What Lenders Need to Know About the CARES Act
Relief payments and new, potentially forgivable Small Business Administration (SBA) loans are part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) the President signed into law on March 27, 2020.
While the law has been signed, all lenders still must await further guidance from the SBA and Treasury in administering these programs.
In the meantime, here is what we believe, as of this writing, every lender needs to know in order to prepare to assist their borrowers and prospective borrowers during these extraordinary times.
Existing SBA Loans
Under the CARES Act, every SBA Loan borrower is deemed to be adversely affected by COVID-19, and relief payments by the SBA are appropriate to all SBA Loan borrowers. Lenders who have made loans through the 7(a) loan program (including loans made under the Community Advantage Pilot Program), may offer the following payment relief to their borrowers:
- The SBA will pay principal and interest (and any associated fees) that are owed on an 7(a) loan in a regular servicing status for a 6–month period beginning with the next payment due on the loan.
- For 7(a) loans currently under deferment, the SBA will pay principal and interest (and any associated fees) that are owed on an SBA loan in regular servicing for a period of 6-months beginning with the next payment due after the deferment period.
- For new 7(a) loans (not including the PPP Loans) made for a 6-month period beginning March 27, 2020, the SBA will pay 6-months of principal and interest payments interest (and any associated fees) that are owed.
The SBA will make such payments to the lenders no later than 30 days after the date the first payment was due. All payments made by the SBA to the lender will be applied to the loan and will relieve the borrower from the obligation to make such payments.
Under the CARES Act, the SBA will communicate and coordinate with state and federal regulators to encourage regulators not to require lenders to increase their reserves on account of receiving payments from the SBA (further clarification is needed as the regulators are not bound by this provision as set forth in the CARES Act).
The SBA has also waived any statutory limits on maximum loan maturities for any 7(a) loan where a lender provides a deferral and extends the maturity date during the 1-year period following the date of enactment of the CARES Act. If necessary, the SBA will provide more time due to higher volume, travel restrictions and the inability to access properties during the pandemic.
Further, the SOP requirement with regard to lender site visits has been revised to extend the time lenders are afforded to make a site visit to not more than 60-days (which can be further extended by the SBA) after the occurrence of an adverse event other than a payment default or 90-days after a payment default.
Businesses in Need of Paycheck Protection Program Funds
The Paycheck Protection Program (PPP) under the CARES Act makes $349 billion of loans available to businesses under the SBA 7a loan program for the period beginning February 15, 2020 and ending June 30, 2020. The PPP Loans are available to small businesses, 501(c)(3) non-profit organizations exempt from taxation under Section 501(a) of the IRS Code (excluding non-profits receiving MEDICAID expenditures), veterans organizations, sole proprietorships, independent contractors, self-employed individuals and Tribal businesses.
The PPP seeks to accomplish two fundamental goals:
- Help small businesses pay their short-term operating expenses, and
- Provide incentives for employers to retain their employees.
Generally speaking, the PPP is intended as a partial revenue replacement lifeline for businesses whose operations have been severely interrupted or disrupted during this crisis
Highlights of the Paycheck Protection Program are as follows:
- Limited to businesses of less than the greater of (a) 500 employees or (b) the applicable standard number of employees established by the SBA for the industry in which the business operates
- Applies to larger businesses that employ not more than 500 employees per physical location for businesses with a NAICS code beginning with 72 (Accommodation and Food Services sectors)
- Affiliation is waived for any business concern having 500 employees or less with a NAICS code beginning with 72, any business operating as a franchise that is assigned a franchise identifier code by the SBA, and any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act (SBICs).
- Generally, the maximum loan size is equivalent to the lesser of 2.5 times the borrower’s average monthly payroll costs plus the outstanding amountofanyEIDL Disaster Loan made between January 31, 2020 and the date on which thesePaycheck Protection Program loans (each, a “PPP Loan”) are available to be refinanced, or $10,000,000.00.
- For businesses that did not operate between February 15, 2019 and June 30, 2019, the average monthly payroll cost will be measured from January 1, 2020 through February 29, 2020.
- For seasonal businesses, the average monthly payroll payments are based on the 12 week period between February 15, 2020 and June 30, 2020 (which is actually a longer time period- clarification needed)
- Eligible payroll cost includes salary, wage, commission or similar compensation, tips, vacation, parental, family, medical or sick leave, allowance for dismissal or separation, health benefits including insurance premiums, retirement benefits and state and local taxes assessed on the compensation.
- Eligible payroll cost does not include compensation of an individual employee in excess of annual salary of $100,000 (as prorated for the covered period), federal tax payments, compensation to an employee whose principal residence is outside the U.S., or qualified sick leave or family leave for which a credit is already allowed under section 7001 of the Families First Coronavirus Response Act
- The SBA will register each PPP Loan using the Borrower’s tax identification number
- PPP Loan proceeds may also be used to cover interest on mortgage obligations (not including prepayment fees), as well as rent, utilities, interest due on debt obligations incurred prior to the covered period under the Act and refinancing of an EIDL disaster loan made between January 31, 2020 and the date on which PPP Loans are made available to be refinanced
- Lenders will make PPP Loans under their delegated authority from the SBA, but the SBA may grant additional authority to lenders (not already qualified under the SBA loan programs) as necessary to process, close, disburse and service PPP Loans.
- The interest rate on PPP Loans will be capped at 4% per annum (subject to further reduction after SBA guidance is issued).
- Businesses who apply forPPP Loans must make a good faith certification that:
- The requested loan is necessary to support the ongoing operations of the eligible recipient due to the uncertainty of current economic conditions.
