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Law360 (April 10, 2020, 5:58 PM EDT) --
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| Franco Furmanski |
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| Carlos Loumiet |
With more than 95% of Americans under a stay-at-home order[2] and extremely low levels of consumer activity,[3] small businesses and their employees are being especially devastated by the current crisis. It is virtually impossible for a small business to survive and maintain its payroll during these times without massive governmental support which is exactly what the federal government has set out to provide.
As discussed in our last Law360 guest article, on March 27, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security, or CARES, Act. The act is unprecedented, and the Paycheck Protection Program, or PPP, that is part of it is no exception. The PPP is intended to provide relief to small businesses by entitling these businesses to receive forgivable loans from lenders participating in the program.
Our prior article discussed the PPP's most noteworthy provisions, including those relating to eligibility, in significant detail, so we will not restate that information. Instead, this piece will focus on guidelines[4] published by the Small Business Administration, or SBA, in conjunction with the U.S. Department of the Treasury, following the publication of our prior article, and recent developments with respect to the PPP.
It is important to note that the SBA guidelines are binding regulations that must be followed by lenders and borrowers participating in the PPP. The guidelines provide much-needed clarity with respect to the PPP by further defining the parameters of the PPP provisions in the CARES Act.
Lender Developments
Following the enactment of the CARES Act, many banks approved to make loans under the PPP voiced hesitancy with respect to their participation in the program, citing provisions in the CARES Act that made these loans a fruitless venture for them. The chief executive of the Independent Community Bankers of America, for example, stated that the 0.5% interest rate cap on these loans would create "unacceptable losses for lenders, which have a duty to preserve their financial strength for the sake of their communities."[5]
This pushback from banks prompted the SBA, in consultation with the Treasury, to increase the permitted interest rate for loans under the PPP to 1%.[6] That, coupled with the processing fees of up to 5% of the loan amount payable to lenders by the SBA,[7] and the fact that the SBA will repurchase the forgiveness amount plus interest upon a lender's request,[8] make the PPP a more worthwhile venture for lenders.
Lenders began accepting PPP applications on April 3, and as expected,[9] banks were flooded with applications. On a conference call with Trump, JPMorgan Chase & Co. reported receiving 375,000 requests worth $40 billion as of April 7, Bank of America Corp. reported receiving 250,000 applications, and Wells Fargo & Co. reported that it stopped taking loan requests after reaching its $10 billion limit.[10]
This mad rush prompted Treasury Secretary Steven Mnuchin, at the direction of Trump, to request an additional $250 billion for the PPP.[11] Senate Majority Leader Mitch McConnell, R-Ky., proposed having the increase approved by unanimous consent, but his efforts were blocked by Senate Democrats, in part because they want the increase to be more than $250 billion.[12]
Ultimately, Congress is expected to approve an increase of at least $250 billion, which would bring the total amount set aside for the PPP to at least $600 billion.[13] As stated in our previous article, extraordinary times call for extraordinary measures, and the PPP definitely qualifies.
Borrower Developments
The number one reason the PPP has garnered so much interest from borrowers is its forgiveness component. As explained in greater detail in our prior article, although these transactions are set up as loans, borrowers will not have to repay the forgiveness amount portion of the loan.
The forgiveness amount is the amount of eligible expenses, including payroll obligations, that a borrower pays over the eight-week period following the loan date.[14] As has been widely discussed, the main purpose of the PPP is to provide payroll relief to small businesses so they can retain their employees, but the language of the CARES Act gives borrowers significant flexibility with regard to use of proceeds.[15]
Accordingly, in its guidelines, the SBA clarifies that at least 75% of PPP loan proceeds must be used for payroll costs, and that no more than 25% of the forgiveness amount can consist of nonpayroll expenses.[16] Neither of these requirements existed under the CARES Act.
Further, although the CARES Act specifically states that certain businesses would be given priority in the PPP, the guidelines published by the SBA state that the process will be handled on a first-come, first-served basis.[17]
Additionally, to the dismay of private equity funds the guidelines published by the SBA to date do not specifically address an issue that makes many of them ineligible for PPP relief. Absent limited exceptions, the PPP prohibits a company of more than 500 employees from obtaining a PPP loan.
For purposes of counting employees, the PPP requires that SBA affiliation rules be applied. In essence, these rules require that a company also count the employees of any other entity that is under common control with the borrower for purposes of calculating that company's number of employees.
