PH COVID-19 Client Alert Series: Treasury Department Releases Paycheck Protection Program Guidance
By Thomas P. Brown, Sean Unger & Shreya Gupta
The CARES Act was enacted on March 27, 2020, establishing a new $349 billion Paycheck Protection Program. The Program is intended to provide much needed relief to millions of small businesses, enabling them to sustain their businesses and keep their workers employed during the pandemic caused by COVID-19. As with any large piece of legislation with so many key provisions, the release of the CARES act has raised questions on the part of both lenders and borrowers about both the implementation of the program and how these loans would play out in practice.
The Treasury released guidance on March 30, 2020 that attempts to answer many of these questions and resolve any potential ambiguities.
Who Can Apply?
All businesses—including nonprofits, veterans’ organizations, tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors—with 500 or fewer employees can apply for these loans. While the guidance did not explicitly clarify the standards on “affiliate” status, the loan application form itself defines “owner” as one who owns “20% or greater,” thus signaling that a similar standard may be applied to determine affiliate status.
Small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders starting April 3, 2020.
Businesses can apply through any existing SBA lender or through any federally-insured depository institution, federally-insured credit union, and Farm Credit System institution that is participating.
The loan request must include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations.
Information for Lenders:
The SBA will guarantee 100% of the outstanding balance of the loans and will waive all SBA guaranty fees, including the upfront and annual servicing fees.
Definition of an Agent:
The guidance contains an inconsistency regarding the definition of an “agent,” which will hopefully be resolved in upcoming guidance reports.
The guidance has imposed a fixed interest rate of .50% and provides that loans under the Program will have a two-year term.
Limits on Loan Forgiveness:
Loan amounts will be forgiven as long as proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the eight-week period after the loan is made and employee and compensation levels are maintained.
While the Treasury’s guidance has clarified many of the relevant provisions for businesses and lenders, some questions still remain unanswered. We expect that, in the coming days and weeks, additional guidance may be available. Until then, please feel free to reach out to us with any questions.