WASHINGTON — Mark Sarno’s tuxedo-rental business in Scranton, Este Tux, makes half of its money from April 15 to June 15 — peak season in the “celebration economy” as high school proms and spring weddings flourish.
This year, Mr. Sarno’s tuxedo inventory swelled just as such large gatherings were banned, cancelled or postponed due to the COVID-19 pandemic. While receiving a relatively small loan through the popular Paycheck Protection Program, Mr. Sarno turned to another emergency loan assistance source, the larger, more flexible Main Street Lending Program, to make continuing inventory and rent payments.
“This was a perfect way for us to get through,” Mr. Sarno said last week. “Not only was it a way for us to get an injection of funds to cover those expenses, but it’s got a deferred interest and principal payment so we’re not burning up money to pay that back right away.”
But Este Tux was a rare breed of business that sought such financing thorough the loan program, established by Congress in March as a pillar of its COVID-19 economic relief legislation to businesses.
Now, with America’s Main Streets dotted with shuttered and struggling businesses, lawmakers are vexed about why the program — five months after Congress approved funding — had issued less than 0.1% of its $600 billion lending capacity as of Aug. 19.
That’s according to the newest report this month from the COVID-19 Congressional Oversight Commission, a five-member bipartisan panel tasked with overseeing the U.S. Treasury Department and Federal Reserve Board. During a virtual hearing this month, debate centered on the dearth of demand from borrowers and what the Fed should do, if anything, to change the scope of the program.
“This program has been a failure,” said Bharat Ramamurti, an attorney who serves as a Democratic member on the commission, during a virtual hearing this month.
Mr. Ramamurti suggested transferring the funding into direct aid for small businesses, much like how the PPP loans converted into grants if spent properly. “The Fed is trying to solve a problem that doesn’t exist, and it is incapable of solving the problem that does exist.”
Sen. Pat Toomey, R-Pa., another member of the commission, acknowledged the long-term economic outlook had dimmed since March but cautioned that direct aid was never part of the deal.
“This program was never designed to put up the payroll tab of the American workforce,” Mr. Toomey said. “It was designed to provide emergency liquidity in the hopes it would keep viable companies alive so workers would have a place to go back to.”
In response to questions, officials with the Federal Reserve, which set up the program, have explained that the program took time to establish; it wasn’t launched until July 6.
Banks and borrowers then must negotiate loans on their own, and it can take weeks to strike an agreement. The demand for new financing remains low despite the economic downturn, according to several recent business surveys.
‘Goldilocks’
Then there are limits on the program.
The idea behind the Main Street Lending Program was to reach a kind of “Goldilocks” business: One that was bigger than the mom-and-pop shops applying for the Paycheck Protection Program money but smaller than the corporations that have access to capital markets and other sources of lending.
The central bank drew up the rules so that medium-size companies across a range of sectors could be eligible. The program offers loans ranging from $250,000 to $300 million to businesses with up to 15,000 employees or up to $5 billion in annual revenue.
The Fed’s most recent loan-specific data, which shows loans issued through July 31, shows just two loans in Pennsylvania were issued, both by FNCB Bancorp., a regional bank based in Lackawanna County and one of 11 banks in the state participating in the program.
“It’s been our goal during this pandemic to do whatever we can to help our community get the credit they need,” said Jerry A. Champi, the bank’s president and CEO, in a phone interview.
In addition to a $3.25 million loan to Este Tux, FNCB issued $50 million loan to Mount Airy Casino and Resort. Mr. Champi said the bank had fielded more than 60 inquiries about the program. The borrowers “were successful before the pandemic, and we want to try to make sure we keep the community up and running,” he said.
In an email, a spokesperson said Mount Airy Casino and Resort will use the loan “to secure the jobs of nearly 1,000 Pennsylvanians employed by Mount Airy and will allow us to continue to support hundreds of Pennsylvania businesses we purchase from and work with.”
It is unclear whether any businesses in Western Pennsylvania have applied this month. A spokeswoman for The PNC Financial Services Group said the bank had not closed any deals, “but we anticipate doing so going forward.”
The lack of interest in the Fed loan program comes as Congress continues to come up empty on a deal to extend key supports for businesses and workers. The PPP expired on Aug. 8, and states, including Pennsylvania, are racing to extend at least $300 a week in unemployment benefits to laid-off workers.
Mekael Teshome, the Federal Reserve Bank’s top regional officer in Pittsburgh, declined to comment on the Main Street Lending Program.
In an interview, Mr. Teshome said the economic outlook in the region had become more uncertain since the spring. Some sectors, such as automobile dealers and residential real estate, bounced back stronger than others, like leisure and hospitality and some manufacturing.
U.S. consumer confidence had dipped in July and stayed flat in the first half of August, and, if federal support is not extended by Congress, it could dampen expectations even further. Some businesses’ investment plans have been scaled back, he said.
In March and April, “There was a sense that the pandemic would be relatively short,” said Mr. Teshome, the vice president and senior regional officer of the Pittsburgh Branch of the Federal Reserve Bank of Cleveland.
“But now, the sense is that it is going to be a prolonged fight,” Mr. Teshome said. “It’s an uneven recovery, and the expectations are that it will be prolonged.”
A close watch
Fed officials in Washington believe more businesses will take advantage of the Main Street Lending Program as the economic downturn continues.
While lawmakers have made no moves to tweak the rules or dismantle it, the program’s performance is being watched closely.
“At some point, we need to have a discussion about the fact that we are in a different place than we were when we designed this program back in March,” Mr. Toomey said, calling the current situation a “new and different challenge.”
At Este Tux in Scranton, Mr. Sarno hopes high school seniors and wedding parties will have something to celebrate next year.
“If everything works out good for 2021, we can successfully pay back all of that loan,” he said.
Daniel Moore: dmoore@post-gazette.com, Twitter @PGdanielmoore
First Published: August 30, 2020, 10:15 a.m.
