By: Grayson T. Orsini
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security, or “CARES” Act. The CARES Act is the largest economic stimulus package in U.S. history. Of note is the “Paycheck Protection Program” (or PPP), the massive, $349 billion dollar expansion of the Small Business Administration’s 7(a) loan program. Under the PPP, the SBA will allow 7(a) loans to be given to an expanded group of qualified business during a “covered period” from February 15, 2020 to June 30, 2020.
Under the traditional 7(a) loan program, small businesses could receive loans for working capital, expansion, and equipment purchases. The PPP expands the list of acceptable uses for 7(a) loans to cover payroll costs, costs for health care benefits, interest payments on mortgages, rental payments, and utility payments. The PPP also expands the 7(a) program to cover all business employing 500 for fewer employees, larger businesses that meet the necessary SBA size standards, and larger businesses in the hotel and food service industries.
The Paycheck Protection Program will be a lifeline for many businesses struggling to stay afloat during this crisis. Lenders and borrowers should be aware of key features of PPP loans so to best position themselves for the challenges and opportunities ahead.
Who Can Make 7(a) Loans
- To take part in the Paycheck Protection Program, lenders must already have been approved to issue loans by the SBA or be considered an “Additional Lender” under the CARES Act.
- Under the PPP Program, the SBA may delegate authority to “Additional Lenders” having the “necessary qualifications” to process, close, disburse, and service loans.
- We do not know how the SBA and the Treasury Secretary will determine what the “necessary qualifications” are. The CARES Act states that “the Department of the Treasury, in consultation with the Administrator [i.e.- the SBA] and the Chairman of the Farm Credit Administration shall establish [such] criteria.”
- The Treasury Secretary has stated that new lenders need to submit applications to DelegatedAuthority@sba.gov to apply with the SBA.
Considerations for Loans
- To see if a borrower is eligible to receive PPP loans, a lender must see whether the borrower was in operation as of February 15, 2020, and either had employees for whom the borrower paid salaries and payroll taxes for, or paid independent contractors as reported on IRS form 1099-MISC.
- Additional documents may be required in order to determine whether the applicant business meets the requirements to receive a PPP loan.
- To calculate the amount of loans to issue, lenders will need to determine the average number of employees a business had during the 12-month period prior to receiving the loans, as well as the payroll costs incurred by the business during the term.
Required Forms for Lenders
- All lenders must submit Form 2484 with their PPP loan applications.
- New lenders must submit Form 3506 along with Form 2484.
Terms and Conditions for PPP Loans
- Under the CARES Act, the interest rate for PPP loans during the covered period are not to exceed 4%. At present, the SBA has stated that PPP loans have a maturity date of 2 years and an interest rate of 1 percent.
- PPP loans may be forgiven for amounts incurred for payroll costs, mortgage interest payments, rent, and utilities. Any loan amount not forgiven will have a maximum maturity of 10 years.
- Under the CARES ACT, the SBA can require lenders to defer PPP loan payments for at least 6 months, but not for more than one year. Under current guidance, loan payments can be deferred for 6 months, although interest will accrue once the loan is issued.
- The Secretary of the Treasury may issue more regulations and guidance for new terms and conditions, including those for compensation, underwriting standards, interest rates, and maturity.
- Congress has recommended that the SBA issue guidance to lenders and agencies. to ensure that the processing and disbursement of covered loans prioritize small businesses and entities in underserved rural markets. These include businesses that are owned by veterans, members of the military community, small business concerns owners, and economically disadvantaged individuals (including business in operation for less than 2 years).
Forgiveness of PPP Loans
- Businesses can receive loan forgiveness for costs and payments incurred during the 8-week period after the loan was issued.
- To be eligible for loan forgiveness, a borrower must submit an application to the lender containing the following documents:
- payroll tax filings reported to the IRS;
- State income, payroll, and unemployment insurance filings; and
- documents verifying payments on mortgage obligations, lease obligations, or utility payments.
- In addition, businesses must also submit a certification, stating 1) that the documents presented are true and correct, and 2) the amount requested for forgiveness was used to keep employees, make interest payments on mortgage obligations, make payments on rent obligations, or make utility payments; and any further documents that the SBA deems necessary.
- After receiving the application, a lender has 60 days to decide whether to forgive the loan amount. The SBA has yet to issue guidance on the criteria that lenders should use in determining whether the forgive loans.
Lender Incentives for PPP Loans
- Lenders are not required to hold capital against issued PPP loans.
- The SBA guarantees 100 percent of any covered loan made during the covered period, on a deferred basis.
- The SBA waives all SBA guaranty fees, including the upfront and annual servicing fee.
- The SBA will reimburse a lender for 100 percent of any loan amount forgiven under the PPP Program within 90 days, plus interest accrued on such forgiven amounts.
- Loans can be sold in the secondary market at a premium. The SBA will not collect fees for any guarantee sold into the secondary market. The SBA is also supposed to issue guidance on secondary market sales no later than 30 days from March 27, 2020.
- The SBA is required to communicate with the FDIC, the Comptroller of the Currency, and state bank regulators to encourage these entities to not require lenders to increase their reserves on account of receiving payments made by the SBA.
- Any insured depository institution or an insured credit union that modifies a covered loan because of COVID-19 related difficulties is not required to disclose the debt as a “troubled debt restructuring” until the appropriate Federal banking agency or the national credit union administration board determines it appropriate.
- The SBA will reimburse a lender for processing fees, based on the balance of the outstanding financing at the time of the covered loan. The SBA will reimburse a lender 5 percent for loans not more than $350,000, 3 percent for loans between $350,000 and $2,000,000, and 1 percent for loans of $2,000,000 or more.
The SBA will continue to issue regulations and guidance for lenders and borrowers. Keep in mind that the CARES Act is unlikely to be the only legal action taken by Congress affecting lenders and borrowers. Wolcott Rivers Gates will continue to monitor developments as they unfold. The unprecedented challenges caused by COVID-19 will raise many questions from lenders and borrowers. Wolcott Rivers Gates is there for you to answer any legal questions you may have.