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Important New Guidance for the Paycheck Protection Program, Main Street Lending Facilities, and Economic Injury Disaster Loan Program

April 10, 2020
Hinshaw Alert

The CARES Act established the Paycheck Protection Program ("PPP" or "Program"), which provides nearly $350 billion in forgivable loans designed to keep workers employed during the COVID-19 crisis. In this alert, we are reviewing the PPP interim rules along with recently issued guidance regarding implementation of the PPP, new guidance on two Main Street Lending Facilities created by the Federal Reserve, and details on the Economic Injury Disaster Loan Program (EIDL).

Paycheck Protection Program

The Interim Final Rules for the PPP were issued by the Small Business Administration (SBA) on April 2, 2020. On April 7, 2020, the SBA issued an FAQ that provided additional guidance on interpreting the provisions of the PPP. This FAQ was amended on April 8th and a second FAQ was issued on that date discussing the participation of faith-based organizations in the Program and the EIDL.

PPP Lenders

Any federally insured depository institution that is not an SBA 7(a) lender may participate in the PPP by submitting to the SBA the CARES Act Section 1102 Lender Agreement (SBA Form 3506).

Lender Underwriting Obligations

To satisfy its underwriting obligations, each bank lender must:

The lender is expected to perform a good faith review in a reasonable time of the information submitted by the loan applicant. If the lender identifies errors or material lack of substantiation, it should work with the applicant to correct the problems.

The lender must make the first disbursement of the loan proceeds within ten days of the SBA's approval of the loan.

Applicant Documentation

As part of the review of the PPP application, the lender should secure the following documents covering 2019 or the preceding twelve months for applicants that have employees:

Lender, SBA, and Agent Fees

Lenders will receive the following fees:

As to SBA fees, none of the following fees will apply to PPP loans:

Agents who assist borrowers will receive fees from the lender as follows:

Capital Treatment

PPP loans will receive a 0% risk weight under the lender's risk-based capital requirements.

Eligible Businesses

The following are eligible to participate in the PPP:

When undertaking employee headcount, the loan applicant must count all part-time and full-time employees—including temporary employees. It is not the responsibility of the lender to determine the employee headcount.

Affiliates

A business must include the employees or receipts of affiliates when determining whether the business may participate in the Program.

A business is affiliated with another if either controls the other. Control may exist through (i) common ownership, (ii) management interlocks, (iii) affiliations arising under stock options, convertible securities and agreements to merge, and (iv) identity of interest. The CARES Act, except as indicated below, follows the SBA affiliation rules found at 13 CFR Section 121.103.

Under the CARES Act, the affiliation rules are waived for (i) businesses within NAICS Code 72—businesses like hotels and restaurants with 500 or fewer employees; (ii) franchises with codes assigned by the SBA; and (iii) businesses that receive financial assistance from SBICs.

It is not the responsibility of the lender to determine which entities might be affiliates of the applicant.

Ineligible Businesses

Certain businesses are ineligible to participate in the Program even if they fit within one of the categories listed above. These include:

There are 18 categories of businesses that are ineligible to participate in the SBA programs, including the PPP. For further information, loan applicants should consult Chapter 2, Section III of the SBAs Lender and Development Company Loan Programs (SOP 50 20 5(K)).

Loan Applications

It is incumbent upon the applicant to carefully review the application. When completing an application, an applicant must certify, among other things, that:

The last bullet point relates to the documentation needed to support the forgiveness of all or part of the loan as discussed below.

Applicants should note that they are signing and delivering a loan application to an agency of the federal government. The filing of a fraudulent application could subject the applicant to fines and criminal penalties.

The SBA will direct any borrower who uses Program funds for unauthorized purposes to repay these funds. The SBA may pursue an applicant—and its principals—who knowingly use proceeds for unauthorized purposes.

Loan Terms

Loan terms are as follows:

Payroll Costs

Payroll costs include salary, commissions, tips, vacation pay, and family, medical, and paid sick leave. However, qualified sick and family wages for which a credit is allowed under Sections 7001 and 7003 of the Families First Coronavirus Response Act (FFCRA) are excluded.

All compensation over $100,000 to an employee making more than $100,000 is excluded, but benefits like health care costs and contributions to retirement plans may be included for such employees. In addition, guaranteed payments and owner distributions that are subject to the self-employment tax for actively participating partners, and members of partnerships and LLCs, should be included up to $100,000 for each such person.

