Note: The information in this update is current as of March 31, 2020. We will continue to monitor the CARE ACT and the PPP Loan program and appropriate guidance from the SBA as it is issued.
What type of Borrower qualifies for a PPP Loan?
Borrowers eligible for the PPP Loans include all small businesses with fewer than 500 full or part-time employees, nonprofits (501(c)(3)), Independent Contractors, Self-Employed persons, sole proprietorships, veterans’ organizations (501(c)(19)) and tribal business concerns. Businesses with more than 500 employees operating primarily in the hospitality industry (e.g., restaurants and hotels, ) are also eligible, as long as there are 500 or fewer employees at any single location. The borrower must have been in operation on or before February 15, 2020. The attribution rules in 13 CFR 121.103 and 121.301 apply to most borrowers and may require a lender to aggregate the employees of an applicant with its affiliates for purposes of determining whether the 500-employee limit has been met.
Who can Lend Under the PPP Loan Program?
All current SBA 7(a) lenders can “opt-in” to the PPP and will be granted delegated authority by the SBA to make and approve the PPP Loans. The specific opt-in process and the SBA required loan forms are still pending. Lenders not currently engaged in SBA 7(a) lending may also participate in providing PPP Loans, provided the lenders are FDIC-insured (banks), FCUA-insured (credit unions) or institutions of the Farm Credit Systems chartered under the Farm Credit Act of 1971. The Secretary of Treasury will issue further guidance for terms of participation of these additional lenders.
What are the terms of a PPP Loan?
The maximum PPP Loan amount is $10 million, but may not exceed 2.5 times the borrower’s average monthly payroll amount over the 12 months prior to origination of the PPP Loan. Payroll costs include compensation to employees and independent contractors, benefits, and payroll taxes. There are certain exclusions to the payroll amount that must be carefully considered. For example, the amount of an employee’s salary in excess of $100,000 is not included in payroll costs. There are slightly different formulas for seasonal businesses and businesses that have not been in business for at least a year. Borrowers who just closed on a regular SBA 7(a) loan on or after January 31, 2020, may refinance the full amount of that loan, up to $10 million.
The maximum interest rate of a PPP Loan is 4%, and there are no prepayment penalties. Borrowers may defer payments on PPP Loans for a six-month period commencing on the origination date. SBA loan fees are waived. The proceeds must be used for payroll costs, health insurance, rent, utilities and/or mortgage interest obligations. There is no requirement for collateral or personal guarantees under the PPP Loans, and borrowers will not be required to show that they cannot obtain financing elsewhere. The borrower will be required to attest that the uncertainty related to the COVID-19 virus has made the PPP Loan request necessary to support the ongoing operations of the business.
When is the PPP Loan Forgiven?
The PPP Loan is forgiven at the end of the 8-week period after the borrower takes out the PPP Loan. Lenders will verify covered expenses and the proper amount of forgiveness. The principal amount of a loan may be forgiven in an amount equal to payroll costs, interest on mortgage obligations incurred before February 15, 2020, rent payments for leases in force before February 15, 2020, and utility payments for service which began before February 15, 2020 during the 8-week period following the origination of the loan.
How much of the PPP Loan will be forgiven?
The purpose of the PPP Loans are to help small businesses retain employees at their current base pay. If the borrower keeps all of its full-time employees and maintains compensation levels for employees earning less than $100,000, the entirety of the PPP Loan would be forgivable (provided the borrower also incurs eligible rent, mortgage interest or utility expenses during the 8 week period.) If the borrower lays off employees, the forgiveness will be reduced by the percent decrease in the number of employees. If the borrower’s total payroll expenses for workers making less than $100,000 annual salary decreases by more than 25%, PPP Loan forgiveness will be reduced by the same proportion. If the borrower has already laid off some employees or reduced compensation, the borrower can still be forgiven for the full amount of its payroll cost if the borrower rehires the employees and reverses decreases to compensation by June 30, 2020. The SBA has 60 days to make a forgiveness determination and the SBA has 90 days after that determination to make payment to the lender.
Who funds the PPP Loan?
The lender funds the PPP Loan. The lender may sell the PPP Loan to the SBA based upon an estimated forgiveness amount, and the SBA would purchase the expected forgiveness amount within 15 days. However, the PPP Loan will carry a 0% risk-weighting, negating the impact on risk-based capital ratios if the lender holds the PPP Loan on its balance sheet (though liquidity and leverage ratios would be impacted by retaining the PPP Loan).
Can a Potential Borrower Start Providing Underwriting Documents?
The guidelines have not yet been published on the forms and specific underwriting documentation, but one of the most important considerations is that the borrower will need to establish an average monthly payroll over the last 12 months. We expect the SBA to issue guidance advising on how loan applicants may demonstrate their average payroll costs for purposes of determining maximum loan eligibility, but early indications are that borrowers should provide W-2s, 1099s, and evidence of state payroll tax payments. The borrower can begin gathering documents now; in addition to payroll information, they will want to ensure that their financial records allow them to quickly identify payments made for payroll and benefits, rent, mortgage interest, and utilities.
What issues should potential Lenders consider in implementing this program for its Borrowers?
- Can my operations process a large influx of applications?
- Do we have to create and implement new procedures to develop, originate and service PPP Loans?
- Do we have the bandwidth to handle customer service questions and concerns regarding the PPP Loans?
- Do we have safeguards in place to mitigate fraud risk for this new program?
- Will we accept applications from non-traditional borrowers, such as independent contractors or sole-proprietors, who will be eligible for small PPP Loans?
Should you wish to discuss any of the topics addressed above or other questions your organization may have as a result of the current environment, please feel free to contact our team.