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Insight Center: Publications

CARES Act Paycheck Protection Program: How Lenders Can Participate

Authors: Richard P. Eckman, Christopher A. Rossi, James W. Stevens and Jacob A. Lutz III

3/28/2020
CARES Act Paycheck Protection Program: How Lenders Can Participate

General

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) created a new program within the U.S. Small Business Administration’s (SBA’s) flagship 7(a) Loan Program  called the “Paycheck Protection Program” (PPP). Under the PPP, SBA will guarantee 100 percent of the amounts loaned by participating lenders to certain U.S. small businesses, nonprofit organizations, veterans organizations and tribal businesses. The legislation authorizes $349 billion for commitments for the PPP. Eligible participants are permitted to borrow up to $10 million under the PPP (covered loans) from February 15, 2020 through June 30, 2020 (covered period).

Who Can Be Lenders Under the PPP?

Covered loans will initially be disbursed through the extensive network of banks that participate in SBA’s 7(a) Loan Program. Given that lenders under the current 7(a) Program originated around $20 billion in loans last year, the increase to originating $349 billion in loans by June 30, 2020 will prove to be a challenge. It would not be surprising to see that date get extended if there is substantial capability left as the end of the origination period nears and substantial need continues to exist.

SBA expects that it will extend authority to make loans under the PPP to additional lenders determined by SBA and the Secretary of the Treasury to have the necessary qualifications to process, close, disburse and service loans made under the PPP. We have been informed that SBA has been working to create a streamlined loan application through an electronic portal to facilitate its and the participating lenders’ ability to move applications through the system and disburse the $349 billion as quickly as possible. We also understand that SBA is working on guidance implementing the PPP loans. The guidance may come out in stages, with initial guidance expected within days. We are tracking these items and will provide updated guidance when appropriate.

What Can a PPP Loan Be Used For?

Although the 7(a) Loan Program is typically used to enable small businesses to purchase property and fixed assets or to complete capital projects, the proceeds from a covered loan can be used for (1) payroll support, including paid sick, medical or family leave, and costs related to the continuation of group health care benefits during those periods of leave; (2) employee salaries; (3) mortgage, lease and utility payments; and (4) any other debt obligations. The draft legislation includes other attractive features, such as (1) increases in the size standard for eligible business concerns, (2) payment deferrals, and (3) a forgiveness option that would enable portions of the loan to be forgiven without resulting in cancellation of indebtedness income. The PPP would also permit the recipient of an economic injury disaster loan made after January 31, 2020 that is for a purpose other than paying payroll costs and other obligations described under “Allowable Uses of Covered Loans” below (eligible EIDL) to refinance that loan into a covered loan under the PPP. All of these features are designed to encourage businesses to retain their employees in the near term given the sudden cessation of nearly all commercial economic activity, which, according to recent reports, has resulted in approximately 3.3 million jobs lost in the United States within a few weeks.

Who Are Eligible Recipients of Covered Loans?

Generally

All “small business concerns” are eligible to receive a covered loan during the covered period. A business is a “small business concern” if:

  • the size of the concern alone (without affiliates) does not exceed the size standard designated for the industry in which the applicant is primarily engaged, and
  • the size of the concern combined with its affiliates is not greater than the size standard designated for either the primary industry of the concern alone or the primary industry of the concern and its affiliates, whichever is greater.

SBA’s size standards make reference to the North American Industrial Classification System (NAICS) codes and are based on either the number of employees or receipts, depending on the industry, and can be found at found at https://www.law.cornell.edu/cfr/text/13/121.201.

Are PPP Loans Available to Nonprofits as Well as Businesses?

Yes. The PPP extends eligibility to obtain a covered loan during the covered period to any business concern, nonprofit organization, veterans organization or tribal business concern if the business concern, nonprofit organization, veterans organization or tribal business concern has no more than 500 employees. Thus, if a business seeking a covered loan operates within an industry for which SBA has established a size standard based on receipts, then the business is eligible to receive a covered loan so long as it and its affiliates do not have more than 500 employees. In addition, if a business seeking a covered loan operates within an industry for which SBA has established a number of employees standard of more than 500, then the business is eligible to receive a covered loan if it and its affiliates have no more than the number of employees so established by SBA.

