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Analyzing Borrower Certification Risks under the Paycheck Protection Program

May 12, 2020

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As the editor of BankBCLP.com, I tend not to write a lot of posts for other blogs hosted by Bryan Cave Leighton Paisner LLP. However, the Paycheck Protection Program(PPP) has affected small business clients throughout the firm.

The shifting narratives around the government’s interpretations regarding eligibility for participation in the PPP has caused many borrowers to reconsider their own applications and to consider exiting the program by returning PPP funds by the government’s current safe harbor return deadline of May 14th.

In this post on the BCLP US Securities and Corporate Governance Blog, I describe the history and background of the PPP certification process, and suggest a three bucket risk framework for analyzing one’s certification. In discussions with corporate clients, we have found this framework to be useful for public and private companies.

As recognized in FAQ 31, this remains primarily a risk for PPP borrowers, and not PPP lenders, as “lenders may rely on a borrower’s certification regarding the necessity of the loan request.” In our experience, this has also made many lenders reasonably constrained from providing any further advice to borrowers regarding analysis of the borrower’s certification.

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Preparing a COVID-19 Reopening Plan

April 24, 2020

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Five Steps to Take Right Now

While banks have remained open as part of critical infrastructure throughout the COVID-19 pandemic, and many were able to keep branches opened throughout the pandemic, we are expecting many banks to further expand branch openings in the coming weeks. Moreover, many business customers of banks will also be seeking to reopen, with their ability to generate revenue critical to the long-term return of the U.S. economy (and the bank’s asset quality).

The consensus of most business folks, including bankers, is that as the U.S. gradually re-opens, the look and feel of businesses will change dramatically. Before the world can return to its full pre-COVID-19 normal, this interim period between the lifting of shelter in place orders and the broad distribution of vaccines or effective treatments is projected by experts to last at least one, and possibly as long as two years. Colleagues at Bryan Cave Leighton Paisner have prepared an alert focusing on public facing businesses which must significantly change their operations to reduce the risk of coronavirus transmission.

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Guidance for Public Company PPP Recipients

April 23, 2020

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On April 23, 2020, the U.S. Treasury published FAQ #31 for the Paycheck Protection Program, providing a safe harbor for return of funds by May 7, 2020 in cases of insufficient need by recipients of PPP funds by public companies with liquidity alternatives.

With this background, I joined several of my securities law and litigation colleagues to publish guidance for public company Paycheck Protection Program loan recipients.

PPP applications require certification that “[c]urrent economic uncertainty makes this loan request necessary to support ongoing operations.”  To the extent that public companies may have had other reliable, accessible sources of capital markets funding, the borrower’s certification of economic need could be called into question. Public companies are clearly not all in the same sitaution with regard to their ability to obtain other sources of funding, and face a number of difficult decisions.

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PPP Litigation and Regulatory Risks

April 22, 2020

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With assistance from some of my litigation colleagues, Bryan Cave Leighton Paisner has just published guidance on re-evaluating practices and considering some of the litigation risks that could arise with the Paycheck Protection Program.

Prior to the PPP going live on April 3, banks scrambled to assemble teams and online application in-take and processing protocols to handle the onslaught of applications.  Over 1.6 million small businesses were approved for relief, a small fraction of the total number of small businesses in the U.S. 

For many, the Program ground to a halt on April 16, 2020, a mere 13 days after it opened, when all of the $349 billion in funding was exhausted.  The abrupt and swift depletion of the Program left many small business owners in dismay and frustrated with their banks, and pondering what recourse they might have.  A few quickly filed lawsuits.  More lawsuits no doubt are coming.  

As Congress gets set to appropriate more than $300 billion in additional funding for the Program, and lenders prepare for ramping up their PPP operations for the second round of applications, it is smart to re-evaluate practices and consider some of the litigation risks that could arise. 

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PPP Refresh – $310 Billion More

April 21, 2020

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Based on news reporting, we understand that Congress and President have collectively agreed on $300 billion in additional funding for the Paycheck Protection Program. The circulated draft of the “Paycheck Protection Program and Health Care Enhance Act” makes no changes to the eligibility or terms of the PPP, but does authorize an additional $310 billion in funds, raising the total funding level for PPP loans to $659 billion.

The Paycheck Protection Program and Health Care Enhance Act would also increase the amount authorized for the SBA to ultimately forgive to $670 billion, presumably recognizing an intent to also be in position to forgive interest in additional to principal.

While the Paycheck Protection Program and Health Care Enhance Act does not alter the eligibility or terms for either borrowers or lenders, it does provide some protected classes of lenders who are ensured a set aside of a portion of the expanded PPP authorization. Specifically, depository institutions and credit unions with between $50 billion and $10 billion in consolidated assets will be ensured the ability to issue, in the aggregate, at least $30 billion in loans guaranteed by the SBA under the PPP. Depository institutions and credit unions with less than $10 billion in consolidated assets, as well as community development financial institutions (CDFIs), minority depository institutions (MDIs), and certain state development companies certified under Title V of the Small business Investment Act will be ensured the ability to issue, in the aggregate, at least $30 billion in loans guaranteed by the SBA under the PPP.

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The Bank Account’s Introduction to the Paycheck Protection Program

April 18, 2020

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Joining all the (far more) popular podcasts, The Bank Account is now recording from the host’s home. This episode features Partners Karen Fries and Mike Royle joining me in a presentation about the basic terms of the SBA’s small business forgivable loan program, the Paycheck Protection Program.

