The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law on March 27, 2020. The CARES Act, a stimulus package providing $2 trillion in economic aid to individuals and businesses, is considered Phase Three of the federal COVID-19 relief legislation.
This article focuses on the roles and obligations of the lender under the Paycheck Protection Program (PPP). Small business owners (those with 500 or fewer employees and certain other larger employers if those employers meet applicable Small Business Administration (SBA) employee-based size standards for those industries) may start applying for these loans on Friday, April 3, and independent contractors and self-employed workers may start applying on Friday, April 10.
Now is the time for lenders to review their credit operations and compliance procedures.
Who can act as a lender under the PPP?
All existing SBA-certified lenders, federally insured depository institutions, federally insured credit unions, and Farm Credit System institutions are all eligible to lend money under the PPP. Institutions that do not meet the criteria may submit an application to firstname.lastname@example.org to be approved to participate in the program. The SBA will verify that lenders who are submitting an application are federally regulated.
What is the benefit to the lender?
Unlike many loan programs, lenders may not collect any transaction fees or costs when participating and lending under the PPP. However, the SBA will reimburse lenders based on the covered disbursement at the following rates:
- 5% for loans of not more than $350,000
- 3% for loans of more than $350,000 and less than $2,000,000
- 1% for loans of not less than $2,000,000
When will the lender receive the benefit?
Per the Act, lenders shall be reimbursed no later than five days after disbursing the loan.
Who is responsible for forgiving the loan?
What happens to the balance of the loan when the SBA offers the borrower forgiveness?
The lending institution is responsible for determining whether or not borrowers are eligible for forgiveness within 60 days of the borrower making an application for forgiveness. As long as the lender receives the required documentation, the lender shall be held harmless from any enforcement action relating to the loan forgiveness.
lenders are required to collect and review the following when making forgiveness determinations:
- Application for Forgiveness (to be published at a later date);
- Documentation verifying: (i) the number of full-time equivalent (or FTE) employees on payroll and pay rates for the covered period, including payroll tax filings to the IRS, state income, payroll and unemployment insurance filings; and (ii) canceled checks, payment receipts, or other documents to verify covered mortgage obligations, lease obligations, and utility payments; and
- A certification from the borrower that
(i) All documentation provided is true and correct; and
(ii) The amount for which forgiveness is requested was used for a “covered payment” (payroll costs, mortgage, rent, utilities).
Once a forgiveness determination is made, the lender will be repaid for the amount of forgiveness within 90 days of the forgiveness determination. The repayment amount will equal the amount of forgiveness plus any interest accrued through the date of payment.
The amount forgiven cannot exceed the principal amount of the financing.
What else do lenders need to know about this program, in order to advise customers and employees who manage credit?
- The PPP guarantees that the entire balance of any loan given under this program will be fully backed and guaranteed by the SBA.
- Any loan extended pursuant to the PPP shall receive a risk weight of zero percent.
- All loans must be deferred for at least six months – this includes all interest, principal, and fees – and may be deferred up to 12 months. If a lender sells the loan on the secondary market, the purchasing entity is required to honor the 6-month deferment period.
- Borrowers may submit only one application. If a customer indicates they have submitted an application to another lender, to “see who acts faster”, they are in violation of the PPP.
Members of the Woods Rogers Banking and Financial Services Team are ready to assist you with questions about PPP lending.