whose seal of approval for a loan makes banks more willing to lend.

In this case, the very existence of the Fed’s program – assuring banks that they could offload Small Business Administration loans whenever they want – could make the program more attractive to lenders, given the fees that can go up to up to 5% that banks can charge for what currently amounts to paperwork processing.

The payroll protection program is one of the key measures adopted as part of a more than $ 2 trillion effort to offset the economic impact of the coronavirus crisis, which has forced much of the l US economy to shut down. It is spending $ 350 billion in loans so that small businesses can continue to pay workers and meet basic expenses like rent.

The deployment of the program, however, has been irregular. Some bankers have said they still don’t understand their potential risks should loans go wrong – even though the Treasury Department has said it will guarantee them in most cases. Bankers were also concerned about keeping the loans at 1% interest, even though the Treasury said last week they could be sold back to the SBA after seven weeks.

The Fed is working on a separate Main Street loan facility that is expected to focus on mid-sized employers with between 500 and 10,000 workers.

Fed Chairman Jerome Powell will provide an update on the economy Thursday in a webcast speech hosted by the Brookings Institution, a Washington-based think tank.

Reporting by Howard Schneider, editing by Steve Orlofsky, Will Dunham and Sonya Hepinstall

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