Paycheck Protection Program
- The CARES Act increases the federal guarantee of loans made for the Payment Protection Program under section 7(a) of the Small Business Act to 100 percent through December 31, 2020. Eligibility for loans is defined as a small business, 501(c)(3) nonprofit, a 501(c)(19) veteran’s organization, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act with not more than 500 employees, or the applicable size standard for the industry as provided by U.S. Small Business Administration (“SBA”), if higher.
- For businesses in the hospitality and dining industries with more than one physical location, if it employs 500 or fewer employees per location and is assigned to the “accommodation and food services” sector (Sector 72) under the North American Industry Classification System (“NAICS”), the business is eligible to receive a loan. In addition, the CARES Act waives entity affiliation regulations for business concerns, non-profits, and veterans’ organizations: (a) in Sector 72 under the NAICS with 500 or fewer employees; (b) franchise businesses with SBA franchisor identifier codes; and any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act.
- Under the Paycheck Protection Program, borrowers can receive up to 2.5 times their average total monthly “payroll costs” incurred in the one-year period before the loan is made, plus the outstanding amount of a loan that was made under the SBA’s Disaster Loan Program on or after January 31, 2020 and that is refinanced as part of the Paycheck Protection Program.
- Amounts borrowed are subject to forgiveness based on the number of employees retained (note, employers can rehire employees who have already been laid off due to the COVID-19 crisis). Amounts eligible for forgiveness are equal to the amount spent by the borrower during an 8-week period after the origination date of the loan compared to the previous year or time period, on payroll costs and eligible rent, mortgage interest and utility expenses.
- More information that may be useful to potential borrowers is available here, here and here. Information that may be useful to lenders is available here and here.
United States Treasury Program Management Authority
- All 7(a) lenders can opt in to participate in the Paycheck Protection Program. The Act also establishes the authority of the U.S. Department of Treasury, the Farm Credit Administration, and other federal financial regulatory agencies to authorize bank and non-bank lenders to participate, including insured credit unions in loans made under the Paycheck Protection Program. For financial institutions under this section, Treasury has authority to issue regulations and guidance for terms concerning lender compensation, underwriting standards, interest rates, and maturity. Interest rates set under this authority may not exceed the maximum permissible rate of interest set on loans made under Section 1102 of this Act. The Act requires that Treasury ensure that terms and conditions provided by this section are the same as the terms established for loans under Section 1102 of this Act for borrower eligibility, maximum loan amount, allowable uses, fee waivers, deferment, guarantee percentage, and loan forgiveness. The Act allows Treasury to issue regulations and guidance as necessary, including to allow additional lenders to originate loans and establish terms. Prohibits borrowers from applying for this loan if that borrower has a previously pending application for a 7(a) loan for the same purpose. Establishes that the SBA will administer the program, including purchasing and guaranteeing loans, with guidance from Treasury.
SBA Disaster Loan Refinancing
- A loan that was made under the SBA’s Disaster Loan Program for purposes other than the permitted loan uses under this program on or after January 31, 2020, may be refinanced as part of a covered loan under the Paycheck Protection Program.
- The CARES Act provides authorization to the SBA to provide additional financial awards to resource partners (Small Business Development Centers and Women’s Business Centers) to provide counseling, training, and education on SBA resources and business resiliency to small business owners affected by COVID-19. It further authorizes the SBA to provide an association or associations representing resource partners with grants to establish an online platform to consolidate resources available across multiple Federal agencies and to implement a training program to educate Small Business Development Center, Women’s Business Center, Service Corps of Retired Executives, and Veteran’s Business Outreach Center counselors on the various federal resources available to ensure counselors are directing small businesses appropriately.
Minority Business Development Agency
- This section authorizes $10 million for the Minority Business Development Agency within the Department of Commerce to provide grants to Minority Business Centers and Minority Chambers of Commerce for the purpose of providing counseling, training, and education on federal resources and business response to COVID-19 for small businesses. This section also eliminates the Minority Business Center program’s non-federal match requirement for a period of three months and allows for centers to waive fee-for-service requirements through September 2021.
Emergency Economic Injury Disaster Loans (“EIDLs”)
- The CARES Act expands eligibility for access to Economic Injury Disaster Loans (EIDL) to include Tribal businesses, cooperatives, and ESOPs with fewer than 500 employees or any individual operating as a sole proprietor or an independent contractor during the covered period (January 31, 2020 to December 31, 2020). Private non-profits are also eligible for both grants and EIDLs. Requires that for any SBA EIDL loans made in response to COVID-19 before December 31, 2020, the SBA shall waive any personal guarantee on advances and loans below $200,000, the requirement that an applicant needs to have been in business for the 1-year period before the disaster, and the credit elsewhere requirement. During the covered period, the new law allows the SBA to approve and offer EIDL loans based solely on an applicant’s credit score, or use an alternative appropriate alternative method for determining applicant’s ability to repay. Establishes an Emergency Grant to allow an eligible entity who has applied for an EIDL loan due to COVID-19 to request an emergency advance on that loan, of not more than $10,000, which the SBA must distribute within 3 days.
