The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contains a number of provisions that affect federal government loan assistance programs, the U.S. Small Business Administration (SBA) that administers them, and the private sector lenders that participate in them. Here is a summary of some of the more important changes that the CARES Act makes to current law:
As to new loans, generally:
- Additional monies been appropriated for SBA business loans, both direct loans and guaranties of loans by private sector lenders, the principal program by which the SBA provides assistance to small businesses ($349 billion).
- What constitutes a “small business” varies by industry and normally includes an annual revenue test, a number of employees test, or both, but these standards have been relaxed under the CARES Act.
- Borrowers must certify that “uncertainty of current economic conditions makes necessary” their loan request, and that they will use proceeds for permitted purposes.
- The window to make loans entitled to the benefits of the CARES Act closes on June 30, 2020. Lenders with existing delegated authority to make SBA-guaranteed loans may make loans under terms authorized by the CARES Act through that date.
Paycheck Protection loans:
- SBA will guarantee “paycheck protection” loans, subject to a compensation limit.
- SBA guarantee amount has been raised from 90% to 100% for these loans.
- Maximum amount of loan is two and a half months’ average payroll costs for employees under a $100,000 cap.
- Proceeds of loans may be used for sick, family and medical leave and healthcare benefits during periods of leave; rent or mortgage payments and utilities; other debt service; and compensation to those under $100,000 cap.
- During this period, no collateral or personal guaranty may be required by the lender.
- The interest rate on covered disaster loans may not exceed 4% per annum, and for short-term loans (less than 6 months), no payments before maturity may be required.
- Payments under check protection loans may be deferred for a minimum of six months, and a maximum of one year.
Practical note: While the SBA has made the terms under which it will guaranty bank loans more favorable to lenders, and has created financial incentives for them to do so, lenders are under no obligation to make such loans.
Forgiveness of Paycheck Protection loans:
- Paycheck protection loans are subject to relaxed forgiveness standards.
- Principal can be forgiven for amounts that a lender reasonably expects a borrower to spend for a “covered period” of eight weeks beginning on the date the loan is made on payroll, interest expense on covered loans, rent and utilities.
- The amount that can be forgiven will be reduced if the employer reduces wages or the total number of employees, subject to upward adjustment for re-hires.
- The SBA pays the lender the amount forgiven within 90 days of determination, plus interest.
- Canceled debt is excluded from gross income for tax purposes.
As to regulated lenders:
- Covered loans have a risk weight of 0% for risk-based capital requirements.
- Modifications to covered loans need not comply with FASB 31 Subtopic 310-40 (Receivables – Troubled Debt Restructurings by Creditors) for purposes of compliance with the Federal Deposit Insurance Act.
- Lenders are reimbursed for making covered loans “at a rate of 5 percent of the balance of the financing outstanding at the time of disbursement,” payable within 5 days.
- An additional $25 billion has been appropriated for disaster loans.
- Coronavirus is deemed a disaster for purposes of the SBA’s Disaster Loan Program, and the SBA “shall issue a disaster declaration for each State and territory.”
- Eligibility for disaster loans is broad, and includes small business concerns that have experienced supply chain disruptions, staffing challenges, decreases in sales or customers or closures related to COVID-19.
- Entities eligible for disaster loans have been expanded to include businesses with fewer than 500 employees where a lower ceiling previously applied to certain industries.
- SBA requirement of personal guaranties for advances of up to $200,000 is waived.
- Requirement that borrower be unable to find credit elsewhere also waived.
Practical note: The SBA considers itself a “lender of last resort,” and may require prospective borrowers to draw down existing lines of credit as a condition.
About the Author: Cornelius Chapman
Con Chapman represents financial institutions and credit users in lending, leasing and workout matters, including tax-exempt bond transactions. He also represents financial institutions in regulatory matters and deposit, interest rate and other products, for-profit and non-profit corporations in governance and financing matters, and businesses in commercial transactions and trade and consumer regulatory matters, including privacy and data security. He can be reached at firstname.lastname@example.org or 617.345.3838.