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Updates on the CARES Act loans program

by on Financial Services. Published April 3rd, 2020
Updates on the CARES Act loans program

By Jim Bullock and Dan Klein

On March 27, 2020, President Trump signed H.R. 748—the “Coronavirus Aid, Relief, and Economic Recovery Act” or the “CARES Act”—into law.[1] Title I of the CARES Act (named the “Keeping American Workers Paid and Employed Act”) establishes a “paycheck protection program” providing temporary financial assistance to America’s small businesses in the form of targeted SBA section 7(a) loans with provisions for loan deferment and forgiveness as well as interim payment of principal, interest and associated fees for other SBA loans.

On April 2, 2020, the SBA issued an interim final regulation on the paycheck protection program’s implementation. We’ve updated this article to include that guidance and other recent Treasury Department pronouncements.[2]

Paycheck Protection Program Loans


Title 1, Section 1102, of the Act establishes a new type of section 7(a) loan (a “covered loan”) to be made between February 15 and June 30, 2020 (the “covered period”).[4] The SBA’s participation in these covered loans is 100 percent.[5]

Who Can Make the Paycheck Protection Program Loans?

Banks with authority to make section 7(a) loans are authorized to make covered loans.[6]

The April 2 SBA regulation also authorizes any federally insured depository institution or federally insured credit union to make the loans, as well as Farm Credit System institution and financing providers that originate, maintain, and service business loans (“Financing Provider”).[7]

Lenders who are not authorized make section 7(a) loans must also meet the following requirements: (i) they cannot be designated in Troubled Condition by their primary federal regulator or subject to a formal enforcement action with their primary federal regulator that addresses unsafe or unsound lending practices; (ii) they must apply the requirements of the Bank Secrecy Act (“BSA”) as a federally regulated financial institution (or functionally equivalent requirements); (iii) and, in the case of a Financing Provider, must have been operating since at least February 15, 2019, have originated, maintained, and serviced more than $50 million in business loans or other commercial financial receivables during a consecutive 12  month period in the past 36 months, or be a service provider to any insured depository institution that has a contract to support such institution’s lending activities in accordance with 12 U.S.C. § 1867(c) and is in good standing with the appropriate Federal banking agency.[8]

A federally insured depository institution or credit union or Farm Credit System institution will be “automatically qualified” by sending the SBA a CARES Act Section 1102 Lender Agreement.[9]

Who is Eligible for Paycheck Protection Program Loans?

U.S. small businesses, §501(c)(3) non-profit entities, §501(c)(19) veterans’ organizations, and Tribal business concerns (small businesses owned by an Indian tribal government) that have 500 or fewer employees (or the maximum amount set by the SBA for the respective industry) are eligible for covered loans.[10] Businesses with more than one location are eligible as long as they do not have more than 500 employees per physical location and are businesses in the industry identified by a NAICS code beginning with 72—i.e., the accommodations and food services industry (hotels, motels, restaurants, and catering services).[11] The employee count includes all employees (full-time, part-time, and other bases); this is tempered somewhat by waiver of the SBA’s affiliation rules[12] for a business in the accommodations and food services industry, operating as a franchise (with an SBA-assigned franchise identifier code) or which receives financial assistance from an SBA-licensed small business investment company.[13] Additionally, individuals who can establish their status as sole proprietors, independent contractors, or self-employed through tax and payroll returns and documentation of income and expenses are also eligible.[14] Recipients of §636(b)(2) disaster relief loans (“Economic Injury Disaster Loans” or “EIDL”) between February 15 and March 27, 2020 for purposes of than the covered loan purposes (discussed below) are eligible for covered loans.[15]

What is the Maximum Loan Amount?

Participants may borrow no more than the lesser of (a) $10 million or (b) the sum of (i) their average total monthly “payroll costs”—salary, wages, commissions, tips or equivalents—limited to a maximum of $100,000 annualized during the covered period per employee; vacation and other forms of paid time off; termination or separation allowances; group health care benefit payments including insurance premiums; retirement benefits; and payment of State or local tax assessed on employee compensation — for the year before the date the loan is made, multiplied by 2.5, plus (ii) the balance of all §636(b)(2) disaster relief loans received between January 31-March 27, 2020 (less any $10,000 EIDL grant received).[16]

These “payroll costs” include compensation paid by sole proprietors or business owners to themselves.[17]

For the purposes of calculating “payroll costs,” borrowers that were not in business between Feb. 15 and June 30, 2019 will use their average total monthly payroll costs for January 1 to February 29, 2020.[18] Borrowers that are “seasonal employers” (not yet defined by the SBA) have the option to use either the 12-week period beginning on February 15, 2019 or the period of March 1, 2019 through June 30, 2019.[19]

How May Borrowers Use Loan Proceeds?