Under the CARES Act, payroll costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee's and employer's share of FICA and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer's share of payroll tax. For example, an employee who earned $4,000 per month in gross wages—from which $500 in federal taxes was withheld—would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs.

Loan Forgiveness

The loan can be forgiven in whole or in part. The amount to be forgiven is equal to the amount spent during the 8 week period following the first disbursement of the loan proceeds to the borrower (the "Covered Period") on (i) payroll costs, (ii) interest payments on mortgages incurred before February 15, 2020, (iii) rent payments on leases in effect before February 15, 2020, and (iv) utility payments for which service began before February 15, 2020. The lender must make the first disbursement of the loan proceeds within ten days of the SBA's approval.

The maximum amount of loan forgiveness for non-payroll expenses is 25% of the amount of the loan. Eligible payroll costs include compensation up to $100,000 in prorated wages, per employee. Aggregate payroll costs must not exceed payroll costs incurred during the equivalent eight week period for the previous year, proportionate to the number of employees.

The amount of loan forgiveness is reduced by:

To encourage employers to rehire workers laid off due to the COVID-19 crisis, borrowers who rehire laid off workers by June 30, 2020, will not be penalized for having a reduced payroll at the start of the period.

A borrower seeking loan forgiveness must submit to the lender an application, which must include:

The lender must make a decision on loan forgiveness within 60 days of the lender's receipt of the forgiveness application.

No borrower shall receive forgiveness without submitting to the lender the documentation described above.

For the borrower, the forgiven amount is not taxable income.

There are two ways lenders may be reimbursed for forgiven amounts:

If a lender has received the required documentation from a borrower attesting that the borrower has accurately verified the payments for payroll costs, payments on covered mortgage obligations, payments on covered lease obligations, or covered utility payments during covered period:

  1. an enforcement action may not be taken against the lender relating to loan forgiveness for the payments for payroll costs, payments on covered mortgage obligations, payments on covered lease obligations, or covered utility payments, as the case may be; and
  2. (ii) the lender shall not be subject to any penalties by the SBA relating to loan forgiveness for the payments for payroll costs, payments on covered mortgage obligations, payments on covered lease obligations, or covered utility payments, as the case may be.

Application Filing Deadline

Loan applications must be filed by June 30, 2020 but applications should be filed as soon as possible.

Main Street Lending Facilities

The CARES Act instructs the Secretary of the Treasury to encourage the Federal Reserve to establish a program of low interest loans to borrowers with between 500 and 10,000 employees. The Federal Reserve issued guidance for this program on April 9th.

The Federal Reserve has established two Main Street Lending Facilities. One facility will purchase from eligible lenders eligible loans made to eligible borrowers which are made on or after April 8, 2020. The second facility will purchase from eligible lenders tranches of eligible loans made to eligible borrowers on loans originated before April 8, 2020.

Hinshaw will be publishing a detailed client alert on these two programs.

The CARES Act includes a number of requirements that must be satisfied if the employer desires to participate in the program including:

Economic Injury Disaster Loan Program

Under the EIDL, the SBA has been authorized to provide funding to small businesses impacted by the COVID-19 crisis. All states have been approved to participate in the program.

The program permits the SBA to make low interest, fixed loans of up to $2 million to a small business (at 3.75%) or non-profit (at 2.75%) for up to 30 years, depending on the circumstances of the borrower. Loan proceeds cannot be used to pay off or consolidate debt. Additionally, owners will have to pledge collateral to secure all loans in excess of $25,000. No personal guarantee will be required unless the loan exceeds $200,000.

Loans may be made to independent contractors, the self-employed, sole proprietorships, and businesses with fewer than 500 employees.

A company must be without any other available credit. Further, it must be unable to meet its obligations and pay its operating expenses.

The deadline to submit applications is December 21, 2020. Applications can be filed online or by mail. The approval process will take a minimum of 21 days. Emergency grants of up to $10,000 will be made within days of the filing of an application.

Businesses looking to secure a loan under the EIDL should apply as soon as possible. In addition to the 21 day minimum waiting period, thousands of companies have already applied for EIDL loans.

Additional information about this SBA program may be found on the SBA's website.