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.
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.
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.
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.
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.
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.
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.
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.
On April 14, 2020, the SBA published an interim final rule that provides additional guidance regarding topics of confusion among both Payroll Protection Program (“PPP”) lenders and borrowers. This new rule supplements the first interim final rule, which was issued by the SBA on April 2, 2020, and specifically addresses the eligibility of self-employed individuals, partnerships, director-owned businesses, and legal gambling businesses. This post covers the updates detailed in the new interim final rule, based on the latest guidance from the SBA as of April 16, 2020.
The new interim final rule makes clear that an individual may be eligible for a PPP loan if the individual:
was in operation as a business on February 15, 2020;
is an individual with self-employment income (such as an independent contractor or a sole proprietor);
has a principal place of residence in the United States; and
The SBA has communicated that it will issue additional guidance for those individuals with self-employment income who: (i) were not in operation in 2019 but who were in operation on February 15, 2020, and (ii) will file a Form 1040 Schedule C for 2020.
We note that individuals should be aware that participation in the PPP may affect eligibility for state-administered unemployment compensation or unemployment assistance programs.
Today, the Federal Housing Finance Agency (FHFA) and the Consumer Financial Protection Bureau (CFPB) announced a joint program to assist borrowers experiencing financial hardship in connection with the COVID-19 pandemic. The Borrower Protection Program (BPP) augments a number of prior actions taken by the regulators in connection with and relating to the CARES Act.
According to the announcement, the BPP “enables CFPB and FHFA to share servicing information to protect borrowers during the coronavirus national emergency.” FHFA Director Mark Calabria added “Borrowers are entitled to accurate information about their forbearance options. This partnership with CFPB ensures FHFA can address misconceptions stemming from consumer complaints by working with Fannie and Freddie servicers.” This may be an early attempt to avoid confusion, consternation and often delay which impacted consumers as well as servicers seeking to understand what specific relief was available to which borrowers. Consumers and servicers alike will recall these challenges plagued the roll out of the TARP HAMP processes following the 2008 Financial Crisis, often exacerbated by media soundbites that did not communicate detail regarding program relief requirements. Even today’s press release reflects additional detail from FHFA: “The missed payments will have to be paid back by the borrower. The missed payments can be added to the normal monthly payments, paid back all at once, tacked on to the end of the loan, or the borrower can have the term of the loan extended.”
Analytical Tools and Complaint Information: The program itself will involve sharing of data between the two agencies: “CFPB will make complaint information and analytical tools available to FHFA via a secure electronic interface; and FHFA will make available to the Bureau information about forbearances, modifications and other loss mitigation initiatives undertaken by Fannie Mae and Freddie Mac (the Enterprises).” CFPB Director Kraninger has noted previously that she sees data analysis as a key focus of the Bureau.
In her testimony before the House Financial Services Committee in February 2020, Kraninger stated: “Complaints, along with other inputs, give us insight into people’s experiences in the marketplace that we analyze and use to improve our mission execution. The analysis helps us regulate consumer financial products and services under existing Federal consumer financial laws, enforce those laws judiciously, and educate and empower consumers to make informed financial decisions. The Bureau also publishes complaint data and reports on complaint trends annually in Consumer Response’s Annual Report to Congress.”
On April 9, 2020, the Federal Reserve announced that it is taking additional action to provide up to $2.3 trillion in loans to support the economy through various programs, including the Main Street Lending Program (“MSLP”). The Fed intends that the MSLP will ensure credit flow to small and mid-sized businesses by providing support to businesses that were in good financial standing prior to the COVID-19 crisis, on terms and conditions to be set by the Federal Reserve.
The MSLP consists of two facilities:
The Main Street New Loan Facility (“MSNLF”) for unsecured term loans originated on or after April 8, 2020; and
The Main Street Expanded Loan Facility (“MSELF”) for upsize tranches of secured or unsecured term loans originated before April 8, 2020 (provided the upsize is on or after April 8, 2020).
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