Fed says it will provide financing against new U.S.
'payroll protection' loans
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[April 07, 2020] By
Howard Schneider and Lindsay Dunsmuir
WASHINGTON (Reuters) - The Federal Reserve
on Monday moved to bolster a new small-business lending program by
allowing banks to turn those loans over to the U.S. central bank for
cash, easing concerns among banks about getting stuck holding the low
The Fed said it would announce details later this week of a new term
financing arrangement for loans made under what is known as the Payroll
Protection Program, part of the federal response to the economic effects
of the coronavirus pandemic.
Term financing facilities have been a staple of the Fed's crisis
response, encouraging banks to make loans for a variety of purposes with
the understanding that they could turn them over to the central bank,
get cash and continue lending.
The program is similar to the arrangement the U.S. government has with
mortgage agencies like Fannie Mae and Freddie Mac, whose stamp of
approval on a loan makes banks more willing to lend.
In this case the very existence of the Fed program - assuring banks they
could unload the Small Business Administration loans when they want -
could make the program more attractive to lenders, given the fees of up
to 5% banks can earn for what now amounts to processing the paperwork.
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Federal Reserve Board building on Constitution Avenue is pictured in
Washington, U.S., March 19, 2019. REUTERS/Leah Millis
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 large portions of the U.S. economy to shutter. It
dedicates $350 billion for loans so small businesses can keep paying workers and
meet basic expenses like rent.
The rollout of the program has been fitful, however. Some bankers have said they
remain unclear about their potential risks if the loans go bad - even though the
Treasury Department has said it would guarantee them in most instances. Bankers
also have been concerned about holding onto the 1% interest loans even though
the Treasury last week said they could be sold back to the SBA after seven
The Fed is working on a separate Main Street Lending Facility expected to focus
on mid-sized employers with between 500 and 10,000 workers.
Fed Chair Jerome Powell is to provide an update on the economy on Thursday in a
webcast speech hosted by the Brookings Institution, a Washington-based think
(Reporting by Howard Schneider, Editing by Steve Orlofsky, Will Dunham and Sonya
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