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24 state attorneys general urge changes to the PPP
On May 6, twenty-four state attorneys general sent congressional leadership a letter urging changes to the Paycheck Protection Program (PPP) to ensure that funds are distributed fairly, equitably and efficiently. The letter asserts that while the PPP has helped many small businesses already by “rapidly inject[ing] the initial $349 billion in funding into our struggling economy,” larger, more “well-connected” companies were better able to take advantage of the process and the program “has suffered from a notable lack of transparency, technical savvy, and functionality.” Specifically, the letter argues that due to insufficient guidance to lenders, the first round of funding “left far too many small businesses empty handed.” In order to ensure any additional funding allocated to the program effectively supports small businesses, the letter requests certain issues be addressed by Congress, including, among other things, (i) prohibiting applications from publicly traded companies with access to alternative funding sources; (ii) ensuring lenders do not favor existing, larger, and more lucrative customers over other applicants; (iii) allocating a portion of future funding exclusively for minority-owned small businesses; (iv) improving communication and technical support; (v) adding flexibility to the loan forgiveness requirements to account for the variety of circumstances facing small businesses; and (vi) providing more direct guidance to lenders.
SBA to limit maximum PPP loans to $20 million for corporate groups
On April 30, the Small Business Administration (SBA) issued an Interim Final Rule (IFR) prohibiting a “single corporate group” from receiving more than $20 million in the aggregate from the Paycheck Protection Program (PPP). Businesses are considered to be a part of a single corporate group “if they are majority owned, directly or indirectly, by a common parent.” Small businesses must adhere to this loan cap by withdrawing or cancelling any PPP loan application or approval above $20 million for any loan that is not fully disbursed as of April 30. Failure to follow the IFR, will make such loans ineligible for loan forgiveness. The IFR assures lenders that they are not responsible for a small business’s compliance with this rule, and further, that the IFR does not alter lender obligations required to procure an SBA loan guarantee. In addition, the IFR allows a non-bank lender to be a PPP lender, subject to certain criteria, if the non-bank lender is “either a community development financial institution…or a majority minority, women, or veteran/military owned lender.” The IFR is effective as of May 4, and comments must be received by June 3.
Special Alert: Regulators provide important guidance on next wave of PPP funding
President Trump on April 24 signed the Paycheck Protection Program and Health Care Enhancement Act, adding $310 billion in funding to the $350 billion initially appropriated to the program under the Coronavirus Aid, Relief, and Economic Security Act. The Federal Reserve Board, Treasury Department, and the Small Business Administration have issued important guidance in recent days related to loan participations, additional Fed support, borrower eligibility, and loan forgiveness. The SBA and the Fed have also provided more information on electronic execution and collection of loan documents, as the importance of digital loans continues to loom large with signatories working remotely.
OCC to host info sessions on PPP
On April 14, the OCC announced that the Office of Innovation will host three Paycheck Protection Program (PPP) listening sessions in April. The sessions will discuss questions and possible solutions for three PPP related topics. The first session covering payroll verification will be held on April 16, from 11:00 am to 1:00 pm (EDT), and will discuss how to make payroll verification quicker and more efficient for PPP loans. The second session, fraud identification, will be held on April 20, from 1:00 pm to 3:00 pm (EDT), to discuss possible methods for financial institutions to detect instances of fraud regarding the PPP. The third session will discuss backend processes, including identifying possible issues that may arise for financial institutions in monitoring PPP loans and in PPP loan forgiveness. This last session will be held on April 21, from 1:00 pm to 3:00 pm (EDT). Participants may share PPP concerns prior to the sessions by contacting the Office of Innovation here.
SBA provides additional guidance on PPP loans for self-employed, independent contractors
On April 14, the Small Business Administration (SBA) released an interim final rule to supplement the first Paycheck Protection Program (PPP) Interim Final Rule issued April 2 (covered by InfoBytes here). This interim final rule provides additional guidance for filers of IRS Form 1040 Schedule C (individuals with self-employment income), information concerning eligibility issues for certain business concerns, and requirements for certain pledges of PPP loans. Specifically, self-employed individuals who filed Schedule C—such as independent contractors or sole proprietors in operation on February 15, 2020—are eligible for PPP loans, provided they meet specific criteria. The interim final rule provides instructions for calculating maximum loan amounts and states that self-employed loan recipients may use the proceeds for, among other things, owner compensation replacement, mortgage interest payments, and interest payments on debt obligations incurred prior to February 15, 2020. Details and clarification on restrictions, PPP loan forgiveness eligibility, and the types of permitted eligible businesses are also included.
The interim final rule takes effect upon publication in the Federal Register and applies to PPP applications submitted through June 30, 2020, or until funds designated for this purpose are exhausted. The SBA will also accept comments on the interim final rule for 30 days following publication.
