Regulators Provide Important Guidance On Next Wave of Paycheck Protection Program 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.

Guidance on Loan Participations: The SBA issued a Procedural Notice on April 24 permitting lenders to sell up to a 100% participation interest in PPP loans to other participating lenders without SBA’s prior written consent, notwithstanding existing SBA regulations that otherwise would not permit such sales absent SBA consent. PPP lenders actively sought this relief, noting liquidity concerns in meeting the overwhelming loan demand.

Federal Reserve PPP Liquidity Facility: The Fed announced on April 23 that it was working to expand access to its Paycheck Protection Program Liquidity Facility for additional SBA-qualified lenders, likely including nondepository institutions in the days ahead. Through the facility, which the Fed recently put into operation, lenders that are depository institutions receive nonrecourse loans at face value of the PPP loans they pledge. The extensions of credit will be available until September 30, 2020.

Guidance on Eligibility: The SBA published an interim final rule targeting in part larger companies that have come under fire for applying for PPP loans instead of turning to the credit markets and other capital providers not typically available to smaller businesses. The new rule provides a limited safe harbor for borrowers that applied for a PPP loan prior to the issuance of this regulation, provided that they repay the loan in full by May 7, 2020. The SBA and Treasury earlier published guidance to clarify that although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere, they are still required to certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant,” taking into account their ability to access other sources of liquidity.

Loan Forgiveness: The SBA has advised borrowers to review the PPP borrower application form for information that will be requested when seeking loan forgiveness that the CARES Act provides. In addition, borrowers should be prepared to submit:

• Loan forgiveness application (not yet released by the SBA, so representations are not yet known)
   
• Documents that verify the number of full-time employees and pay rates for the look-back and covered periods
   
• Documents that verify payments on eligible mortgage, lease, and utility obligations
   
• Certification that the documents are true and that the borrower used the forgiveness amount to keep employees and make eligible mortgage, interest, rent, and utility payments
   
• Any other documentation the SBA or lender determines necessary

The PPP lender must make a decision on forgiveness within 60 days of receiving an application. Lenders that forgive loan amounts can seek reimbursement from the SBA under:

• Option 1 - Request that the SBA purchase the expected forgiveness amount of a PPP loan, or a pool of PPP loans, at the end of week seven of the loan origination. The SBA must purchase the forgiveness amount within 15 days of receiving the report and finding that the expected forgiveness amount is reasonable.
   
• Option 2 – After a lender processes the forgiveness amount, the SBA must pay the lender the full amount of the forgiveness plus interest from the date of forgiveness through the date of payments.

Digital SBA Loans and ESIGN Requirements:

Lenders have at least two options for using electronic means to execute and collect loan documents remotely.

• Lenders may opt for an entirely electronic application and execution process, with the Fed accepting these digital PPP loans as collateral for advances by the PPPLF. If originating PPP loans electronically, lenders must comply with Appendix 8 of the SBA Standard Operating Procedure 50 10 5 (Appendix 8), which provides various technical requirements, including among other things, (i) specific processes for identity verification and authentication of each signer, (ii) strict document integrity and vaulting requirements, which must meet standards comparable to requirements for electronic mortgage notes and electronic chattel paper, and (iii) specific vendor diligence requirements and contractual provisions that must be included in agreements with vendors providing electronic solutions. Appendix 8 also provides for lender liability for failure to comply with the SBA’s requirements for digital loan originations. These, and other requirements found in Appendix 8, were discussed at a webinar hosted by Orrick on April 15, which can be viewed here.
   
• Lenders may also collect scanned copies of wet-signature originals, but are required to obtain the paper original within six months. The SBA and the Treasury Department guidance provides that lenders may accept scanned copies of signed original loan applications and documents containing the information and required certifications, as well as the promissory note used for the PPP loan. The Fed has similarly indicated that it will accept scanned copies for the purposes of participating in the PPPLF. Lenders are still required to obtain the paper originals (which are the operative negotiable documents) within six months—or risk loss of the guarantee. Acceptance by the SBA and the Fed of scanned copies for origination and PPPLF participation does not excuse the lender from obtaining the paper original or change the scanned copy into an enforceable note, even though the Fed will accept the scanned copy as evidence of collateral.

Please see Orrick's March 30 Special Alert and April 1 Special Alert for additional information on the PPP. We will continue to provide updates 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 an Orrick attorney with whom you have worked in the past.