Waste of the Day: Covid Lending Program Has $257 Million In Losses

Topline: A federal Covid-era lending program faces millions in losses, with past-due payments growing as small business borrowers face increased interest payments on the variable rate loans.

Key Facts: As of Sept. 30, 2023, the federal Main Street Lending Program had $257 million in actual loan losses, according to a U.S. Government Accountability Office report.

Since interest payments began in August 2021, most borrowers have been making them on time.

However, the rate of past-due payments increased to about 7.6 percent in August 2023 and could remain higher than average as borrowers face increased interest payments as variable rates on Main Street loans have risen.

The GAO found that 610 loans (or about 33%) had been fully repaid, and 45 loans (or about 2.5 percent) had recorded losses.

Background: Responding to the Covid-19 pandemic, the Federal Reserve System Board of Governors authorized 13 emergency lending programs for certain parts of the economy, including businesses and employers.

The Main Street Lending Program was for small and mid-sized businesses and nonprofits and ended on Jan. 8, 2021. The Federal Reserve implemented the emergency lending program to mitigate disruptions in credit for large and small businesses, as well as state and local governments, as a result of the pandemic.

The program provided loan for employers who had been in good financial standing prior to the onset of the pandemic. Employers who took the loans must have made “reasonable efforts to maintain payroll and retain workers.”

Larger businesses make up a large portion of the fully repaid loans, while loans with losses were proportionally higher for smaller businesses. For example, businesses that had 2019 gross revenue of $7.7 million or more accounted for the majority of fully repaid loans, as of August 2023. \

Critical Quote: “Small businesses’ access to credit has decreased since 2022, as banks have tightened credit standards in response to a less positive economic outlook and industry-specific problems,” the GAO said in its report.

“The Federal Reserve implemented the emergency lending facilities to mitigate disruptions in credit markets for large and small businesses, as well as state and local governments, as a result of the COVID-19 pandemic. We found that since the termination of the facilities, while uncertainties exist in credit markets, near-term default risks in the markets the facilities operated in appear to be low, as vulnerabilities also remain low.”

Summary: A program intended to help small and medium-size businesses during the pandemic may have been created out of relative goodwill but the variable rates on the loans will be no friend to the businesses that must pay them back.

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This article was originally published by RealClearInvestigations and made available via RealClearWire.