For purposes of determining whether a business concern, nonprofit organization, veterans organization or tribal business concern employs no more than the requisite number of employees, the term “employee” includes all individuals employed on a full-time, part-time or other basis.

The PPP also expands the eligibility of covered loans to individuals who operate under a sole proprietorship or as an independent contractor as well as to eligible “self-employed individuals” (as defined in the Families First Coronavirus Response Act). Any eligible self-employed individual, independent contractor or sole proprietorship seeking a covered loan is required to submit such documentation as is necessary to establish the individual as eligible, including payroll tax filings reported to the Internal Revenue Service, Form 1099-MISC, and income and expenses from the sole proprietorship.

In addition, during the covered period, any business concern that employs no more than 500 employees per physical location of the business concern and that is assigned a NAICS code beginning with 72 (Accommodation and Food Services) at the time the covered loan is disbursed is eligible to receive a covered loan. The current 7(a) affiliation rules will be applicable with several exceptions. For more info, see “Overview of Coronavirus Aid, Relief, and Economic Security Act (CARES Act) Paycheck Protection Program.”

Companies that will not be eligible for a covered loan due to SBA’s affiliation principles may want to consider the “Main Street Lending Program” or another similar program or facility being established by the Federal Reserve System to enable lending to small and midsized businesses having between 500 and 10,000 employees. We are tracking these initiatives by the Federal Reserve and will provide updates as matters develop with respect to these programs.

How Does Someone Apply for a Covered Loan?

Generally

For purposes of making covered loans, a lender approved to make loans under the PPP is deemed to have been delegated authority by SBA to make and approve covered loans, subject to the applicable provisions of the PPP.

Eligibility Considerations

In evaluating the eligibility of an applicant for a covered loan, a lender is required to consider whether the applicant:

  • was in operation on February 15, 2020
  • had employees for whom the borrower paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.

Specifically, during the covered period, the normal requirement that an applicant be unable to obtain credit from nonfederal sources on reasonable terms and conditions does not apply to a covered loan.

Borrower Application Requirements

An applicant for a covered loan is required to make a good faith certification:

  • that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the applicant
  • acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments
  • that the applicant does not have an application pending for a loan under the PPP for the same purpose and duplicative of amounts applied for or received under a covered loan, and
  • during the period beginning on February 15, 2020 and ending on December 31, 2020, that the applicant has not received amounts under the PPP for the same purpose and duplicative of amounts applied for or received under a covered loan.

What Will Lenders Be Paid to Make PPP Loans?

SBA is required, no later than five days after the disbursement of the covered loan, to reimburse the lender at a rate, based on the balance of the financing outstanding at the time of disbursement of the covered loan, of:

  • 5 percent for loans of up to $350,000
  • 3 percent for loans greater than $350,000 and less than $2 million
  • 1 percent for loans of $2 million or greater.

An agent that assists an applicant to prepare an application for a covered loan is not permitted to collect a fee in excess of the limits established by SBA.

What Are the Loan Terms?

Maximum Loan Amount

The maximum amount that can be borrowed under a covered loan is determined as follows but cannot exceed $10 million:

  • in most instances, the maximum loan amount is 2.5x the average total monthly payments by the applicant for “payroll costs” (as described in more detail below) incurred during the one-year period before the date on which the loan is made, plus the amount of any eligible EIDL to be refinanced into the covered loan
  • in the case of a “seasonal employer” (as determined by SBA), the maximum loan amount is 2.5x the average total monthly payments by the applicant for payroll costs incurred during the 12-week period beginning February 15, 2019, or at the election of the applicant, March 1, 2019, plus the amount of any eligible EIDL to be refinanced into the covered loan
  • if requested by an applicant that was not in business during the period beginning February 20, 2019 and ending June 30, 2019, the maximum loan amount is 2.5x the average total monthly payments by the applicant for payroll costs incurred during the period beginning on January 1, 2020 and ending on February 29, 2020, plus the amount of any eligible EIDL to be refinanced into the covered loan.

