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Nebraska regulator clarifies eligibility of lender affiliates for PPP loans
The Nebraska Department of Banking and Finance re-posted FAQs from the Department of the Treasury and Small Business Administration regarding the Paycheck Protection Program. The FAQs clarify that lenders are permitted to make PPP loans to companies owned in whole or in part by an outside director or a less than 30 percent equity holder of the lender, provided no favoritism or prioritization of the director’s or equity holder’s company is involved. This does not apply to companies owned in whole or in part by directors or owners that are key employees of the lender.
Treasury and Small Business Administrator urge Congress to appropriate funds for Paycheck Protection Program
On April 15, the U.S. Treasury secretary and Small Business Administration administrator issued a statement urging Congress to appropriate additional funds for the Paycheck Protection Program to meet the high demand from small businesses for relief in response to Covid-19. The statement notes that “SBA will not be able to issue new loan approvals once the programs experiences a lapse in appropriations.”
FDIC updates Covid-19 FAQs for financial institutions
On April 15, the FDIC released updates to its list of Covid-19 frequently asked questions (FAQs) for financial institutions. The FAQs were originally released on March 19, covering bank operational issues and urging banks to work with borrowers who are experiencing payment difficulties due to Covid-19, as reported by InfoBytes here. New FAQs discuss credit reporting of payment accommodations, reminding lenders to report borrower accounts as current, provided the borrowers continue to observe the terms of the accommodations. The guidance also points financial institutions to a recent CFPB statement (covered here) for guidance on the FCRA under the CARES Act. The FDIC also updated the Troubled Debt Restructurings (TDRs) guidance, emphasizing that financial institutions do not need to classify Covid-19 borrower payment accommodations as TDRs if certain criteria are met, and that examiners “will not criticize prudent efforts to modify the terms on existing loans to affected customers.” Other updates to the FAQs include, among other things: (i) obligations to obtain updated real estate valuation information for Covid-19 related loan modifications; (ii) the use of alternative signatures for Part 363 annual reports and other notices; (iii) real estate loans in excess of loan-to-value percentages for loans refinanced by borrowers impacted by Covid-19; (iv) risk-based capital rules regarding multi-family loan modifications; (v) eligible Community Reinvestment Act activities during the Covid-19 pandemic; and (vi) Bank Secrecy Act issues regarding filing requirements, raising compliance challenges with FinCEN, and whether loans under the Small Business Administration’s Paycheck Protection Program are considered new accounts for customer due diligence purposes.
Special Alert: The Fed’s Main Street Lending Program: Fitting relief for fintechs and nonbank lenders?
The Federal Reserve Board’s recently announced the Main Street Lending Program, intended to provide financing for a range of small and mid-sized businesses, may provide much needed federal relief for fintech firms and nonbank lenders that has otherwise been lacking.
These firms generally have not qualified for the federal assistance efforts to date. The Fed designed its initial wave of programs — such as the Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF) for companies with investment-grade credit, or programs for companies involved in the broad commercial paper and money markets or certain securitizations — for larger, well-established corporations. At the other end of the spectrum, the Payroll Protection Program (PPP) is tied to preexisting Small Business Administration eligibility standards. Businesses “engaged in lending,” which includes finance companies, factoring companies, and “other business whose stock in trade is money,” generally are ineligible for the PPP.[1] Even if that eligibility rule were not a showstopper, many fintechs and nonbank lenders, particularly portfolio companies of private equity or venture capital funds, are precluded from the PPP by the SBA’s broad “affiliation rule,” which provides, for example, that applicants must include the number of employees of each of its affiliates.[2]
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.
SBA, Treasury release additional PPP FAQs
On April 15 and 14, the Small Business Administration (SBA) and the Treasury Department (Treasury) provided additional guidance to the Paycheck Protection Program (PPP) frequently asked questions (FAQs) to address lender concerns about, among other things, application submissions, signature requirements, and applications from SBA employees and family. Some of the FAQs include the following guidance:
- Lenders may submit loan applications through E-Tran only after collecting the same borrower information and certifications contained in the application form, and performing a good faith review of the borrower’s payroll calculations.
