March 26, 2020 — The following analysis was produced by David Frulla, David Hickey, and Timothy Lavender of Kelley Drye & Warren LLP:
The United States Senate passed H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) late in the evening of Wednesday, March 25. The House of Representatives is expected to consider and pass the bill on Friday, and, President Trump to sign it shortly thereafter.
Title I of Division A of the CARES Act is entitled the Keeping American Workers Paid and Employed Act. Title I provides over $350 billion in, in part, short-term economic relief for small businesses, non-profit organizations, veterans organizations, and Tribal business concerns facing business disruption from the novel coronavirus COVID-19. For its part, Title I creates what is known as the “Paycheck Protection Program” (“PPP”).
In summary, the PPP provides $349 billion for expedited, low-interest business interruption loans to small entities. The loans will be backed with a 100% federal guarantee and funding, through the Small Business Administration’s traditional Section 7(a) lending authority. The Section 7(a) program is the SBA’s primary program for providing financial assistance to small businesses that would not otherwise have access to credit for the same uses or on the same terms. There are nearly 2,000 SBA-approved lenders nationwide. The PPP broadens and increases the flexibility of the Section 7(a) lending program in significant ways.
Principally, under the PPP, funding can be used for a wide range of daily operating expenses. Under the PPP, the loan’s term can be up to ten years. Fees for these loans are waived. Significantly, no collateral or personal loan guarantee is required. These loans are also non-recourse to a borrower’s principals, if the loan is used for permissible purposes (described below). No pre-payment penalty is allowed. The interest rate is capped at 4%. The maximum loan amount calculation is largely made using monthly payroll costs and capped at $10 million. For eligible “impacted” borrowers (basically, any borrower that qualifies for a loan), loan repayment deferral is available for no less than six months and up to one year. Flexible terms are also available for loan modifications. PPP lending authority will extend “during the covered period” of February 15, 2020, through June 30, 2020.
Further, and with some qualifications, the PPP provides tax-free forgiveness of that portion of these PPP small entity loans used for paying workers, mortgage interest and rent expenses, and utilities during the 8-week period beginning on the date the loan was originated. In addition to current Section 7(a)-approved SBA lenders, the PPP authorizes the SBA and Treasury Department quickly to approve the participation of other lenders (insured depository institutions, credit unions, farm credit system lenders, and other lenders) in originating and servicing these loans.
Because the PPP is utilizing an existing lending program, lending should be able to begin over the near term. The CARES Act sets a 15-day deadline for the SBA to issue regulations needed to carry out the PPP. Once SBA-approved lenders can proceed to make loans under the program, under standard SBA timelines, an SBA loan can be made available in as little as 36 hours, but generally within 5 to 10 business days. These loans can be made by the lender without seeking specific SBA approval for any loan.
PPP Qualification
An entity qualifies as a eligible borrower under the PPP if it meets the following: (1) the borrower can make a “good faith” certification of COVID-19-related business injury (quoted below); (2) the borrower meets applicable SBA size standards for number of employees and independence; (3) the borrower was in business on February 15, 2020; (4) the borrower will use the funds to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; and (5) the employer is not double-dipping, that is, seeking or having already obtained the same type of PPP loan from another lender.