The Federal Reserve's Main Street Lending Program is expected to launch this week and business groups and lawmakers are already trying to change it.

At a Tuesday Senate committee hearing on the implementation of Title IV of the Cares Act, lawmakers including Mike Crapo (R-Idaho) and Mark Warner (D-Va.) questioned the expected efficacy of the program, which will be open to companies with as much as $5 billion in 2019 annual revenue or fewer than 15,000 employees that were in good financial standing before the crisis. They also wondered aloud whether the business community would take it up at all.

That skepticism is merited. While the Main Street Lending Program, announced on March 23, offers loans with low interest charges--the variable rates are equal to Libor plus 300 basis points, or about 3 percent--they must be repaid. It is expected to run directly through federally insured depository institutions, including banks, savings associations, and credit unions. However, several restrictions--such as limitations on executive compensation and requiring that companies make "reasonable efforts" to retain their employees during the loan term--may make this financing less palatable for some businesses.

"As it's currently structured, it's not helpful," says Chuck Morton, partner and co-chair of the corporate group at Venable, a Washington, D.C.-based law firm that represents corporate clients. "If [businesses] can get money someplace else under terms anywhere close to Libor plus 300 basis points without the restrictions on payments, they will take that money." 

The business lobby's alteration list includes: unraveling the compensation limits, extending the repayment period to six years from four years, reducing the minimum loan amount to $250,000 from $500,000, lowering interest rates or making them fixed, and making the repayment schedule more flexible. 

Much of this could be achieved through administrative tweaks, suggests David Cole, a partner with Holland & Knight's corporate and securities group. Like the Paycheck Protection Program, which requires that, to qualify for loan forgiveness, businesses must spend 75 percent of PPP funds on payroll costs like salaries, the Main Street Lending Program carries some restrictions that aren't actually listed in the original Cares Act statute, he says. For instance, the dreaded compensation limits. "They arguably stepped outside the boundaries of their authority in the PPP loan," Cole adds. "Same thing here."

Further, the Treasury Department could move to absorb more losses from the program, which could give the Fed breathing room to modify terms. Currently, Treasury has allotted $75 billion in funds from the Cares Act to backstop the Main Street program, which effectively supports up to $600 billion in new loans. In recent days, Treasury secretary Steven Mnuchin has suggested that more funds could be made available.

The likelihood of the program's getting revamped will depend on how many businesses actually tap into it. Speaking at a Senate hearing on May 19, Federal Reserve Board chair Jerome Powell signaled the potential for modifications. "We will continue to be prepared to adapt ... if the uptake is not what we would hope."

One thing working in favor of the uptake: tightening credit.

Since the start of the pandemic, conventional credit markets have begun to seize up, says Bill Phelan, general manager of PayNet, Equifax's commercial lending and banking data provider. He points to his company's Small Business Lending Index, which has tracked small-business lending activity and access to capital since 2005. After hitting all-time highs in 2019, the April 2020 Index fell 14.4 points to 107.4, which is 32 percent below its year-ago level. "Depending on what you're financing needs are, there is still some traditional lending going on," says Phelan. "Obviously it has taken a big hit."

If lenders worried about continued economic fallout turn off the spigot, says Cole, borrowers will turn to the program, regardless of the terms. "There are companies that are projecting that we haven't seen the worst of the coronavirus," he says, adding: "Smart companies are trying to raise cash wherever they can."

Indeed, tighter credit markets could cast the program into a familiar Fed role, says Morton. "If our headline has always been that this is the credit of last resort, guess what--this is the last resort."