The Federal Reserve Monday moved to strengthen a new small-business lending program by allowing banks to show those loans over to the U.S. central bank for money, easing concerns among banks about getting stuck holding the low-interest loans.
The Fed said it might declare details later this week of a new term financing program for loans made under what is called the Payroll Protection Program, a part of the federal response to the economic impacts of the coronavirus pandemic.
Term financing services have been a staple of the Fed’s crisis response, encouraging banks to make loans for a wide range of purposes with the understanding that they could pass to the central bank, get money and continue lending.
The program is just like the arrangement the U.S. government has with mortgage businesses like Fannie Mae and Freddie Mac, whose stamp of clearance on loan makes banks more willing to lend.
In this case, the existence of the Fed arrangement – assuring lenders they could release the Small Business Administration loans when they want – could make this system more attractive to lenders, given the fees of as much as 5% banks can earn for what now amounts to processing the paperwork.
The Payroll Protection Program is one of the crucial measures adopted as part of an over $2 trillion effort to balance out the economic impact of the coronavirus crisis, which has forced giant portions of the U.S. economy to shutter.