Private equity companies typically own investments in a large portfolio of companies, many of which they control for purposes of the SBA affiliation rules. This, in many cases, leads to private equity funds and their portfolio companies exceeding the 500-employee threshold, and therefore being ineligible to receive PPP relief.
As a result, private equity funds have been lobbying aggressively for guidelines stating that portfolio companies are excepted from the SBA affiliation rules.[18] Whether their efforts will be successful remains to be seen.
General Developments and Conclusion
The mad rush of PPP applicants is not shocking at all, given the current crisis and unprecedented benefits offered under the program. While the SBA guidelines provide much clarity with respect to the PPP's provisions, from a practical standpoint many questions remain regarding the program's implementation.
Banks are being inundated with requests, and many are having trouble managing the tsunami of applications.[19] This has prompted some banks to limit the number of applicants or require that the applicant have a preexisting banking relationship.[20]
Although some banks, like Bank of America, due to public backlash have since moved away from the preexisting customer policy, some smaller banks will probably retain such a policy to manage the number of applications.[21]The SBA, too, is struggling to manage the number of applications, with their loan application system crashing over the weekend and still presenting technical issues.[22] There has simply never been a program on the scale of the PPP, and given the rapidity of its enactment, SBA resources have not yet been able to scale up.
It is hard to require or ask for patience in times like these, during which a week-long delay can literally cost millions of people their jobs. However, what seems clear is that the SBA and Treasury are working tirelessly to implement this program and have it run smoothly as soon as possible. America hopes they succeed.
Franco Furmanski is an associate and Carlos Loumiet is a partner at Nelson Mullins Riley & Scarborough LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] U.S. weekly jobless claims hit 6.6 million, extending a record streak as coronavirus layoffs continue, Business Insider.
[2] About 95% of Americans have been ordered to stay at home, Business Insider.
[3] The Impact of Coronavirus (COVID-19) on Foot Traffic, Safe Graph.
[4] Small Business Administration, Interim Final Rule ("IFR"), 13 CFR Part 120.
[5] US doubles interest rate on small business loans after lenders complain, Fox Business; see also Federal program for small businesses that are hurt by coronavirus is slowed by snags, Los Angeles Times.
[6] IFR, paragraph 2.i. The CARES Act allowed lenders providing PPP loans to charge interest of up to 4%. However, early guidance from the SBA and Treasury required that lenders charge interest rates not to exceed .5%. That was increased to 1% pursuant to the IFR.
[7] The CARES Act, amending the Small Business Act, 15 U.S.C. 636(a)(36)(P)(ii).
[8] The CARES Act, Section 1106(c)(2).
[9] The forgivable nature of these loans make them, in effect, a grant to qualifying businesses. Accordingly, borrower's desperate rush to get their hands on these proceeds was expected.
[10] Small business stimulus loans: JPMorgan received 375,000 requests worth $40 billion, Forbes.
[11] Mnuchin requests boost in funding for Paycheck Protection Program, CBS News.
[12] Senate democrats block $250 billion in small business relief, accuse McConnell of a "Political Stunt", Newsweek.
[13] Mnuchin requests boost in funding for Paycheck Protection Program, CBS News.
[14] The CARES Act, Section 1106(b)(2).
[15] IFR paragraph 2.o. (stating that changes pursuant to the IFR requiring most of the PPP proceeds to be used for payroll costs are being made "in light of the [CARES] Act's overarching focus on keeping workers paid and employed.").
[16] IFR paragraph 2.r.; IFR paragraph 2.o.
[17] The CARES Act, amending the Small Business Act, 15 U.S.C. 636(a)(36)(P)(iv) (stating that small businesses in underserved and rural markets (including veterans and members of the military community), small businesses owned and controlled by socially and economically disadvantaged individuals, women-owned businesses, and businesses in operation for less than two years; IFR, paragraph 2.m.
[18] Private equity denied access again in Senate's new loan bill, the Washington Post.
[19] Five problems banks face in getting coronavirus relief out the door, the Hill.
[20] PPP loans: lender list and requirements, Yahoo Finance.
[21] With survival at stake, small business owners frustrated by aid delays, NPR.
[22] Five problems banks face in getting coronavirus relief out the door, the Hill.
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