By: Robert T. Smith
The recently enacted Coronavirus Aid, Relief, and Economic Security Act (CARES) creates an SBA loan program focused on supporting funding of payroll and other operating costs for small businesses – referred to as the Paycheck Protection Program. These loans may be forgiven if certain criteria are satisfied.
The CARES Act authorizes the SBA to extend lending authority under the program to any financial institution that has the ability to “process, close, disburse and service loans”, meaning that even non-SBA lenders will have the opportunity to originate these loans for their customers. Our firm has prepared a separate memorandum detailing the eligibility and other provisions of the Paycheck Protection Program accessible here.
While the SBA will issue regulations to better detail the operable provisions of the act, banks should initially be aware of the following:
(1) The only underwriting requirements contained in the law are that (A) the borrower’s business was operational on February 15, 2020, and (B) the borrower was paying salaries and payroll taxes at that time.
(2) These loans are 100 percent guaranteed by the SBA.
(3) The maximum interest rate on new loans is 4.00 percent.
(4) The maximum term is 10-years and each borrower will receive a complete payment deferral for at least 6 months and not more than 1 year.
(5) The loans are unsecured and do not require a personal guaranty.
(6) For regulatory capital purposes, each covered loan will have a risk weight of zero percent.
(7) The SBA will reimburse lenders for processing costs at a specified rate depending on the balance of the loan at funding:
- 5 percent for loans not exceeding $350,000;
- 3 percent for loans of more than $350,000 and less than $2,000,000; and
- 1 percent for loans at or above $2,000,000.
(8) Loans may be forgiven generally based on the borrower continuing to employ its employees – with the amount forgiven reduced to the extent that the borrower has laid off employees and/or reduced employee compensation above a specified level.
(9) Determinations of the amount eligible to be forgiven are made by the “lender” – and the lender is held harmless from liability for this decision provided it has received the required documentation from the borrower as provided in the law.
(10) For any loan that is forgiven, the SBA will pay the lender the amount of the forgiven loan (plus accrued interest) within 90 days.
We are reviewing developments concerning the CARES Act and related legislative and regulatory matters as they occur. Please contact our office if we can assist with any issues during this challenging time.
Robert T. Smith heads the Finance and Commercial Transactions Practice Group. His diverse corporate practice focuses on representing companies and financial institutions in general business, transactional, securities and regulatory matters.
Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.