Uncle Sam to the Rescue: The U.S. CARES Act

3 min

In March 2020, the U.S. Congress passed the CARES (Coronavirus Aid, Relief and Economic Security) Act, a $2 trillion economic stimulus package, to help mitigate the economic damages caused by COVID-19. One of Congress's main goals in passing the CARES Act was to provide financial assistance to affected small businesses. In furtherance of that goal, Congress implemented the Paycheck Protection Program (PPP). The PPP provides government-backed loans and grants to support small businesses adversely affected by the pandemic. Under the PPP, small businesses – defined as any business operation with no more than 500 employees or meeting the Small Business Administration's (SBA) regulations for the industry-specific size standards – were able to borrow sufficient funds to cover eight weeks of payroll, mortgage interest, rent, and utilities, subject to certain caveats. One key caveat: for the loan to be forgivable, businesses were required to use at least 75% of the amounts received on payroll. Unsurprisingly, the PPP met with huge demand, and the $349 billion allocated to it was depleted within two weeks. In an attempt to address numerous concerns and deficiencies with the initial PPP, Congress subsequently passed the Paycheck Protection Program Flexibility Act (PPPFA).

The PPPFA made an additional $310 billion available for the program, and provided greater flexibility, including extending loan maturity dates from two years to five years and extending the PPP's covered period (i.e., the period during which recipients are required to spend the funds) from June 30, 2020 to December 31, 2020. Additionally, small business owners may now allot 40% of the loan to nonpayroll matters, such as rent, compared to the previous 25%, without forgoing the possibility of obtaining loan forgiveness. Nevertheless, despite Congress's attempts, many of the initial uncertainties and issues with the PPP still remain. For example, the conditions of forgiveness are still murky. Although loans can be fully forgiven if at least 60% of the funds are used for payroll costs and the remainder are used for nonpayroll costs (such as interest of mortgage, rent, and utilities), the SBA has not yet addressed how lenders (i.e., commercial banks through which the government made the funds available to the end-users) should submit forgiveness applications, or what happens when borrowers cannot repay loans in the allotted time. Small-business owners are still confused as to whether the loans will turn into government grants, or if the loans must somehow be repaid. And while lenders earn a percentage-based processing fee, since the government doesn't pre-fund, but only reimburses the loan, lenders worry about running out of resources. Last, although the SBA has said it will conduct "ongoing due diligence to ensure taxpayer funds are being used appropriately," it has provided no guidance on this process, other than asking forgiveness applicants to hold on to financial records for six years.

Currently, it is unclear how Congress or the SBA will address the many remaining uncertainties surrounding the PPP and PPPFA. While a new bill, the Prioritized Paycheck Protection Program Act, is currently being discussed by members of Congress, it does not address any of the previously mentioned concerns. Congress and the SBA must work closely together to remedy these issues and create a clearer, more funneled process, in order to take some of the guesswork out of what has proved so far to be an extremely helpful and beneficial program.

Mark S. Vecchio, who co-chairs the Venable New York Corporate Group, represents clients in corporate and commercial transactions. A special thank you to Jennifer K. Couch for her contribution to this article. Jennifer is a student at Georgetown University Law Center and a summer associate in Venable's New York office.