For purposes of the covered loans, “payroll costs” means:

  • as to companies having employees — the sum of payments of any compensation with respect to employees that is a:
    • salary, wage, commission or similar compensation
    • payment of cash tips or equivalent
    • payment for vacation, parental, family, medical or sick leave
    • allowance for dismissal or separation
    • payment required for the provision of group health care benefits, including insurance premiums
    • payment of any retirement benefit, or
    • payment of state or local tax assessed on the compensation of employees.
  • as to self-employed persons and individuals that have organized as a sole proprietor — the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment or similar compensation and that is in an amount not more than $100,000 in one year, as prorated for the covered period.

However, payroll costs do not include the following:

  • the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period
  • taxes imposed or withheld under Chapters 21 (Social Security and Medicare taxes, employee and employer portion), 22 (railroad retirement tax), or 24 (withholding obligations from employees) of the Internal Revenue Code of 1986
  • any compensation of an employee whose principal place of residence is outside of the United States
  • qualified sick leave wages and qualified family leave wages, in each case, for which a credit is allowed under the Families First Coronavirus Response Act.

What Are the Allowable Uses of Covered Loans?

During the covered period, an eligible recipient may use the proceeds of the covered loan for:

  • payroll costs
  • costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums
  • employee salaries, commissions or similar compensations
  • payments of interest on any mortgage obligation, but not any prepayment of or payment of principal on a mortgage obligation
  • rent (including rent under a lease agreement)   
  • utilities
  • interest on any other debt obligations that were incurred before February 15, 2020.

What Is the Maximum Interest Rate? Is SBA Waiving Its Fees and Prepayment Fees?

The interest rate for a covered loan is not to exceed 4 percent. There is no prepayment penalty for any payment made on a covered loan.

Under the 7(a) Program, SBA generally collects a fee that it establishes as necessary to reduce to zero the cost to SBA of making guarantees for 7(a) loans. The amount of the fee is not to exceed 0.55 percent per year of the outstanding balance of the deferred participation share of the loan, and this fee cannot be passed to the borrower. SBA is not permitted to collect this fee during the covered period with respect to a covered loan. SBA also generally collects a guaranty fee with respect to each 7(a) loan that its guarantees (other than a loan that is repayable in one year or less), the amount of which depends on the total loan amount and may be charged to the borrower. SBA is not permitted to collect this fee during the covered period with respect to a covered loan.

Are Personal Guarantees and Collateral Required?

No personal guarantees or collateral are required for the covered loan. In addition, SBA has no recourse against any individual shareholder, member or partner of an eligible recipient of a covered loan for nonpayment of any covered loan, except to the extent that the shareholder, member or partner uses the covered loan proceeds for a purpose not authorized.

Are Payments on the Loan Deferred?

During the covered period, SBA must require all lenders under the PPP to provide complete payment deferral for “impacted borrowers” having a covered loan. The deferral period is required to be no less than six months and no longer than one year. For these purposes, an “impacted borrower” is any eligible recipient that is in operation as of February 15, 2020 and that has an application for a covered loan that is approved or pending approval on or after the enactment of the CARES Act.

Historically, many 7(a) loans are packaged and sold in secondary markets. To protect against investors that decline to approve a deferral requested by a lender as a result of the CARES Act, SBA is required to exercise the authority to purchase the loan so that impacted borrowers receive a deferral for a period of no less than six months and no more than one year.

SBA is required to provide guidance to 7(a) lenders on the deferment process within 30 days after the enactment of the CARES Act.

Is There a Forgiveness Feature of Covered Loans?

Generally

A borrower is eligible to have its covered loan forgiven. The amount eligible to be forgiven is the sum of the following costs incurred and payments made during the eight-week period after the covered loan is originated (forgivable amount):

  • payroll costs (as previously described)
  • payments of interest on any liability of the borrower that is a mortgage on real or personal property and that was incurred before February 15, 2020 (covered mortgage obligation)
  • payments on any rent obligated under a leasing agreement in force before February 15, 2020 (covered rent obligations)
  • payments for a service for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020 (covered utility payments).