- The business will use the proceeds of the loan to retain employees, maintain payroll or make mortgage payments, lease payments or utility payments
- The business does not have an application pending for PPP Loan or any other SBA loan program for the same purpose
- Acknowledgement that the business may not receive another 7(a) loan for the same purpose through December 31, 2020
- Eligible business must have been in operation on February 15, 2020 and have either had employees for whom they paid salaries and payroll taxes, or have paid independent contractors.
- PPP Loans will be have a 100% guaranty from the SBA
- No personal guarantors or collateral will be required as security for a PPP Loan
- Fees payable by the borrower and the lender for PPP Loans will be waived through June 30, 2020 (as the CARES Act currently stands, the SBA ongoing fee paid by lenders resumes after June 30, 2020)
- The traditional requirement that the business cannot find credit elsewhere will not apply to these loans
- Lenders will be required to provide payment deferments for no less than 6-months and no more than 12-months
- If the secondary market declines approval for the deferral, the SBA will purchase the loan to allow a borrower to receive the deferment
- The SBA will provide further guidance on payment deferments within 30-days after enactment of the Act.
- PPP Loans may be sold on secondary market and the SBA may not collect any fee for any guarantee sold into the secondary market
- Any lender that modifies a PPP Loan in relation to COVID-19 related difficulties in a troubled debt restructuring on or after March 13, 2020 shall not be required to comply with the Financial Accounting Standards Board Accounting Standards Codification Subtopic 310-40 (Receivables- Trouble Debt Restructuring by Creditors) for purposes of compliance with the requirements of the Federal Deposit Insurance Act until such time as the appropriate Federal agency/board determines appropriate
- Lenders will be paid the following original fees forPPP Loans based on the balance of the financing outstanding at the time of disbursement:
- 5% for loans no more than $350,000
- 3% for loans between $350,001-$2,000,000
- 1% for loans not less than $2,000,000
- Payments to the lenders are to be made within 5-days of disbursement of the PPP Loan
- An agent assisting a business to prepare the application for the loan may not collect a fee in excess of the limits established by the SBA
- Prepayment fees will be waived for PPP Loans
- Perhaps, most importantly, Section 11106 of the Cares Act provides that the Government willforgive—and borrowers will not have to repay –the amount of aPPP Loan that a recipient can document was used during the 8- week period following the date of origination of thePPP Loan for:
- Payroll costs
- Interest on mortgage obligations
- Utility payments
- The debt forgiven cannot exceed the amount borrowed.
- The list of forgivable debt in the CARES Act does not include refinancing of EILD loans even though use of proceeds from a PPP Loan can be included in the maximum loan size- further clarification is needed
- Amounts forgiven shall be considered cancelled debt authorized under section 7(a) of the Small Business Act.
- Amounts forgiven shall be treated in accordance with the procedures that are otherwise applicable to a loan guaranteed under the 7(a) program
- No later than 90 days after the date the SBA determines the amount of debt to be forgiven, the SBA will remit to the lender an amount equal to the amount forgiven plus accrued interest through the date of payment
- Any lender authorized under the 7(a) program may report to the SBA an expected forgiveness amount on a covered loan or pool of loans up to 100% of the principal. The SBA will purchase the expected forgiveness amount as if the amount were the principal amount of a loan guaranteed under the 7(a) program within 15 days of receipt of the report.
- Forgiveness may not exceed the principal amount financed and will be reduced by multiplying the amount of the loan used to pay eligible costs (ie payroll, rent, mortgage interest, utilities) by the quotient obtained by dividing the average number of full-time equivalent employees per month employed by the business between February 15, 2020 through June 30, 2020 by either (at borrower’s election) the average number of full-time employees per month employed between February 15, 2019 and June 30, 2019 or the average number of employees per month between January 1, 2020 and February 29, 2020.
- Debt forgiveness will also be reduced proportionately by the amount of any reduction in total salary/wages of any employee that exceeds 25% of the employee’s total salary/wages (for employees earning less than $100,000).
- The reduction of loan forgiveness will be determined without regard to the reduction in the number of full-time employees or reduction in salary of one or more employees during the period beginning February 15, 2020 through 30 days after enactment of the CARES Act if the business has eliminated the reduction in the number of full time employees no later than June 30, 2020
- Borrowers seeking loan forgiveness under thePPP must submit to the lender the following documentation:
- Documentation verifying the number of full-time employees on payroll and the pay rates for the periods described above, including
• State income, payroll and unemployment insurance filings
• Cancelled checks, payment receipts, transcripts of accounts or other documents verifying payments on covered mortgage obligations, lease obligations and covered utility payments
• Certification from an authorized representative of the business that the documentation is true and correct, and that the amount for which forgiveness was requested was used to retain employees, make interest payments on covered mortgage obligations, rent payments or utility payments
• Any other documentation required by the SBA
- Documentation verifying the number of full-time employees on payroll and the pay rates for the periods described above, including
- Lender is prohibited from approving loan forgiveness unless the borrower provides the above documentation
- The lender must issue a decision on the debt forgiveness application within 60 days after the date the lender receives a debt forgiveness.
- If a lender receives the documentation required above and approves the forgiveness, an SBA enforcement action may not be taken against the lender relating to these eligible loan forgiveness payments, and the lender will not be subject to any penalties by the SBA relating to loan forgiveness for these covered payments.
- The amounts forgiven under Paycheck Protection Loan Program will be excluded from gross income calculations for purposes of the IRS Code
- A business is not prohibited from applying for a PPP Loan if it received a disaster loan for a purpose other than paying payroll and other costs described under the PPP.
Many questions remain regarding eligibility and implementation of the programs by lenders. The hope is that the SBA and Treasury will act quickly to issue further guidance so that lenders can assist businesses under the PPP.