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What Businesses and Community Banks Need to Know About the CARES Act, SBA Lending, and Loan Forgiveness

The CARES Act has significant relief for small businesses, including $349 billion in Small Business Administration (SBA) loan guaranties and subsidies and additional funding for SBA programs. Highlights include: 

  • Expansion of SBA’s 7(a) Loan Program to Support New “Paycheck Protection Program” Loans. The SBA’s existing 7(a) program will see:
    • Increase in maximum loan amount to $10 million.
    • Allowable uses expanded to include:
      • Payroll support (including paid sick or medical leave);
      • Employee salaries;
      • Mortgage, rent and utility payments;
      • Insurance premiums; and
      • Other debt obligations. 
  • Loan Forgiveness. Certain borrowers would be eligible for loan forgiveness equal to the amount spent during an eight-week period after the origination date of the loan on:
    • Payroll costs;
    • Interest payment on any mortgage incurred before Feb. 15, 2020;
    • Rent on any lease in force before Feb. 15, 2020; and
    • Utilities for which service began before Feb. 15, 2020.

The amount forgiven would be reduced in proportion to any reduction in employees retained compared to the prior year and to the reduction in pay of any employee beyond 25% of prior year compensation.

  • Subsidies for Certain Existing SBA 7(a) Loans
  • Special Terms for SBA Loans.
    • No personal or collateral guarantee will be required.
    • The eligible recipient does not have to certify that it is unable to obtain credit elsewhere.
    • Eligible borrowers must make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19; that funds will be used for a permitted purpose; and that they are not receiving fund from another SBA program for the same uses.
    • Maximum term of loan is 10 years.
    • Interest rate cannot exceed 4% but interest payments are completely deferred for 1 year.
    • No prepayment penalty.

Who Qualifies?

The CARES Act program covers business with 500 or fewer employees, unless the covered industry’s SBA size standard allows more than 500 employees, which were operational on Feb. 15, 2020. The size standards are tested on an affiliate basis—combined with all businesses under common control (50% ownership or contractual control)—counting on an aggregate basis towards the size test, except for hospitality and restaurant businesses, franchises, and recipients of Small Business Investment Company (SBIC) investment.

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Bank Regulatory Provisions in the CARES Act

On March 25, 2020, senators released an updated draft of the Coronavirus Aid, Relief, and Economic Security Act (a.k.a the “CARES Act”) (the acronym is so much better than EGRRCPA!) to provide emergency assistance and health care response for individuals, families, and businesses.  Bryan Cave Leighton Paisner’s initial review of the overall Act is available here.

The current draft contains a number of bank regulatory provisions of potential interest to financial institutions of all sizes.

Section 4008 – Debt Guaranty Authority.  Authorizes FDIC to re-implement transaction account guarantee program, subject to cap on amounts insured.  In the 2008 financial crisis, the FDIC provided unlimited insurance for amounts held in noninterest-bearing transaction accounts (i.e. checking accounts that don’t pay interest).  Dodd-Frank prohibited the FDIC from every doing that again.  The CARES Act authorizes the FDIC to provide the program again through December 31, 2020.  Current draft of legislation limits coverage to “a maximum amount” without specifying the amount.  Effectiveness will require FDIC action.  Current draft of legislation also allows the NCUA to provide comparable insurance for credit unions, and permits the NCUA to provide insurance on an unlimited amount in such accounts.  Since its formation, no depositor has ever lost a penny of FDIC-insured funds.

Section 4014 – Optional Temporary Relief from Current Expected Credit Losses.  No financial institution or holding company shall be required to comply with FASB’s current expected credit loss methodology (i.e. CECL) (which otherwise is scheduled to become effective for the largest public bank holding companies for Q1 2020).  Effective from adoption of the Act and ending on the earlier of December 31, 2020 or the termination date of the national emergency. 

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