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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).
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 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 also permits 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.
Covered loans will be disbursed through the extensive network of banks that participate in SBA’s 7(a) Loan Program. See https://www.sba.gov/article/2020/mar/02/100-most-active-sba-7a-lenders for a list of the 100 most active SBA 7(a) lenders. The CARES Act also empowers SBA to extend authority to additional lenders, which we understand may include finance companies and fintech companies, to make covered loans.
Please be advised that this is a summary of the CARES Act as passed by the Senate and the House of Representatives and signed by President Trump. In addition, SBA will need to prepare regulations, protocols and processes to implement the PPP and to provide guidance to businesses with respect to the covered loans. We are tracking these items and will provide updated guidance when appropriate.
All “small business concerns” are eligible to receive a covered loan during the covered period. A business is a “small business concern” if:
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.
Expansion of Eligibility
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.
Applicability of SBA Affiliation Rules
Under current SBA regulations, when counting the number of a business concern’s employees, the employees of the concern and its affiliates (domestic and foreign) are counted. Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists. Thus, a concern is an affiliate of an individual, concern or entity that owns or has the power to control more than 50 percent of the concern's voting equity. If no individual, concern or entity is found to control, then SBA will deem the board of directors or president or chief executive officer (CEO) (or other officers, managing members or partners who control the management of the concern) to be in control of the concern. In addition, SBA will deem a minority shareholder to be in control if that individual or entity has the ability, under the concern's charter, bylaws or shareholder's agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders. There are also other circumstances when affiliation may be found. Thus, the considerations are fact-dependent. See https://www.law.cornell.edu/cfr/text/13/121.301 for the SBA affiliation regulation as it pertains to SBA’s Business Loans Programs.
The CARES Act states that the provisions applicable to affiliations under 13 C.F.R. 121.103 apply with respect to a nonprofit organization and a veterans organization in the same manner as with respect to a small business concern. However, during the covered period, the provisions applicable to affiliations under 13 C.F.R. 121.103 are waived with respect to eligibility for a covered loan for the following business concerns:
This narrow waiver of SBA’s affiliation principles may present challenges for the portfolio companies of private funds, particularly more mature funds and their related funds, in being able to access a covered loan. If the private fund is considered to control the portfolio company, then that portfolio company will be considered an affiliate of any other company controlled by such funds for purposes of determining the number of employees unless one of the three exceptions noted above apply to the company.
Companies that are not 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.
Maximum Loan Amount
The maximum amount that can be borrowed under a covered loan is determined as follows:
For purposes of the covered loans, “payroll costs” means:
However, payroll costs do not include the following:
Allowable Uses of Covered Loans
During the covered period, an eligible recipient may use the proceeds of the covered loan for:
Interest Rate, Waiver of Prepayment Penalties and SBA 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.
Waiver of Personal Guarantee and Collateral Requirements
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.
Loan Payment Deferment
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.
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:
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):
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:
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:
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.
How to 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:
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 covered period:
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.
In evaluating the eligibility of an applicant for a covered loan, a lender is required to consider whether the applicant:
Specifically, during the covered period, the requirement that an applicant be unable to obtain credit from nonfederal sources on reasonable terms and conditions, taking into consideration the prevailing rates and terms in the community in or near where the concern transacts business, for similar purposes and periods of time does not apply to a covered loan.
An applicant for a covered loan is required to make a good faith certification:
Reimbursement of Lenders for Processing
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:
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.
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 regulations implementing the PPP and providing guidance in anticipation of the CARES Act enactment. The regulation may come out in stages. We are tracking these items and will provide updated guidance when appropriate.
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.