What Lenders Need to Know About Certain Key Provisions of Title I of the CARES Act

The following is a summary of certain provisions of the Paycheck Protection Program, Loan Forgiveness, and Subsidy for Certain Loan Payments sections contained in Title I (Keeping American Workers Paid and Employed Act) of the Senate’s emergency economic relief package known as the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).  The CARES Act was approved by the U.S. House of Representatives and signed into law by the President on Friday, March 27, 2020.

Section 1102 Paycheck Protection Program

The Paycheck Protection Program (the “Program”) instituted in Section 1102 of the CARES Act is a federally backed loan program designed to get money to eligible recipients to maintain their workforce by permitting the businesses to use the loans for “payroll costs” and other permitted purposes. The CARES Act permits such loans to be fully guaranteed by the Small Business Administration (the “Administration”).

Expanded Lender Eligibility

• Lenders already authorized under the Small Business Act (15 U.S.C. 636(a)) (“SBA”) to make general business loans pursuant to Section 7(a) of the SBA (“7(a) Loans”) are automatically authorized to make loans under the Program (“Covered Loans”).
• The Secretary of the Department of Treasury is permitted to expand those authorized to make Covered Loans to the extent such lenders “have the necessary qualifications to process, close, disburse and service loans made with the guarantee of the Administration.”

Lender Incentives

• While up to 85% of the amount of current 7(a) Loans may be guaranteed by the Administration, Covered Loans may be 100% guaranteed by the Administration for the life of the loan, which may be up to 10 years.
• The maximum individual loan amount guaranteed by the Administration has been temporarily increased to $10,000,000 with respect to Covered Loans.
• Guarantee and yearly fees normally payable to the Administration with respect to 7(a) Loans are waived for Covered Loans.
• The Administration is required to pay a processing fee to lenders under the Program at a rate of:
  • 5% for loans up to $350,000;
  • 3% for loans greater than $350,000 but less than $2,000,000; and
  • 1% for loans of not less than $2,000,000.
• Covered Loans are deemed to have a risk weight of 0%. As such, lenders are not required to maintain any specific capital amounts in connection with Covered Loans.

Expanded Borrower Base

• The Program has expanded the pool of potential borrowers to include:
  • Small business concerns (as defined in the SBA) currently eligible to receive 7(a) Loans;
  • Any other business concern, nonprofit organization, veterans organization or Tribal business concern if it employs not more than 500 employees or the size standard in number of employees established by the Administration for its industry;
  • Any business concern with more than one physical location that employs not more than 500 employees per physical location and that is in the restaurant or hospitality industry at the time of loan disbursal; and
  • Individuals who operate under a sole proprietorship or as an independent contractor and “eligible self-employed individuals” (as defined in Section 7002(b) of the Families First Coronavirus Response Act).
• The affiliation rules normally used for 7(a) Loans to disqualify certain borrowers are temporarily waived for:
  • Any business concern with not more than 500 employees that is in the restaurant or hospitality industry;
  • Any business concern operating as a franchise that is assigned a franchise identifier code by the Administration; and
  • Any business concern that receives financial assistance from a company licensed under Section 301 of the Small Business Investment Act.
• Potential borrowers are not required to demonstrate that they were unable to obtain credit elsewhere in order to qualify for the Program.

Ability to Refinance Certain SBA Economic Injury Disaster Loans (EIDLs)

• Unlike SBA 7(a) loan programs, which are usually funded by a private lender partner, EIDLs are funded and administered directly by the Administration.
• Under the CARES Act, any EIDL made from and after January 31, 2020, up to the date on which Covered Loans are first made available, may be refinanced (including by a private lender) as part of a Covered Loan.

Secondary Market

• The SBA is not permitted to collect any guarantee fees in connection with the sale of any Covered Loan in the secondary market.
• Any Covered Loans sold on the secondary market to an investor are required to be purchased by the SBA in the event such investor declines to provide any payment deferment relief required under the Program.

Section 1106 Loan Forgiveness

A portion of Title I of the CARES Act provides loan forgiveness for some Covered Loans based on certain qualified expenses and costs of the business (i.e., payroll costs, certain mortgage obligations, certain lease obligations and utility payments) during the eight-week period beginning on the date of the origination of the Covered Loan.

• To the extent the Administration determines that a portion of a Covered Loan is subject to loan forgiveness, the Administration will make a payment to the lender within 90 days in an amount equal to the principal so forgiven along with all accrued interest through the date of payment.
• Lenders and, at the discretion of the Administration, investors purchasing a Covered Loan in the secondary market are permitted to deliver to the Administration a report detailing the amount such lender or investor reasonably expects to be forgiven under the Program, and the SBA is thereafter required to purchase the principal amount of such expected forgiveness within 15 days of receipt.
• Lenders are authorized to rely upon documentation provided by the borrower with respect to the forgiveness amount, and the SBA may not take an enforcement action or impose any penalties against the lender in the event such documentation is inaccurate.

Section 1112 Subsidy for Certain Loan Payments

Congress has provided that all borrowers are adversely affected by COVID-19 and that relief payments by the Administration are appropriate for all borrowers and, in addition to the relief provided by the CARES Act, the Administration should encourage lenders to provide payment deferments when appropriate and extend the maturity of “covered loans” and to avoid balloon payments or increase in debt payments resulting from deferments so long as we remain under a declaration of national emergency by the President. For purposes of Section 1112, covered loans (“Subsidy Covered Loans”) include (a) all loans guaranteed by the Administration under Section 7(a) of the SBA (other than Paycheck Protection Program Loans), (b) all loans guaranteed by the Administration under Title V of the Small Business Investment Act, and (c) all loans made by an intermediary to a small business concern using grants or loans received under Section 7(m) of the SBA (Microloan program).

The Administration is required to pay principal, interest and fees on a Subsidy Covered Loan in a regular servicing status within 30 days of the due date:

• With respect to a loan made before the date of enactment of the CARES Act and not on deferment, for the six-month period beginning with the next payment due on the covered loan;
• With respect to a loan made before the date of enactment of the CARES Act and on deferment, for the six-month period beginning with the next payment due on the loan after the deferment period; and
• With respect to a loan made during the period beginning on the date of enactment of the CARES Act and ending on the date six months thereafter, for the six-month period beginning with the six-month period beginning with the first payment due on the loan. With respect to a loan made during the period beginning on the date of enactment of the CARES Act and ending on the date six months thereafter, for the six-month period beginning with the six-month period beginning with the first payment due on the loan.

Payments so made by the Administration relieve the borrower of the obligation to pay such amounts.

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