On March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the Act). The legislation’s first title, the “Keeping American Workers Paid and Employed Act,” provides a host of relief measures for small businesses, including $349 billion for Small Business Administration (SBA) loan forgiveness, guarantees, and subsidies. This Special Alert summarizes pertinent SBA-related provisions of the Paycheck Protection Program (PPP) and potential opportunities for both (i) small businesses, and (ii) existing and new SBA lenders to grow their small business lending portfolios. We will provide an update on the relief measures following the Treasury Department’s (Treasury) release of additional program details, which is expected imminently.
Implementation
We note that regulations must still be promulgated and current SBA procedures will likely require enhancements to meet the ambitious timeline to bring relief to small businesses. Further, the mechanisms for implementation of this extraordinary loan program remain to be worked out and are expected to be challenging, including how to address:
- Expanding SBA’s capacity to handle the anticipated volume of nationwide requests in comparison to past surges in its loan activity, which have largely been focused on geographically localized conditions (e.g., hurricanes, earthquakes, etc.)
- Expediting SBA eligibility decisions, which can currently take up to 10 business days, although 24-36 hour turnaround times are already in-place for certain loans
- Accelerating the loan documentation and funding process, which ranges between 45-90 days for many SBA loans but can be expedited under the SBA’s delegated authority programs for preferred lenders
Borrower relief
The PPP temporarily amends SBA 7(a) loan program rules for the period beginning on February 15, 2020 and ending on June 30, 2020. PPP highlights include:
- Expands 7(a) Eligibility. Typical “small business” eligibility requirements will not apply. Generally, all businesses, including self-employed individuals, sole proprietors, independent contractors, nonprofit organizations, and tribal businesses, with fewer than 500 employees are eligible. PPP applicants must certify that (i) the uncertainty of the economic condition makes the loan request necessary to support the ongoing operations of the business, (ii) the loan proceeds will be used to retain workers and maintain payroll or make mortgage, lease, or utility payments, and (iii) the applicant does not have another 7(a) loan outstanding nor an application pending for the same purpose. Loan forgiveness (discussed further below) may be diminished for borrowers under the PPP who release employees or reduce salaries, and any loan amounts not forgiven will remain subject to full repayment.
- Waives Standard SBA Requirements. Certain requirements, such as personal guarantees, SBA fees, and collateral requirements, will be waived.
- Increases Maximum Loan Amount. The maximum PPP loan amount will be equal to 250% -of the borrower’s average total monthly payroll costs, up to $10 million. Interest rates will be capped at 4%, and the maximum maturity will be 10 years. Currently, the maximum 7(a) loan amount is $5 million.
- Establishes Loan Forgiveness. Unlike other SBA loans, PPP loans will provide (i) loan forgiveness of up to eight weeks of payroll (based on employee retention and salary levels) and mortgage interest, rent, and utility obligations, and (ii) at least six months of deferral with maximum deferrals of up to one year. The maximum loan forgiveness amount will be equal to the sum of payroll costs, mortgage interest, rent, and utilities incurred during the eight-week period after loan origination.
Lender opportunities
- Delegates Authority to Lenders. PPP lenders will have delegated authority to make borrower eligibility determinations based on streamlined SBA requirements. While delegated authority generally provides great latitude to lenders under government-backed programs, we note the possibility of future False Claims Act (FCA) allegations pursuant to which lenders can be held strictly liable under the FCA for origination and underwriting deficiencies. In the wake of the financial crisis, the U.S. Department of Housing and Urban Development (HUD) and Department of Justice (DOJ) teamed up to bring FCA claims against lenders with delegated authority to originate FHA-insured mortgages.
- Enhances Loan Guarantees. The SBA will fully guarantee PPP loans, an increase over current SBA 7(a) loan guarantees, which range between 50-90% of the loan amount.
- Potentially Allows for New Lenders. The SBA and Treasury will have authority to expand the number of lenders beyond currently approved SBA 7(a) lenders, and could include non-bank lenders. While the particulars of the lender application process are still to come, the CARES Act indicates that lenders must, at a minimum, be able to process, close, disburse, and service loans made with the guarantee of the SBA. In this regard, lenders already qualified under other government-backed programs, such as those for residential mortgage loans, may have an advantage. In addition, many fintech companies that have the capacity to process same-day online business loans may present a compelling case for inclusion to facilitate a rapid nationwide roll-out.
Next steps
As noted above, the SBA and Treasury must still issue regulations, which are required by April 11, but may be available sooner. We will provide additional information on guidelines as they become available. As such, eligible small businesses, and current and potential SBA lenders, may want to take certain steps in advance of full implementation, as further described below.
Borrowers wishing to take advantage of the PPP should begin collecting documentation related to payroll costs, including:
- Employee wage information for 12 months prior to loan origination, which will be required to determine the maximum loan amount
- Documentation for loan forgiveness - verifying the number of full-time equivalent employees on payroll and their pay rates (including payroll tax filings reported to the IRS and state income, payroll, and insurance filings) during a period, at the borrower’s option, beginning (i) on February 15, 2019 and ending on June 30, 2019, or (ii) January 1, 2020 and ending on February 29, 2020
- Payment records for mortgages, leases, and utilities
Lenders contemplating participation in the PPP will want to:
- Develop policies and procedures to ensure loan originations are made to eligible businesses for permitted purposes and in strict compliance with SBA and Treasury guidelines
- Plan ahead for how to manage loan servicing protocols and responsibilities, particularly in light of loan forgiveness provisions tied to employee retention and specified payments
- Determine the availability of a secondary market for such loans, as well as the required loan-level representations and warranties for loan sales, which will be dictated in part by forthcoming regulations
We will provide timely updates regarding any guidance published on this topic. If you have any questions regarding the matters discussed in this Alert, please contact an Orrick attorney with whom you have worked in the past.