CARES Act: Paycheck Protection Program Update

Initial Guidance and Form Application published by Department of Treasury and the Small Business Administration

Late on Tuesday, March 31, 2020, the Department of Treasury and the Small Business Administration issued initial guidance related to the Paycheck Protection Program. Included in this guidance is the form application for borrowers to use when applying for a covered loan under the Paycheck Protection Program.

When can borrowers begin to apply for Paycheck Protection Program covered loans?

The guidance from the Department of Treasury states that lenders participating in the Paycheck Protection Program will begin processing loan applications as soon as this Friday, April 3, 2020 (for small businesses and sole proprietorships), so time is of the essence for borrowers in preparing the application to submit for your lender’s review.

The Department of Treasury provides the following dates for application processing and lending, with the category of borrower affecting the start date:

• Small businesses and sole proprietorships can apply for and receive loans starting April 3, 2020.
• Independent contractors and self-employed individuals can apply for and receive loans starting April 10, 2020.

If you are an independent contractor or a self-employed individual, we recommend that you still reach out to your bank as soon as possible to provide the application and requested materials.  We anticipate that the demand for covered loans under the Paycheck Protection Program will exceed the supply of funds allocated to these covered loan under the CARES Act.

Which lenders are participating in the Paycheck Protection Program?

Existing lenders who participate in the SBA 7(a) loan program are approved to lend under the Paycheck Protection Program.  We anticipate additional lenders will be approved for participation in the program, however, the timing of this approval and enrollment process for additional lenders remains unclear.

If you are interested in applying for a covered loan, we recommend that you reach out to lenders you have relationships with as soon as possible to determine if they are currently enrolled as a lender in the SBA 7(a) loan program and if they are receiving applications for covered loans under the Paycheck Protection Program.

Did the initial guidance from the Department of Treasury and Small Business Administration clarify the terms outlined in the text of the CARES Act?

The initial guidance did provide some points of clarification:

• Average Monthly Payroll Measurement Period:
  • Instead of the rolling 12 month time frame outlined in the CARES Act, the application and related guidance indicates employers will use your average monthly payroll for 2019 (with some variation for seasonal employers and new businesses).

• Employees with associated payroll costs of over $100,000 on an annualized basis:
  • The application indicates that “costs” related to payroll are capped at $100,000 on an annualized basis for each employee. This is a variance from the text of the CARES Act, which indicated salary and wages were capped at $100,000 per employee, but did not indicate an overall employee payroll cost cap when considering benefits and other related expenses included in the definition of “payroll costs” under the program.

• What are the terms of a covered loan under the Paycheck Protection Program?
  • The Department of Treasury states that all loan terms will be the same for every borrower who receives a covered loan.
  • Interest Rate: 0.50% fixed rate
  • Maturity Date: 2 years for any portion that is not forgiven. There is no prepayment penalty.
  • Deferment: All payments are deferred for 6 months, however interest (at the rate of 0.50% will continue to accrue during this deferment period).
  • Unsecured Loan: There are no guarantees required in connection with a covered loan and there is no collateral required for these loans. The business and certain other owners will be required to provide certain certifications in good faith when submitting the application.

• Terms of loan forgiveness:
  • The initial guidance does indicate that “due to the likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.” This means that of the funds borrowed (2.5 x average monthly payroll costs = maximum loan amount), the government is anticipating that in order to receive full forgiveness of the principal amount, borrowers will have to demonstrate the use of at least 75% of the borrowed funds toward payroll costs, with up to 25% of the borrowed funds used for other covered overhead expenses (e.g. rent, mortgage interest, utilities)

Do we anticipate additional guidance?

As we are updating this news alert, the SBA has not issued regulation related to the Paycheck Protection Program and the associated loan forgiveness.  Regulation may not be published prior to loans being made under this program.  This is an unusual path for enacting a piece of legislation, but these are unusual times.

We will continue to monitor guidance and regulation from the Department of Treasury and the Small Business Administration, and will continue to update this landing page as additional guidance is received.