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CDFIs to exclusively lend $10 billion in PPP funding
On May 28, the SBA, in consultation with the Treasury Department, announced that $10 billion of Round 2 funding for the Paycheck Protection Program (PPP) will be lent exclusively by Community Development Financial Institutions (CDFIs) to ensure that “the PPP reaches all communities in need of relief during the Covid-19 pandemic.” SBA Administrator Jovita Carranza stated, “CDFIs provide critically important capital and technical assistance to small businesses from rural, minority and other underserved communities, especially during this economically challenging time.” The announcement notes that as of May 23, CDFIs have approved more than $7 billion in PPP loans, including $3.2 billion in Round 2 funding, leaving a balance of $6.8 billion in Round 2.
SBA clarifies PPP loan forgiveness process, lender and borrower responsibilities
Recently, the Small Business Administration released two interim final rules (IFR) to provide guidance on the Paycheck Protection Program (PPP) loan forgiveness process, as well as directions on lender and borrower responsibilities. Both IFRs are effective immediately, and comments will be received for 30 days following publication in the Federal Register.
The loan forgiveness IFR outlines PPP loan forgiveness requirements for borrowers and lenders. Among other things, lenders must confirm that they received the borrower certifications in the loan forgiveness application form (covered by InfoBytes here) and verify the borrower’s calculations. The IFR also clarifies several questions, including those related to employee status, payroll calculations, and nonpayroll expenses eligible for forgiveness.
The lender and borrower responsibilities IFR provides additional guidance on the SBA PPP loan review, the loan forgiveness process for lenders, and lender eligibility for processing fees. While the IFR recommends that lenders work with borrowers to correct identified “errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents,” it does not require lenders to “independently verify the borrower’s reported information if the borrower submits documentation supporting its request for loan forgiveness and attests that it accurately verified the payments for eligible costs.” Lenders must report their decisions on forgiveness applications to the SBA and request payment from the SBA for borrowers that are eligible for forgiveness no later than 60 days after receiving a complete application. The SBA also has the authority to review any PPP loan, although it will evaluate a loan based on the “rules and guidance available at the time of the borrower’s PPP loan application.” In addition, the IFR notes that lenders may lose fees for any loans deemed to be ineligible, and that the SBA may claw back already issued-fees if it determines the lender has failed to fulfill its obligations under the PPP. According to the IFR, lenders will receive payment from the SBA on eligible loans, plus any accrued interest through the date of payment, no later than 90 days after a lender reports its decision to SBA.
Federal agencies issue FAQs covering CRA and Covid-19
On May 27, the Federal Reserve Board, the OCC, and the FDIC posted Community Reinvestment Act (CRA) FAQs related to Covid-19. The FAQs acknowledge that while Covid-19 affected states are categorized by the Federal Emergency Management Agency (FEMA) as Category B, which would normally not be considered designated disasters under the CRA, the agencies will grant consideration for activities that revitalize or stabilize affected areas by protecting public health and safety. The FAQs frequently cite to the joint statement on CRA consideration for activities in response to Covid-19, issued by the agencies in March (covered by InfoBytes here). Among other things, the FAQs discuss how Paycheck Protection Program and Main Street Lending Program loans may be eligible for CRA consideration and how bank examiners will consider affordable housing measures under the CRA.
Boston Fed releases Main Street Lending Program forms and agreements
On May 27, the Federal Reserve Bank of Boston posted the necessary legal forms and agreements for eligible borrowers and eligible lenders to participate in the Main Street Lending Program on their website. The documents include, among other things, lender registration certifications and covenants, lender wire instructions, loan participation agreements, and servicing agreements. The Boston Fed has also updated the Main Street Lending Program’s FAQs.
Additional details about the Main Street Lending Program can be found in a previous InfoBytes post here, and a Buckley Special Alert here.
SBA extends PPP safe harbor for a second time
On May 27, the Small Business Administration (SBA) in consultation with the Treasury Department issued an update to the Paycheck Protection Program (PPP) Frequently Asked Questions to reflect the extension of the safe harbor deadline from May 14 to May 18. The SBA recently issued an interim final rule (IFR) to supplement the CARES Act and extend, for the second time, the PPP safe harbor for repayment from May 14 to May 18, to allow borrowers to avail themselves of a safe harbor with respect to the certification required by the CARES Act. The IFR also codifies the timeframe extension for submission of the initial SBA Form 1502 report for PPP loans. As previously covered by InfoBytes, the new timeframe for submission of Form 1502 is the later of (i) May 29, or (ii) 10 calendar days after disbursement or cancellation of the PPP loan.
SBA gives guidance on collecting PPP processing fees
On May 21, the Small Business Administration (SBA) released a procedural notice detailing the Form 1502 reporting process through which lenders will be able to collect the processing fees on eligible Paycheck Protection Program (PPP) loans. The SBA will pay lenders’ processing fees for PPP loans, based on the balance of the loan at the time of full disbursement, in the following amounts: (i) five percent for loans of not more than $350,000; (ii) three percent for loans of more than $350,000 and less than $2 million; and (iii) one percent for loans of at least $2 million. Lenders are required to report to the SBA on Form 1502 loans have been fully disbursed or canceled. Form 1502 should be submitted electronically to the SBA by the later of (i) May 29, or (ii) 10 calendar days after disbursement or cancellation of the PPP loan. (This is an updated deadline that was recently reflected in the SBA’s FAQs and was first announced in an interim final rule regarding disbursements under the PPP, covered by InfoBytes here.)