In addition to the other allowable uses of section 7(a) loans, the covered loans may be used for payroll costs, to pay for group health benefits (including insurance premiums), mortgage interest payments (but not prepayment of principal), rent or lease payments, utility payments, and interest payments on other debt obligations incurred before February 15, 2020.[20] Importantly, the covered loans are non-recourse loans except to the extent used for any purpose other than these specified purposes.[21]

However, borrowers must use at least 75% of the borrowed funds for payroll costs.[22]

What are the Application Requirements for Covered Loans?

A borrower must have been in operation on February 15, 2020 and either had employees for whom it paid salaries and payroll taxes or paid Form 1099 independent contractors.[23] When applying for a covered loan, the borrower must make a good faith certification that:

(i) the loan is necessary to support its ongoing operations in the uncertain economic times created by the COVID-19 outbreak,

(ii) the funds will be used to retain workers and maintain payroll or to make mortgage, lease, or utility payments, and

(iii) it does not have another covered loan application pending for the same amount and purposes and has not received a covered loan between February 15-December 31, 2020 for the same amount and purposes.[24]

The borrower is not required to show that it cannot obtain credit elsewhere, to personally guarantee the covered loan, or to put up collateral securing the covered loan.[25]

The borrower should use the authorized form provided by the SBA or the online form provided by its bank (which should mirror the SBA form). The SBA form is available at–paycheck-protection-program-borrower-application-form.

Deferment and Other Terms Applicable to Covered Loans

As noted above, covered loans are non-recourse with limited exception.[26] The interest rate charged is 1%, and there cannot be pre-payment penalties.[27]

Additionally, based on the presumption that all applicants for covered loans have been affected by the COVID-19 outbreak, payment of principal, interest and associated fees must be deferred for a period of at least six months (up to a maximum of one year).[28] To the extent that a covered loan has a remaining balance after forgiveness under §1106 of the Act (discussed below), the balance will continue to be guaranteed by the SBA, and the maximum maturity for the covered loan cannot exceed two years from the date of the loan disbursement.[29]

The SBA will reimburse lenders for processing covered loans—

(i) 5% on covered loans of $350,000 or less;

(ii) 3% on covered loans that are more than $350,000 but less than $2,000,000; and

(iii) 1% on covered loans of $2,000,000 or more

—provided that lenders submit their requests for reimbursement to the SBA within five days of the loan disbursement.[30] However, the SBA’s usual fees under §§636(a)(18)(A) and (23)(A) are waived, and the SBA will charge no fee for guaranteeing covered loans that are sold into the secondary market.[31]

Easing Regulatory Requirements

For purposes of lenders’ risk-based capital requirements, covered loans are deemed to have a risk weight of zero, and FDIC-insured lenders modifying a covered loan in a troubled debt restructuring on or after March 13, 2020 (because of the COVID-19 outbreak) are freed from any obligation under the Federal Deposit Insurance Act (12 U.S.C. §§1811 et seq.) to comply with the FASB Accounting Standards Codification Subtopic 310–40 (‘Receivables – Troubled Debt Restructurings by Creditors’) until the appropriate Federal banking agency or the National Credit Union Administration Board, as applicable, directs otherwise.[32]

The $350,000 limit on express loans under §636(a)(31) is raised to $1,000,000 until December 31, 2020 (the limit will automatically revert to $350,000 on January 1, 2021).[33]

The exception to the guarantee fee waiver for veterans (i.e., where the President’s budget forecast includes a cost greater than zero for the program) is repealed, as is the SBA’s rule “Express Loan Program: Affiliation Standards” (85 Fed. Reg. 7266, February 10, 2020).[34]

Paycheck Protection Loan Forgiveness Program

The Act also establishes terms for the forgiveness of covered loans to the extent that principal is used for specific expenses during the eight weeks after the loan’s origination (in the loan forgiveness program, this 8-week period is called the “covered period”).[35]

Upon approval of the borrower’s application for forgiveness (discussed below), the SBA will reimburse the lending institution (and the borrower’s obligation will be forgiven) for the principal spent by the borrower during the covered period for the sum of its:

  • payroll costs;[36]
  • payments on real or personal property mortgages incurred before February 15, 2020;[37]
  • rent under a leasing agreement in force before February 15, 2020 (if applicable);[38] and
  • electricity, gas, water, transportation, telephone, and internet services in use before February 15, 2020.[39]