A borrower with tipped employees, as described in the Fair Labor Standards Act of 1938, may receive forgiveness for additional wages paid to those employees.

Amounts so forgiven are excluded from gross income for federal income tax purposes. In addition, the cancellation of indebtedness on a covered loan under the PPP does not otherwise modify the terms and conditions of the covered loan.

Reduction in Forgiveness Based on Reduction in Numbers of Employees or Reduction of Wages and Salary; Effect of Rehiring or Restoration of Wages and Salary

The amount of loan forgiveness is reduced, but not increased, by multiplying the forgivable amount by the quotient (expressed as a percentage) obtained by dividing the average number of full-time equivalent employees per month employed by the borrower during the eight-week period after the covered loan is originated by:

  • in the case of nonseasonal employers — either of the following (as elected by the borrower):
    • the average number of full-time equivalent employees per month employed by the borrower during the period beginning on February 15, 2019 and ending on June 30, 2019, or
    • the average number of full-time equivalent employees per month employed by the borrower during the period beginning on January 1, 2020 and ending on February 29, 2020.
  • in the case of seasonal employers — the average number of full-time equivalent employees per month employed by the borrower during the period beginning on February 15, 2019 and ending on June 30, 2019.

The average number of full-time equivalent employees is determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.

In addition, the amount of loan forgiveness is reduced by the amount of any reduction during the eight-week period after the origination of the covered loan in the total salary or wages of any employee who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000 by more than 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the beginning of that eight-week period.

However, the amount of loan forgiveness will be determined without regard to a reduction in the number of full-time equivalent employees or a reduction in the salary or wages of one or more employees that occurred during the period beginning on February 15, 2020 and ending on the date that is 30 days after the date of enactment of the CARES Act if, as applicable:

  • in the case of any such reduction of employment — not later than June 30, 2020, the borrower has eliminated the reduction in the number of full-time equivalent employees, as compared to the number of full-time equivalent employees as of February 15, 2020, or
  • in the case of any such reduction in salary or wages — not later than June 30, 2020, the eligible employer has eliminated the reduction in the salary or wages of such employees, as compared to the salary and wages of such employees as of February 15, 2020.

The CARES Act permits SBA and the Secretary of the Treasury to prescribe regulations granting de minimis exemptions from the requirements for limiting the loan forgiveness with respect to covered loans.

Maturity for Covered Loans with Remaining Balance after Application of Forgiveness

With respect to a covered loan that has a remaining balance after giving effect to any loan forgiveness:

  • the remaining balance continues to be guaranteed by SBA, and
  • the covered loan shall have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness.

How Can A Borrower Apply for Loan Forgiveness?

A borrower seeking loan forgiveness with respect to a covered loan is required to submit to the lender that is servicing the loan an application that provides certain documents and makes certain certifications. A borrower is not permitted to receive forgiveness without submitting to the lender the documentation required. These required documents and certifications include:

  • documentation verifying the number of full-time equivalent employees on payroll and pay rates for the relevant pay periods, including:
    • payroll tax filings reported to the Internal Revenue Service
    • state income, payroll and unemployment insurance filings.
  • documentation verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments, including cancelled checks, payment receipts, transcripts of accounts, or other documents
  • a certification from a representative of the borrower authorized to make such certifications that:
    • the documentation presented is true and correct, and
    • the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments.
  • any other documentation SBA determines necessary.

The lender is required to issue a decision on the forgiveness application no later than 60 days after the date on which it receives the application. If a lender has received the documentation required from a borrower attesting that the borrower has accurately verified the payments for payroll costs, payments on covered mortgage obligations, payments on covered lease obligations, or covered utility payments during the covered period:

  • an enforcement action may not be taken against the lender under section 47(e) of the Small Business Act relating to loan forgiveness for the payments for payroll costs, payments on covered mortgage obligations, payments on covered lease obligations, or covered utility payments, as the case may be, and
  • the lender will not be subject to any penalties by SBA relating to loan forgiveness for the payments for payroll costs, payments on covered mortgage obligations, payments on covered lease obligations, or covered utility payments, as the case may be.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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