Coronavirus Aid, Relief, and Economic Security Act or the “CARES Act” Summary of SBA 7(a) Small Business Interruption Loans
The information below provides a summary of the terms of the “Paycheck Protection Program” included in the CARES Act passed by the Senate late on March 25, 2020. It is anticipated that the House will take up the bill on Friday. Due to concerns regarding the spread of COVID-19, the House plans to hold a voice vote on the bill. Please note that this information is in summary format only and does not address every provision contained in the bill as it relates to the Paycheck Protection Program. This article will explore coronavirus aid for small business.
H.R. 748 “Paycheck Protection program”
The “covered period” for loan eligibility is defined as February 15, 2020 – June 30, 2020.
ELIGIBLE BORROWERS/LOAN AMOUNT
When looking at coronavirus aid for small business; during this covered period, “eligible recipients” that may receive a “covered loan” in addition to “small business concerns” include:
- Any business concern, nonprofit organization, veterans organization, or Tribal business concern if the concern employs not more than the greater of (a) 500 employees or (b) the employee threshold for that entity’s applicable industry size standard. Employees include full-time and part-time employees.
- Sole proprietors, independent contractors and eligible self-employed individuals are included as well (documentation is required).
- Any business that has more than 1 physical location, does not have more than 500 employees per location and has a NAICS code beginning with 72 (generally, accommodation and food service sector companies).
- SBA affiliation rules are waived for NAICS code 72 businesses, any business concern operating as a franchise and assigned a franchise identifier, and businesses receiving assistance from SBICs. This does not apply to nonprofits and veteran’s organizations.
The Maximum Loan Amount is Calculated As The Lesser of:
- 2.5 x the total average monthly payments by the borrower for “payroll costs” incurred during the 1-year period prior to the date on which the loans is made (adjusted for seasonal employers or businesses not in operation for a full year); or
- In addition, coronavirus aid for small businesses: the loan amount can include any SBA 7(b)(2) disaster loan prior to 1/1/2020 that will be refinanced through the covered loan. Thus, refinances of 7(b)(2) loans are allowed. As such the limitation regarding 7(a) and7(b)(2) loans for the same purpose set forth in the prior version of the bill was removed.
Coronavirus Aid For Small Business: “Payroll costs” include:
- Salaries, wages, commissions, or similar compensation; cash tip equivalents; vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for group health care benefits including insurance premiums; retirement benefits; state and local tax assessed on employee compensation; and compensation or income to a sole proprietor in independent contractor that is a wage, commission, income, net earnings from self-employment or similar compensation not more than $100,000 (pro-rated for the covered period).
- There are exclusions to what may be considered “payroll costs” the most significant which is likely compensation of any individual employee in excess of an annual salary over $100,000 and any compensation of an employee whose principal place of residence is outside of the U.S.
Payroll costs, health coverage continuation during periods of paid sick, medical or family leave, and insurance premiums; employee salaries, commissions, or similar compensation; payments of interest on mortgage payments, rent, utilities, and interest on any other debt incurred prior to the covered period.
Note for coronavirus aid for small business – The loan may NOT be used to repay principal on prior mortgages or other debt.
There is no recourse against any shareholder, member, or partner of an eligible recipient of a covered loan except to the extent the loan is not used for an allowable purpose.
For purposes of making covered loans in coronavirus aid for small businesses, a lender approved to make loans under this bill shall be deemed to have delegated authority by the SBA to make and approve covered loans. There is an “Opt In” for lenders qualified to participate as a lender under 7(a) of the Small Business Act. This authority can be extended to additional lenders who (as determined by SBA and Treasury) have the qualifications to process, close, disburse and service SBA guaranteed loans.
Eligibility Review Criteria:
- Borrower was in operation on February 15, 2020;
- Had employees for whom the borrower paid salaries and payroll taxes; or
- paid independent contractors on a 1099 basis; and
- The determination on COVID-19 impact is NOT in the final bill.
- Borrower must certify that due to uncertainty of economic conditions it needs the loan for ongoing operations and the proceeds will be used for payroll, mortgage payments, lease payments and utility payments; that the borrower does not have an application pending for a loan for a duplicative purpose or has received a loan from February 15, 2020 – February 31, 2020 for a duplicative purpose.
- During the covered period, the requirement that the entity could not obtain credit elsewhere does not apply.
During the covered period there will be no SBA yearly fee or SBA guarantee fee with coronavirus aid for small businesses.
SBA GUARANTEE AMOUNT
The SBA shall require 7(a) lenders to provide “impacted borrowers” (an eligible borrower who applies for a loan under the CARES Act) complete payment deferment relief for a period not less than 6 months and not more than 1 year.
With regard to deferment, there is a presumption is that borrowers have been adversely impacted by COVID-19.
Secondary Market – With respect to loans sold on the secondary market, if an investor declines to approve a lender’s deferral request, the SBA shall exercise the authority to purchase the loan so that the impacted borrower may receive the deferral.
SBA Guidance must be given to lenders within 30 days of enactment with regard to the deferment process.
Secondary Market Sales – Covered loans are eligible for sale into the secondary market without fee to the SBA.
Increased the maximum loan amount from $350,000 to $1,000,000 (to then be prospectively repealed on January 1, 2021 to revert back to $350,000).
“Covered Period” is the 8 week period beginning on the date of origination of the covered loan.
Borrowers are eligible for forgiveness of indebtedness for the sum of the following costs incurred and payments made during the covered period:
- Payroll costs;
- Interest on mortgages incurred before February 15, 2020;
- Rent on a lease in place prior to February 15, 2020;
- Payment on most utilities if in place prior to February 15, 2020.
