In a previous post on this blog, we discussed the key provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that are important to small businesses applying for loans under the Paycheck Protection Program (PPP) Loans Program to be administered by the Small Business Administration (SBA). That post can be viewed at Coronavirus Aid, Relief and Economic Security (CARES). In this post, we will highlight issues for lenders who have essentially been charged with implementing the PPP loan program.
As a quick refresher, on March 27, 2020, the President signed the CARES Act which provides for, among other things, the PPP Loans Program. These loans are intended to provide much needed funds to small businesses to meet short term capital needs for operations. Borrowers will not be required to repay that portion used for certain purposes, and those amounts will be forgiven. Congress appropriated $349 billion for the PPP loan program. The Program covers loans made between February 15 and June 30, 2020. While no legislation has been passed as of this writing, the Congress and the White House have begun discussions toward potentially increasing the funding designated for the PPP loans.
Before we dive into some of the details of the PPP loans, I think it is instructive to consider the point of the PPP loans. The point is not to generate additional commercial loan volume or even additional commercial loans for the participating lenders. The point is to provide liquidity to small businesses to maintain their payroll and keep their employees employed during the coronavirus-induced shutdown. The CARES Act is using the framework of the existing SBA 7(a) loan program and the procedures already in place to efficiently distribute the needed capital to small businesses. The PPP loan program is merely the mechanism employed to quickly deploy the necessary capital. Congress could have chosen direct payments to small businesses, but that would have proven difficult to administer, and, as such, the PPP loan program was created.
When the PPP loan program was created, Congress was not viewing the program through a traditional commercial lending lens, so it is helpful for lenders to not view it through a traditional commercial lending lens either. This can present a challenge as lenders have been rightly trained to analyze potential loans through that lens, but since some of the terms of the PPP loans do not fit neatly into traditional commercial lending tenets (loan forgiveness, no collateral, no balloon payment options, and short amortizations), it will serve lenders well to think about these loans differently.
Here’s a quick overview of some key provisions that are important for lenders to know:
- All current SBA 7(a) lenders are automatically approved to make PPP loans
- Federally insured depository institutions
- Federally insured credit unions
- Farm Credit System institutions (other than the Federal Agricultural Mortgage Corporation)
The lenders listed above not currently approved as a 7(a) lender can be approved for the PPP loans by submitting a CARES Act Section 1102 Lender Agreement.
- The SBA Guarantee percentage is 100% for PPP loans
- All loans will be processed under delegated authority
- Lenders are permitted to rely on borrower certifications to determine eligibility and use of proceeds
- Lenders do not have to apply the “credit elsewhere” test
- Borrower does not have to pay an upfront guarantee fee to SBA
- Lender does not have to pay the “on-going guaranty fee” to SBA
- There is no subsidy recoupment fee
- There is no fee payable to SBA for loans sold in the secondary market
Compensation to Lenders.
SBA will pay lenders a process fee for processing PPP loans in the following amounts:
- 5% for loans up to $350,000
- 3% for loans between $350,000 and $2,000,000
Lenders will collect the PPP Loan application from their borrowers as well as evidence of their borrowers’ payroll costs. Lenders will then complete the SBA Form 2484 – PPP Lender Application Form for each loan and submit each loan through the SBA ETRAN system for approval.