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Federal Reserve to backstop Paycheck Protection Program loans

Brian Cheung
Reporter

The Federal Reserve will backstop the Small Business Administration’s emergency loan program, as lenders continue to work through logistical challenges in disbursing money to Main Street amid the coronavirus shutdown.

The Fed released a two-sentence statement on Monday committing the central bank to providing financing to lenders processing the $350 billion Paycheck Protection Program signed into law to mitigate the economic impact of the coronavirus.

“To facilitate lending to small businesses via the Small Business Administration’s Paycheck Protection Program (PPP), the Federal Reserve will establish a facility to provide term financing backed by PPP loans,” the statement read. “Additional details will be announced this week.”

Through term financing, the Fed could take on PPP loans originated by banks concerned about the cost of servicing the loans.

Federal Reserve Chair Jerome Powell holds a news conference following the Federal Open Market Committee meeting in Washington, U.S., December 11, 2019. REUTERS/Joshua Roberts

The loans, authorized by the CARES Act passed two weeks ago, were originally structured with a fixed interest rate of 0.5% and would defer interest payments for up to six months.

But community banks worried that a 0.5% rate was well below “break even” for lenders to feasibly participate in the program. The Independent Community Bankers of America wrote a letter on April 1 urging policymakers to peg the loan rates closer to 4%.

The U.S. Treasury and the Small Business Administration ultimately set a 1.00% rate.

The financing concerns around the PPP complicate an emergency effort already suffering from logistical problems in launching the program. On the first day of applications last Friday, April 3, only two of the four largest U.S. banks were able to successfully open their web portals. Complaints rushed in as several small businesses alleged that the system was rendering them ineligible despite years of banking relationships.

Under the program, small businesses with 500 or fewer employees are eligible as long as they commit to maintaining employee and compensation levels. Starting Friday, independent contractors and self-employed workers will be eligible for PPP loans through their existing lenders.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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