Amounts forgiven are considered cancelled indebtedness, and the purchase of the guarantee is otherwise treated in accordance with SBA rules in coronavirus aid for small businesses. Amounts forgiven are not taxable income to the borrower. The SBA remits the forgiven amount plus interest not less than 90 days after the amount is determined.
7(a) lenders may report to the SBA the “expected forgiveness amount” on a covered loan up to 100% of principal, and the SBA purchases that amount as if it were a guaranteed amount under 7(a). The purchase is made not later than 15 days after the date on which the SBA receives the bank report.
Limit – The amount forgiven shall not exceed total payroll costs during the covered period plus debt payments on obligations that were incurred prior to the covered period.
- The amount forgiven is reduced by a percentage equal to:
The Average number of FTEs during the covered period by
Average FTEs from 2/15/2019 – 6/30/2019; or
Average FTES from 1/1/2020 – 2/29/2020.
For avg FTEs a borrower would average FTEs for each pay period during a month.
- The amount forgiven is also reduced by the amount of any reduction in compensation greater than 25% (based on most recent full quarter) for employees making less than $33,333 during the covered period or less than $100,000 in 2019.
- Borrowers with tipped employees are eligible for forgiveness for additional wages paid to the tipped employees.
There is an exemption in the calculation of average FTEs for employees terminated or salary reductions made from February 15, 2020 – to 30 days after the enactment of the Act which the employer hires back prior to June 30, 2020.
Borrowers must apply for loan forgiveness and verify FTEs and pay rates by providing:
- Payroll tax filings; state income, payroll and unemployment insurance filings; financial statement verifying debt payments before the covered period;
- Documentation verifying payments with proceeds are being made towards covered obligations;
- Certification that documents supporting application are true and correct, and that proceeds were used for appropriate purposes;
- and any other documentation the SBA deems necessary.
Forgiveness payments will not be allowed without the required documentation. Lenders have a 60-day period to decide on loan forgiveness applications in coronavirus aid for small business. SBA guidance must be given to lenders within 30 days of enactment with regard to the loan forgiveness process. There is a safe harbor for lenders against enforcement actions if the lender receives the documentation required under this section from a borrower attesting that the borrower has accurately verified the applicable payments.
Appropriation and Loan Terms
$349B is authorized for all 7(a) loan commitments, including business interruption loans under this bill.
$299.4B would be appropriated for the cost of 7(a) guaranteed loans interruption loans as detailed in H.R. 748.
With the enactment of the bill, the interim rule “Express Loan Programs: Affiliation Standards” is permanently rescinded.
No collateral is required for the covered loan.
No personal guarantee is required for the covered loan.
Maturity (if there is a balance after forgiveness) – Max of 10 years from the date the borrower applies for loan forgiveness.
Interest Rate – the loan shall bear an interest rate not to exceed 4%.
No subsidy recoupment fee.
No prepayment penalty for any payment made on a covered loan.
Lenders will be reimbursed by the SBA within 5 days for lender’s processing at a rate of 5% of the balance of the financing outstanding at the time of the disbursement of the covered loan for loans more than $350,000; 3% for loans between $350,000 – $2,000,000; and 1% for loans not less than $2 million. Agents may not collect fees in excess of the limits established by the SBA.
The SBA will issue guidance to ensure loan proceeds get to businesses in un-deserved and rural markets.
US TREASURY PROGRAM MANAGEMENT
The Treasury Department, in consultation with SBA, and bank regulatory agencies will establish the criteria for banks and specialty lenders that do not already participate in SBA lending programs to participate in a small business interruption loan program to provide 7(a) loans in accordance with the CARES Act until the date the national emergency declared by the President with respect to COVID-19 expires.
Eligibility criteria otherwise applicable to 7(a) loans shall not apply to loans made under the CARES Act.
Banks must continue to operate in a safe and sound manner.
The Treasury Department, in consultation with the SBA, shall issue regulations and guidance that set out compensation, underwriting standards, interest rates, maturity, and other relevant terms and conditions.
Regulations should be consistent with the terms stated in the Act for coronavirus aid for small businesses.
To receive a loan under this Act, borrowers must certify that they do not have a 7(a) application pending and has not received a 7(a) loan from February 15, 2020 – December 31, 2020.
The SBA is to issue regulations to carry out this title not later than 15 days after enactment.
Covered loan modifications on or after March 13, 2020 shall not be required to comply with FASB 310-40 (TDR) until such time as the federal banking agency deems appropriate.
LOAN PAYMENT SUBSIDY
$16.8B appropriated for loan payment subsidies for “covered loans” which appears to include all 7(a) guaranteed loans. The text reads, “in addition to the relief provided by the [Small Business Act], the [SBA] should encourage lenders to provide payment deferments, when appropriate, and to extend the maturity of covered loans, so as to avoid balloon payments or any requirement for an increase in debt payments resulting from deferments provided by lenders during the period of the national emergency…”
The SBA shall pay principal, interest, and fees owed on a covered loan in regular servicing status:
- For a covered loan made before the enactment of the Act and not on deferment, for a 6-month period beginning on the next payment date;
- For a covered loan made before the enactment of the Act and on deferment, for a 6-month period beginning with the payment date after the deferment period; and
- For a covered loan made during the period beginning on the date of enactment of this Act and ending on the date that is 6 months after, for 6 months beginning with the first payment date.
- These payments are made within 30 days of the due date.
- The SBA shall also coordinate with bank regulators to encourage bank regulators not to require lenders to increase their reserves due to receiving these subsidy payments; waive statutory limits on maximum maturities for covered loan duration where the lender provides a deferral and extends the maturity of a covered loan during the 1-year period following enactment; and extend lender site visit requirements for coronavirus aid for small businesses.
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