With details scant or quickly changing, lenders that want to participate in the Small Business Administration's (SBA) Payroll Protection Program (PPP) need to know the latest rules and guidance.
On Thursday, April 2, 2020, less than 24 hours before the PPP went live, the SBA issued an Interim Final Rule (Rule) implementing the PPP—the temporary loan program established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act). Late on April 6, with the PPP well under way, the SBA, in consultation with the Department of Treasury (Treasury), issued Frequently Asked Questions for Paycheck Protection Program Loans (FAQs). Then, on April 8 and again on April 13, SBA and Treasury updated the FAQs, finally made available the lender agreement for non-bank lenders, and encouraged nonbank lenders that meet the criteria to apply to "increase the scope of PPP lending options and the speed with which PPP loans can be disbursed to help small businesses across America."
Together, the Rule and FAQs provide some (but not complete) clarity around lender obligations. Importantly, the Rule implemented the CARES Act provision to authorize "additional lenders," by identifying eligible lenders as current SBA lenders, federally insured institutions, and certain non-bank finance companies, and for those lenders, the Rule set liability limits.
Below are key provisions, as they currently stand, that lenders should consider beyond the loan terms themselves.
Eligible Lenders
SBA Lenders
- All existing SBA 7(a) lenders are automatically approved to make PPP loans.
Federally Insured Institutions
The following institutions are automatically authorized to make PPP loans upon submission of the Lender Agreement (SBA Form 3506):
- Federally insured depository institutions (IDIs)
- Federally insured credit unions
- Farm Credit System institutions
The Rule excludes any federally insured institution that is in troubled condition or subject to a formal enforcement action related to unsafe and unsound lending practices. Also, the Rule requires Farm Credit System institutions to apply Bank Secrecy Act (BSA) requirements and excludes the Federal Agricultural Mortgage Corporation.
Other Lenders
Finance companies that are not federally insured institutions (non-bank lenders) may be authorized to make PPP loans, but only after evaluation by the SBA and Treasury. A non-bank lender meeting the characteristics below (in either Group A or Group B) may submit the Non-Bank Lender Agreement (SBA Form 3507) to request approval:
Group A
- Is a financing provider;
- Originates, maintains, and services business loans or other commercial financial receivables and participation interests;
- Has a formalized compliance program;
- Applies BSA requirements as or equivalent to a federally regulated institution;
- Has been operating since at least February 15, 2019; and
- Has originated, maintained, and serviced more than $50 million in business loans or other commercial receivables during a consecutive 12-month period in the past 36 months.
Group B
- Is a service provider to an IDI; and
- Has a contract to support the IDI's lending activities as a "bank service company."
Limited Underwriting Requirements
Underwriting requirements are limited for the PPP. Lenders must:
- Confirm receipt of borrower certifications;
- Confirm receipt of information demonstrating that the borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020; and
- Comply with BSA/AML requirements for existing and new accounts, as appropriate.
The Rule does not specify how closely a lender should review a borrower's PPP application, given that the lender is permitted to rely on the borrower's certifications. With respect to payroll calculations, a lender is "expected to perform a good faith review, in a reasonable time." The FAQs also instruct lenders to assess the overall quality of the borrower's documents and adjust the level of diligence applied to the review accordingly.
Limited Liability
Under the CARES Act it appears there is no obligation for a lender to verify a borrower's documentation supporting a loan forgiveness request. The Rule clarifies that the requirement is only that the borrower provide the necessary attestation. In the Rule, the SBA states that it will hold a lender harmless and will not take any enforcement action or impose any penalties as long as the lender has received the attestation.
Other Notable Provisions
Lender Processing Fees. SBA will reimburse lenders for processing fees in the following amounts:
|
Loan Amount |
Fee Limit |
|
Up to $350,000 |
5.0 % |
|
$350,001 to $2,000,000 |
3.0 % |
|
$2,000,001 and up |
1.0 % |
Agent Fees. Agent fees must be paid out of the fees the lender receives from the SBA only. No fees may be received from the borrower or paid out of PPP loan proceeds. Agent fees are limited to the following amounts:
|
Loan Amount |
Fee Limit |
|
Up to $350,000 |
1.00 % |
|
$350,001 to $2,000,000 |
0.50 % |
|
$2,000,001 and up |
0.25 % |
Fee Waivers. For PPP loans, the SBA is waiving borrower up-front guarantee fees, lender annual service fees, subsidy recoupment fees, and fees for guarantees sold into the secondary market.
SBA Advance Purchase. A lender may request that the SBA purchase the expected forgiveness amount of a PPP loan or loan pool at the end of the 7th week of the covered period (which seems to be the 7th week after funding) by submitting a report. The SBA will purchase the forgiveness amount within 15 days of receipt of a complete report.
Secondary Market. Once fully dispersed, loans may be sold on the secondary market at a premium or discount to par value. SBA guidance on any advance purchase for PPP loans sold in the secondary market is forthcoming.
Regulatory Capital Requirements. For IDIs and credit unions, the CARES Act establishes a 0% risk-weighting for PPP loans. The federal banking agencies have also provided a liquidity facility and favorable capital treatment for IDIs making PPP loans.
TDR Reporting. For PPP loans later modified, the CARES Act provides IDIs and insured credit unions relief from troubled debt restricting (TDR) disclosures until the appropriate federal banking agency or the National Credit Union Administration deems it appropriate.
Conclusion
Given the COVID-19 pandemic and the government's scramble to rapidly deploy relief, there is extraordinary demand on and scrutiny of the PPP. The SBA and Treasury are developing this program on the fly, and the PPP will undoubtedly continue to evolve. We will continue to analyze changes to the program and watch for further updates to the lender guidance.