FINRA adds PPP question to Covid-19 FAQs
On April 13, FINRA updated its FAQs on regulatory relief due to Covid-19 to include an FAQ that addresses Paycheck Protection Program loans. The FAQ answers a question relating to loan forgiveness for registered persons, stating that the loan forgiveness amount will not be considered a “compromise with a creditor” and will not need to be reported on Form U4 for question 14K.
NCUA provides guidance regarding Small Business Administration loan programs
In April, the NCUA issued guidance to federally insured credit unions regarding the U.S. Small Business Administration’s (SBA) loan programs to help small businesses. The guidance provides an overview of the Paycheck Protection Program, including eligibility criteria for both lenders and borrowers, loan terms, loan forgiveness, and lender compensation. The guidance provides that the NCUA will not criticize credit unions’ good faith efforts to prudently use the SBA programs with members affected by Covid-19.
Lawsuit alleges bank is prioritizing lending clients for access to the PPP
On April 4, a group of plaintiffs filed an action against a national bank, alleging that prioritizing existing lending clients and limiting access to the Paycheck Protection Program (PPP) to depository clients and other small firms violates the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Small Business Administration’s (SBA) 7(a) loan program. As previously covered by Buckley Special Alerts (see here and here), the PPP expands 7(a) eligibility for SBA-guaranteed loans that will provide loan forgiveness of up to eight weeks of payroll (based on employee retention and salary levels), as well as additional relief for eligible borrowers. (See Buckley’s dedicated SBA page for additional information.) The plaintiffs contend that the bank declined initially to accept PPP loan applications for small businesses that were not lending clients of the bank. According to the amended complaint, the bank updated its policy on April 4 to allow customers with depository relationships only to apply for PPP loans, provided they do not have a credit card or loan with another financial institution. The plaintiffs argue that the bank has “no legal authority under the CARES Act to deny access, restrict or otherwise impede” small business access, notwithstanding that there is no such prohibition in the CARES Act.
Special Alert: Treasury and SBA release initial details on Paycheck Protection Program
On Tuesday, March 31, the Department of the Treasury and the Small Business Administration released initial details regarding the nearly $350 billion Paycheck Protection Program established by the Coronavirus Aid, Relief, and Economic Security Act. Under the program, private lenders will offer SBA-guaranteed loans to small businesses that require capital to meet payroll and other expenses.
The SBA published a COVID-19-specific webpage with additional information about programs and resources, and Treasury posted four documents outlining key features of the program, as well as information for borrowers and lenders:
- The PPP Overview describes the program’s scope, eligibility requirements, and application process. It notes that no-fee loans used to meet payroll and to pay mortgage interest, rent, or utilities may be forgiven, with payments deferred for up to six months. Businesses in all industries with up to 500 employees are eligible, and larger businesses in certain industries may also be eligible. Applications will be accepted starting April 3, 2020.
- The PPP Lender Information Fact Sheet provides details regarding lenders that are eligible to make the SBA-guaranteed loans. Importantly, all existing SBA-certified lenders are granted “delegated authority” to originate loans eligible for the SBA guarantee (subject to eligibility and other requirements). Federally insured depository institutions and credit unions, as well as Farm Credit System institutions, may also make SBA-guaranteed loans under the program. Lenders that currently do not hold SBA certification may submit applications to participate to the address noted in the Lender Fact Sheet. We expect additional detail regarding the application process in the near future.
- The PPP Borrower Fact Sheet sets forth information for potential small-business borrowers. One important condition of obtaining a loan under the program: Employee and compensation levels must be maintained. However payroll costs are capped at $100,000 on an annualized basis for each employee, so any amounts above $100,000 paid to a single employee will not be calculated in the loan amount nor towards meeting a potential threshold for loan forgiveness (e.g., SBA indicates non-payroll costs may be limited to not more than 25% of the forgiven amount). Additional details regarding an exact percentage of the loan that must be used for payroll are forthcoming.
- The PPP Application Form is now available online. Small businesses will need to provide basic information and respond to disclosure questions, including whether the business is delinquent on any federal debt. The application form requires that the borrower respond to seven certification statements that relate to the intended use of funds, the necessity of the loan to support ongoing obligations of the business, the total number of employees, and that the information in the application is correct. It appears that lenders will calculate loan amounts by referencing the businesses’ prior-year tax returns. Due to the federal extension on filing taxes, most businesses will likely submit 2018 tax returns for review.
Please see Buckley’s March 30 Special Alert for additional information on the program. We will continue to provide timely updates regarding any guidance published on this topic on our dedicated SBA page, which includes additional SBA resources you may find helpful. If you have any questions regarding the matters discussed in this alert, please contact a Buckley attorney with whom you have worked in the past.
Special Alert: CARES Act “Paycheck Protection Program” offers relief and opportunities for small businesses and lenders
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.
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Click here to read the full special alert
We will provide timely updates regarding any guidance published on this topic on our dedicated SBA page, which includes additional SBA resources you may find helpful. If you have any questions regarding the matters discussed in this Alert, please contact a Buckley attorney with whom you have worked in the past.