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Law360 (April 20, 2020, 11:18 PM EDT) -- The Federal Reserve Board is cutting some of the red tape surrounding the government's COVID-19 small business lending effort with an interim rule that will let banks issue loans through the program to the small businesses of their own directors and shareholders.
The board acknowledged on Friday that restrictions within the Federal Reserve Act have made it difficult for bank insiders to access loans through the U.S. Small Business Administration's Paycheck Protection Program, having an outsize impact on smaller communities.
"These requirements have prevented some small business owners from accessing PPP loans — especially in rural areas," the board said in a statement. "The board is providing the temporary change to allow banks to make PPP loans to a broad range of small businesses within their communities."
The rule exempts PPP loans from certain restrictions — of the Federal Reserve Act and Regulation O — aimed at preventing insider abuse and favoritism, including loan size limits, prior approvals and other reporting requirements for bank insiders that can significantly weigh down the loan process.
The Fed is acting based on the Housing and Community Development Act of 1992, which gives it the authority to grant exceptions to these restrictions for loans that pose "minimal risk."
The board noted that PPP loans are less susceptible to insider abuse than other extensions of credit from banks to insiders in part because they carry standard terms that prevent modifications. But the board stressed that the SBA will continue to weed out any banks who favor insiders.
"SBA explicitly has prohibited a banking organization from favoring in processing time or prioritization a PPP application … and the board will administer this interim final rule accordingly," the board said.
The rule comes in response to a clarification the SBA made last week stating that directors or other equity holders of lenders may borrow PPP loans from those lenders as long as their equity interest is less than 30%.
The PPP offers two-year loans up to $10 million to cover payroll as well as health care benefits, mortgage interest payments, rent and more, and they'll be forgiven if businesses keep employees on payroll through the crisis. The new rule will apply only to loans made during the PPP eligibility period between Feb. 15 and June 30.
The initial $349 billion set aside for the program through the $2 trillion Coronavirus Aid, Relief and Economic Security Act was exhausted last week, and Congress is currently hashing out the details of a potential $250 billion second round of funding.
The program is under considerable scrutiny amid claims that chain restaurants and businesses with existing banking relationships have enjoyed a leg up on mom-and-pops.
The board said it was able to implement the rule immediately based on its "good cause" that acts in the public interest, superseding administrative procedures that would have caused delays. That said, public comments will be open for 45 days post-publication.
--Editing by Aaron Pelc.
For a reprint of this article, please contact reprints@law360.com.