Subsidy for Certain Loan Payments
- This Section requires the SBA to pay the principal, interest, and any associated fees that are owed on the covered loans for a six-month period starting on the next payment due. A covered loan means any existing 7(a) (including Community Advantage), 504, or microloan product, however, Paycheck Protection Program loans are not covered. Loans that are already on deferment will receive six months of payment by the SBA beginning with the first payment after the deferral period. Loans made up until six months after enactment will also receive a full 6 months of loan payments by the SBA. SBA must make payments no later than 30 days after the date on which the first payment is due. This Section also requires the SBA to still make payments even if the loan was sold on the secondary market. The SBA is required to encourage lenders to provide deferments and allows lenders, up until one year after enactment, to extend the maturity of SBA loans in deferment beyond existing statutory limits.
- This Section amends the Small Business Reorganization Act to increase the eligibility threshold to file under subchapter V of chapter 11 of the U.S. Bankruptcy Code to businesses with less $7,500,000 of debt. After one year, this increase sunsets and the threshold amount returns to $2,725,625. This section amends the definition of income in the Bankruptcy Code for chapters 7 and 13 to exclude coronavirus-related payments from the federal government from being treated as “income” for purposes of filing bankruptcy. Explicitly permits individuals and families currently in chapter 13 to seek payment plan modifications if they are experiencing a material financial hardship due to the coronavirus pandemic, including extending their payments for up to seven years after their initial plan payment was due; this accommodation sunsets after 1 year.
Emergency Rule Making Authority
- SBA is required to establish regulations no later than 15 days after enactment of this title. There has been some initial guidance, but expect there to be more comprehensive regulations published in the coming days.
$500 Billion Emergency Stabilization Fund
The Coronavirus Economic Stabilization Act of 2020 (“CESA”) provides $500 billion to Treasury’s Exchange Stabilization Fund to provide loans, loan guarantees, and other investments, distributed as follows: (a) direct lending, including: (i) $25 billion for passenger air carriers, certain certified eligible businesses that are approved to perform inspection, repair, replace, or overhaul services, and ticket agents; (ii) $4 billion for cargo air carriers; and (iii) $17 billion for businesses important to maintaining national security and (b) $454 billion, as well as any amounts available but not used for direct lending, for loans, loan guarantees, and investments in support of the Federal Reserve’s lending facilities to eligible businesses, states, and municipalities.
- The loans made under this program are only available to businesses organized in the U.S. and that have significant operations and a majority of their employees in the U.S. To be eligible, such businesses must not have reasonable access to credit at the time of the transaction. In addition, unlike loans to small businesses under the Paycheck Protection Program, loans under this program are not forgivable and will include terms compensating the government for its investment. For example, the government will likely expect to receive warrants, equity or, in certain cases, a senior debt instrument. The loans may also be secured and will bear interest at rates that reflect the risk and are based on market conditions for comparable obligations prior to the outbreak of COVID-19.
- Loans under this program will subject the borrower to restrictions on executive compensation (which are described below), dividends and stock buybacks during the term of the loan plus one year.
Assistance to Mid-Size Businesses
- CESA directs the Treasury Secretary to “endeavor to seek the implementation of a program or facility” to provide financing to banks and other lenders that make direct loans to mid-size businesses and nonprofit organizations with between 500-10,000 employees. These loans would be originated from private lenders at an interest rate not to exceed 2%. Principal and interest payments would be delayed for at least the first six months of the loan term. These loans would only be available to businesses organized in the U.S. with significant operations and employees located in the U.S.
- The borrower cannot be a debtor in bankruptcy and the borrower must certify that the uncertainty of current economic conditions make a loan necessary to support ongoing operations. In addition, the loans issued under this program would include several material restrictions, including requirements that the borrower certify that it: (a) will not buy back stock or pay dividends for the term of the loan plus one year; (b) intends to restore at least 90% of its workplace in existence as of February 1, 2020 and restore all compensation and benefits to its workers within four months of the termination of the COVID-19 public health emergency; (c) will use the funds to retain at least 90% of its workforce at full compensation and benefits until September 30, 2020; (d) will not outsource or offshore jobs for the term of the loan and two years thereafter; (e) will not abrogate collective bargaining agreements for the term of the loan plus two years; and (f) will remain neutral in any union organizing efforts for the duration of the loan.
Executive Compensation Restrictions
- Borrowers that participate in lending programs under CESA (i.e., loans from the Emergency Stabilization Fund or for mid-size businesses), must agree to cap all employee compensation (including salary, stock, and bonuses) for the term of the loan plus one year. Officers or employees that receive more than $425,000 per year cannot receive more compensation than they received in 2019, and severance pay or other benefits upon termination cannot exceed twice the 2019 compensation amount. Officers or employees that receive more than $3 million per year cannot receive total compensation in excess of: (a) $3 million plus (b) 50% of the excess over $3 million of the total compensation received by the officer or employee in calendar year 2019.