- Lenders that submitted applications prior to April 14 without collecting the required borrower information and certifications must do so as soon as possible before loan closing.
- Lenders may accept scanned copies of loan applications, borrower certifications, and other required documents. E-sign compliant electronic signatures and consents may also be accepted.
On April 13, one of the SBA and Treasury FAQs—also included on FinCEN’s website along with FAQ 18—discusses beneficial ownership requirements for PPP loans. For new customers, lenders meet their beneficial ownership obligations by collecting the following information from natural persons with ownership stakes in the applicant of 20 percent or greater: “owner name, title, ownership %, TIN, address, and date of birth.” SBA and Treasury also released an FAQ that addressed lender submission requirements prior to issuing PPP loans. FAQ 21 states that lenders are required to sign the lender application form for the PPP (SBA Form 2484) in order to issue PPP loans, but lenders do not need a separate SBA Authorization. Terms and conditions in the lenders’ promissory note must be consistent with CARES Act sections 1102 and 1106 as well as the PPP Interim Final Rule. Additional FAQs from this date address nonbank lenders, the $10 million loan cap, and the affiliation rules applicability to various kinds of businesses.
Please see Buckley’s dedicated SBA page, which includes additional SBA resources.
District court says CARES Act does not provide a private right of action under PPP loan provisions
On April 13, the U.S. District Court for the District of Maryland denied plaintiffs’ request for a temporary restraining order and preliminary injunction against a national bank, ruling that “the CARES Act does not expressly provide a private right of action” and that the bank’s Paycheck Protection Program (PPP) eligibility restrictions do not violate the Act. As previously covered by InfoBytes, the plaintiffs alleged that the bank prioritized existing lending clients in the PPP and limited access to depository-only customers that did not have a credit card or loan with another financial institution. The plaintiffs argued that the bank had no legal authority under the Act to deny, restrict, or impede access, even though there is no such prohibition in the Act.
The court first determined that the Act contains neither an express nor implied private right of action. Moreover, even if Congress did intend to provide a private right of action, the bank’s alleged conduct “does not run afoul” of the law. While the Act outlines requirements that banks must consider when offering loans to small businesses, it “does not constrain banks such that they are prohibited from considering other information when deciding from whom to accept applications, or in what order to process applications it accepts.” The court also rejected the plaintiffs’ argument that Congress waived the “credit elsewhere” requirement with respect to PPP loans. According to the court, “[t]ypically, when an entity applies for an SBA loan, it has to certify that it could not obtain a loan from a different source. . . . In this case, [the bank] has imposed no such requirement on businesses’ eligibility for the PPP.” The court also concluded that the plaintiffs failed to demonstrate irreparable harm, and that imposing a temporarily restraining order could disincentivize lenders from participating in the program and reduce small businesses’ access to PPP loans. “[G]iven the competing policy interests, the need to balance the desire to assist the widest swath of small businesses with the need to incentivize lender participation, and the overall fluidity of this epidemic, Congress is better positioned to remedy any defects in the CARES Act, and to pass the supplemental legislation it believes best aimed at ameliorating the effects of the COVID-19 crisis,” the court wrote.
On April 14, the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the Fourth Circuit.
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.
Illinois regulator permits credit unions to offer PPP loans to non-members
On April 10, the Illinois Department of Financial and Professional Regulation authorized state-chartered credit unions to offer current and future government assistance programs created as a result of the COVID-19 pandemic, including loans made under the Small Business Administration’s Paycheck Protection Program, to members of other Illinois state-chartered credit unions. Credit unions doing so must maintain documents demonstrating that the individual or business seeking assistance is a member of another Illinois state-chartered credit union and that the credit union at which the person is a member is unwilling or unable to provide the applicable government assistance.