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On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted in response to the COVID-19 pandemic.

Section 1102 of the CARES Act provides for $349 billion in forgivable loans through the Paycheck Protection Program (PPP), an expansion of the SBA’s existing 7(a) loan program. The PPP attempts to help small businesses retain or re-hire their employees. While the details of the PPP may remain somewhat fluid, this update is intended to provide lenders with an accurate overview of PPP loans as of the time this update was written.

  1. Process. PPP loans are a subset of SBA 7(a) loans and will generally be processed in the same way.  15 USC § 636(a)(36)(B)
  2. Maximum Loan Amount. The maximum loan amount: is the lesser of (i) $10 million or (ii) 2.5 times the business’s average total monthly “payroll amount”[1] plus the amount of any pre-existing Economic Injury Disaster loan (EIDL) an applicant may wish to refinance. 15 USC § 636(a)(36)(E). Independent contractors do not count as employees for purposes of PPP loan calculations. (SBA Interim Final Rule, p. 11).
  3. Terms. PPP loans will have an interest rate of 1.0% fixed and have a maturity of two years. Loan payments must be deferred for at least six months from the date of origination; however, interest will accrue on PPP loans during the six-month deferment. (SBA Interim Final Rule, p. 12-13) (15 USC § 636(a)(36)(M)). Note that Section 1109 of the CARES Act gives the Secretary of the Treasury the power to issue regulations and guidance on the terms, conditions, underwriting standards, interest rates, and maturity of PPP loans; so, the loan terms could theoretically change.
  4. SBA Guarantee. The SBA will guarantee 100% of these loans. 15 USC § 636(a)(2)(F).
  5. Non-Recourse and Unsecured. The loans are non-recourse (15 USC § 636(a)(36)(F)(v)) provided that the funds are used for authorized purposes (payroll, healthcare, etc), and no personal guarantees or collateral are required (15 USC § 636(a)(36)(J)).
  6. Delegated Authority. The CARES Act amends the SBA 7(a) loan program so that all lenders approved to make 7(a) loans now have “delegated authority” to make and approve PPP loans. (15 USC § 636(a)(36)(F)(ii)). As a result, it is theoretically possible for a PPP loan to be made by an approved 7(a) lender on the same day that the application is submitted.
  7. What Delegated Authority Entails. While there is no specific guidance in the CARES Act or (to date) in any regulations, or standard operating procedures on what exactly “delegated authority” entails in connection with the PPP, we can look to how this concept worked in the past. Prior to the CARES Act, the Small Business Act contemplated that there would be a special class of 7(a) lenders that would have “delegated authority” under programs such as the Preferred Lender Program (PLP). Lenders granted “delegated authority” can make SBA 7(a) loans without any pre-approval from the SBA.  Under the PLP, an SBA loan number is assigned by the SBA “upon notification” of the PLP Lender. The SBA closing requirements under the PLP are generally the same as non-PLP 7(a) loans.
  8. Lending Criteria. A borrower is generally eligible for a PPP loan if all of the following apply:
  • It is a business concern or non-profit with 500 or fewer employees, whose principal place of residence is in the United States, or is a business that operates in a certain industry and meets the applicable SBA employee-based size standards for that industry. In determining the number of employees of an applicant, the applicant’s affiliates must be counted as well.  Rules for determining “affiliates” can be found here: https://www.sba.gov/document/support–affiliation-rules-paycheck-protection-program. More information on size standards, including a size standards tool, can be found here: https://www.sba.gov/document/support–table-size-standards
  • It was in operation on February 15, 2020.
  • It had employees for whom the borrower paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.

            (15 USC § 636(a)(36)(F)(ii))

A borrower is also eligible for a PPP loan if it is an individual who operates under a sole proprietorship or as an independent contractor or eligible self-employed individual, and was in operation on February 15, 2020. (SBA Interim Final Rule, p. 6).

The borrower must also submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.

  1.  Documentation. To date, there is no special form Promissory Note prescribed by the SBA for PPP loans. The only form note on the SBA website for 7(a) loans is SBA Form 147, which is the same form in effect prior to the enactment of the CARES Act.
  2. Fees. Lenders will be paid processing fees for making PPP loans, which will be based on the balance of the financing outstanding at the time of final disbursement:
  • Loans $350,000 and under: 5.00%
  • Loans greater than $350,000 to $2 million: 3.00%
  • Loans greater than $2 million: 1.00%

Those fees are paid by the SBA to the Lender. (15 USC § 636(a)(36)(P)).  Lenders may not collect any fees from the applicant.

  1. Loan Forgiveness. Section 1106 of the CARES Act provides for potential[2] PPP loan forgiveness up to the full principal amount of the loan and any accrued interest. That is, the borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes and employee and compensation levels are maintained. The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan. However, not more than 25 percent of the loan forgiveness amount may be attributable to nonpayroll costs. The SBA has said it will issue “additional guidance” on loan forgiveness. (SBA Interim Final Rule, pp. 13-14).
  2. Underwriting. The lender’s underwriting obligations in connection with PPP loans are as follows:
    • Confirm “receipt” of borrower certifications contained in the PPP borrower application. The borrower application can be found here:    https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf
    • Confirm “receipt” of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020.
    • Confirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application.
    • Follow applicable Bank Secrecy Act (BSA) requirements.

(SBA Interim Final Rule, p. 21).

Borrowers must submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount. (SBA Interim Final Rule, p. 23).

For each borrower application, the lender must electronically submit an accompanying “Lender Application Form”.  The information required for the Lender Application Form can be found here: https://www.sba.gov/sites/default/files/2020-04/PPP%20Lender%20Application%20Form_0.pdf

  1. Reliance on Borrower Certifications. The SBA will allow lenders to rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness. Lenders must comply with the applicable lender obligations set forth in section 12 above, but will be held harmless for borrowers’ failure to comply with program criteria. (SBA Interim Final Rule, p. 5).

[1] See Metz Lewis’ prior blog post on how to calculate average monthly payroll: https://www.metzlewis.com/wp-content/uploads/2020/04/Metz-Lewis-PPP-Loan-Application-Questions-and-Answers_-005.pdf

[2]  Loan forgiveness will be subject to a number of factors outside the scope of this update.  Such factors include staff and payroll levels of the borrower.

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