The SBA will begin accepting 1502 reports on fully disbursed or cancelled PPP loans on May 22. Lenders will not receive a processing fee payment if the loan is canceled before disbursement or if a disbursed loan is canceled or voluntarily terminated but repaid before May 18 (the borrower certification safe harbor date). As detailed in the procedural notice, lenders will be required to create an account in the Fiscal Transfer Agent Lender portal to access and submit Form 1502. The procedural notice includes, among other things, specifics on account creation and reporting. Additionally, the procedural notice contains useful questions and answers, including how the processing fees will be disbursed and when processing fees may be subject to clawbacks from the SBA.
SBA clarifies PPP eligibility for foreign affiliates
On May 21, the SBA recently published an interim final rule (IFR), which addresses the eligibility requirements related to employees of a Paycheck Protection Program (PPP) borrower’s foreign affiliates. The SBA reiterated in the IFR that a small business must include foreign affiliate employees when calculating how many people it employs for purposes of determining if the business meets the PPP eligibility requirement of 500 or fewer employees. The SBA acknowledged, however, that previous guidance (covered by InfoBytes here) may have created “reasonable borrower confusion,” so in “an exercise of enforcement discretion,” the agency reiterated that the “SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s exclusion of non-US employees from the borrower’s calculation of its employee headcount if the borrower (together with its affiliates) had no more than 500 employees whose principal place of residence is in the United States.” The SBA further determined that these borrowers will “not be deemed to have made an inaccurate certification of eligibility solely on that basis.”
The IFR takes effect upon publication in the Federal Register and is applicable to PPP applications submitted through June 30, 2020, or when program funding is exhausted. Comments are due within 30 days.
Prudential regulators outline principles on small-dollar lending
On May 20, the FDIC, Federal Reserve Board, OCC, and NCUA issued joint principles for offering responsible small-dollar loans. The agencies note the “important role” that small-dollar lending can play during times of economic stress, such as the Covid-19 pandemic, and issued the guidance to encourage supervised banks, savings associations, and credit unions to offer responsible small-dollar loans to consumers and small businesses. The principles cover various loan structures, including open-end lines of credit with minimum payments, closed-end loans with short single payment terms, and longer-term installment payments. The guidance indicates that reasonable loan policies and risk management practices would generally address the following:
- Loan structures. Loan amounts and repayment terms should align with eligibility and underwriting criteria that support successful repayment of the loan, including interest and fees, rather than re-borrowing, rollovers, or immediate collectability in the event of default.
- Loan pricing. Pricing, including for loans offered through managed third-party relationships, should reflect “overall returns reasonably related to the financial institution’s product risks and costs” and comply with applicable state and federal laws.
- Loan underwriting. Underwriting should use internal and/or external data sources to assess a customer’s creditworthiness. Underwriting may use new technologies and automation to lower the cost of providing the small-dollar loans.
- Loan marketing and disclosures. Disclosures should comply with applicable consumer protection laws and regulations and provide information in “a clear, conspicuous, accurate, and customer-friendly manner.”
- Loan servicing and safeguards. Timely and reasonable workout strategies, such as payment term restructuring, should be provided for customers who experience financial distress.
As previously covered by InfoBytes, the federal financial regulators issued a joint statement in March, encouraging institutions to offer reasonable, small-dollar loans to consumers and small businesses to help mitigate the effects of the Covid-19 pandemic.
6th Circuit denies stay of injunction against PPP Ineligibility Rule
On May 15, the U.S. Court of Appeals for the Sixth Circuit denied the SBA’s emergency motion for a stay of the district court’s injunction against the agency’s Paycheck Protection Program (PPP) Ineligibility Rule. As previously covered by InfoBytes, the district court granted a preliminary injunction against the SBA’s PPP Ineligibility Rule—which, in relevant part, excludes from PPP loan eligibility “sexually oriented businesses that present entertainment or sell products of a ‘prurient’ (but not unlawful) nature.” The district court concluded that the Rule was in conflict with the Congressional purpose of the CARES Act, which houses the PPP, to protect workers in need during the Covid-19 pandemic, including workers for businesses that have been historically excluded from SBA financial assistance.
The 6th Circuit agreed with the district court, denying the motion for a stay. The court noted that the CARES Act specifies that eligibility “is conferred on ‘any business concern,’” which “encompasses sexually oriented businesses.” It went on to state that “the public interest is served in guaranteeing that any business, including plaintiffs, receive loans to protect and support their employees during the pandemic.”
In dissent, one judge argued that it is “unclear whether Congress meant that any business concern was eligible for a PPP loan regardless of SBA restrictions,” and therefore, the injunction should be stayed pending a decision on the merits.
SBA, Treasury release PPP loan forgiveness application
On May 15, the Small Business Administration (SBA) in consultation with the Treasury Department announced the release of the Paycheck Protection Program (PPP) Loan Forgiveness Application that borrowers must complete in order to have their loans forgiven at the conclusion of the eight-week covered period, which begins upon loan disbursement. The application provides specific instructions, including several measures designed to reduce compliance burdens and simplify the process. These include: (i) “[o]ptions for borrowers to calculate payroll costs using an ‘alternative payroll covered period’ that aligns with borrowers’ regular payroll cycles”; (ii) the flexibility to count any eligible payroll and non-payroll expenses paid or incurred during the eight-week period after the disbursement of a borrower’s PPP loan; (iii) clear instructions on how to perform calculations to confirm eligibility for loan forgiveness as required by the CARES Act; (iv) a safe harbor from forgiveness reduction for borrowers that were able to rehire employees by June 30; and (v) the addition of a new exemption from forgiveness reduction “for borrowers who have made a good-faith, written offer to rehire workers that was declined[.]” The SBA announced it “will also soon issue regulations and guidance to further assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities.”