As the Paycheck Protection Program is changing rapidly, it’s important to note that guts of this presentation were recorded on April 9, 2020. While the funds have currently been exhausted for new PPP loans (pending Congress deciding when and how to allocate additional funds), the key terms of the loans and the forgiveness functions discussed in this podcast episode remain accurate, at the least as of the time of posting.

While our initial approach was going to be to engage in a debate on the merits of this practice, none of us ultimately wanted to take the side of justifying the practice; for different reasons, many of which are expressed on the podcast, we all believe that it is a bad idea for bank directors to personally approve loans.

For those interested in hearing more information about the Paycheck Protection Program in audio form, I highly recommend the Big Small Business Rescue from Planet Money. And if you’re craving more content, and prefer the last financial crisis, I’d also suggest the FDIC “podcast” on the 2008 financial crisis.

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SBA PPP Loan Approval Statistics

April 17, 2020

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From launch of the Paycheck Protection Program on April 3, 2020 through the exhaustion of the originally committed funds on April 16, 2020, 4,975 lenders approved loans to over 1.6 million small businesses for over $342 billion. On April 17, the SBA published a Paycheck Protection Program Report with additional statistics on the approved PPP loans.

Excluding weekends (which probably isn’t fair, as I know a lot of bankers that worked non-stop the last two weekends), this amounts to over 160,000 applications approved each day, or more than $34 billion in loan proceeds each day.

The Report indicates the overall average loan size approved was $206,000. Assuming each applicant applied for the maximum PPP loan it was entitled to, this indicates that the average applicant’s monthly payroll costs were approximately $82,400.

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SBA PPP Eligibility Requirements

April 16, 2020

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The SBA has made clear that businesses with 500 or fewer employees can apply for PPP funds, with certain exceptions. The number of employees for a business is generally determined by the average number of people employed for each pay period over the business’s latest 12 calendar months. For this determination, any person on the payroll must be included as one employee regardless of hours worked or temporary status.

However, for businesses with greater than 500 employees, there are still three possible ways qualify for PPP funds. This post analyzes the three additional methods for a business to qualify for PPP funds, based on the latest guidance from the SBA as of April 15, 2020.

Method 1: SBA Employee-Based Size Standards

Under the CARES Act, the SBA requires borrowers to have 500 or fewer employees or the number of employees specified per the SBA’s Size Standards table. Thus, a business with greater than 500 employees may still be eligible if it meets applicable SBA employee-based size standards for its primary industry. A business’s primary industry is denoted by its North American Industry Classification System (NAICS) Code. A list of all NAICS codes is available here.

For example, a business in the in the primary industry of natural gas extraction (NAICS Code 211130) with 1,000 employees would still be eligible for PPP funds because the applicable SBA employee-based size standard is 1,250.

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PPP: Affiliation Guidelines

April 9, 2020

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PPP: Affiliation Guidelines

April 9, 2020

Authored by: Jim Havel and Robert Klingler

In determining eligibility under the Paycheck Protection Program, the SBA will aggregate “affiliates” of the borrower. This post further explores what the SBA considers “affiliate” of the borrower, based on the latest guidance from the SBA as of April 9, 2010.

How does the SBA Define “Control” for Aggregation Purposes?

The SBA’s standard definition of “control” for affiliation and aggregation purposes is a facts-heavy analysis similar to a totality of the circumstances standard. The SBA generally goes as high up and across the ultimate ownership group and its controlled companies when it comes to the entity deemed to control for aggregation/ affiliation purposes.

Control is both affirmative and negative best understood through use of examples:

  • For examples of affirmative control, see all of the tests below.
  • For examples of negative control, see Example 3 of Test 1 below.

Four tests will generally apply for affiliation based on control for PPP Loans.

Test 1 – Affiliation based on ownership:

Example 1 – Equity control: The classic and easiest example to understand is equity control. If an entity controls a majority of the equity (50%+1) of another business (or multiple businesses), the SBA will aggregate all of the employees of those companies together under PPP.

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Tax Effects on Paycheck Protection Program Borrowers

April 6, 2020

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With regard to the interplay of various tax provisions of the CARES Act and the Paycheck Protection Program (PPP), we note the following:

  • If a borrower takes a PPP loan, they are restricted from claiming the employee retention credit, even if the PPP loan is not forgiven.
  • If any portion of a borrower’s PPP loan is forgiven, the borrower is restricted from taking advantage of the deferred payment of the employer portion of Social Security tax obligations.
  • If all or a portion of borrower’s PPP loan is forgiven, the statute provides that such forgiven amount shall be excluded from gross income.

Employee retention credit. The CARES Act provides certain eligible employers a refundable credit with respect to the employer’s share of Social Security tax for due in an amount equal to 50% of qualified wages paid after March 12, 2020 and before January 1, 2021 (up to $10,000 per employee for all calendar quarters). Eligible employers generally include those required to fully or partially suspend operations due to a COVID-19 related government order or that have a 50% decrease in gross receipts for a calendar quarter when compared to the same quarter in 2019.  Generally, all employee wages paid by employers with up to 100 full-time employees in 2019 are eligible for the credit. However, if an employer had more than 100 full-time employees in 2019, only wages paid to employees who are not providing services due to the suspension of operations or significant decrease in gross receipts are credit-eligible. If an employer takes a PPP loan, they are not eligible to take advantage of the employee retention credit.

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