However, no more than 25% of the forgiven amount may be for non-payroll costs. In other words, borrowers must use at least 75% of the loan amount on payroll costs to be eligible for loan forgiveness.[40]

The loan forgiveness includes the forgiveness of interest accrued on the forgiven principal.[41]

Protection Against Layoffs & Wage Reductions

If the borrower reduces its number of employees during the covered period, the amount of potential loan forgiveness also will be reduced. The reduction amount is determined by multiplying the total amount of requested forgiveness by the quotient of (a) the borrower’s average number of full-time equivalent employees for each pay period per month (“FTE/m”) during the covered period divided by (b) its FTE/m for either (i) February 15-June 30, 2019 or (ii) January 1-February 29, 2020 (whichever the borrower selects).[42] For example, if a borrower with a $1,000,000 covered loan had an average of 100 full-time employees between February 15-June 30, 2019 or January 1-February 29, 2020 (whichever the borrower selects) and institutes a layoff of 20 employees during the covered period, the borrower’s eligible loan forgiveness amount will be reduced to $800,000 ($1,000,000 x .8 [i.e., 80 FTE/m during the covered period divided by 100 FTE/m] = $800,000).

Furthermore, if a borrower reduces the wages of certain employees during the covered period, the amount of potential loan forgiveness likewise will be reduced. This restriction protects those employees who earned $100,000 or less (annualized) in 2019; and the borrower’s potential loan forgiveness will be reduced by the amount the reduction in the employee’s salary or wages exceeds 25% of the employee’s total salary or wages during the most recent full quarter during which the employee was employed before the covered period.[43] For example, if a borrower with a $1,000,000 covered loan paid five of its employees a salary of $100,000 (annualized) for the full quarter prior to obtaining the covered loan, but reduced their wages to $70,000 (annualized) during the covered period, the borrower’s eligible loan forgiveness amount will be reduced by $25,000 (i.e., the reduction for each employee exceeds 25% of the employee’s total annualized salary or wages by $5,000; $5,000 x 5 employees = $25,000).

These reductions can be avoided if the layoff or salary reduction occurs between February 15, 2020 and April 26, 2020 (i.e., 30 days after the Act was enacted), and the borrower eliminates the layoff or reduction by June 30, 2020.[44]

What is the Loan Forgiveness Process?

To obtain loan forgiveness, the borrower must submit to the lending institution servicing the covered loan an application with:

  • documents verifying the number of full-time equivalent employees on the borrower’s payroll, and their respective payrates, “for the periods described in subsection (d)”;[45] this documentation should include payroll tax filings reported to the Internal Revenue Service and income, payroll, and unemployment insurance filings with individual states;
  • documents verifying payment of the other covered items (mortgage or lease obligations and utilities) such as cancelled checks, payment receipts, account transcripts, or similar documents verifying payments; and
  • any other documents required by the SBA.[46]

Borrowers who do not submit the required documentation are not eligible for loan forgiveness.[47] Additionally, the borrower’s authorized representative must certify that the documentation presented is true and correct and that the amount of the requested forgiveness was used for the covered purposes (to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments).[48]

Within 60 days after receiving the borrower’s application, the lender must determine whether the loan qualifies for forgiveness under the CARES Act and its decision (whether or not) to forgive the requested principal.[49] The lender may rely on the borrower’s documentation and certification verifying payments for the covered items. No enforcement action relating to loan forgiveness may be taken against the lender under §47(e) of the Small Business Act (15 U.S.C. §657t(e)), and the lender shall not be subject to any penalties by the Administrator relating to loan forgiveness, if the lender has received from the borrower the required documentation.[50]

Within 90 days after the forgiveness amount is determined, the SBA will remit the sum of the forgiveness amount to the lender with interest accrued through the date of payment.[51]

What is the Lender’s Option for Advance Purchase?

Alternatively to waiting for the borrower’s application, the lender (or, at the SBA’s discretion, a third party purchasing the covered loan in the secondary market) may submit a report to the SBA of the expected forgiveness amount for a covered loan (or a pool of covered loans) up to 100% of the principal amount of the covered loan (or pool of covered loans), and the SBA will purchase the covered loans within 15 days after receiving the report (the same as if the expected forgiveness amount was the principal amount of a guaranteed section 7(a) loan).[52]

How Will Lenders Treat Forgiven Loans for Tax Purposes?

The amounts forgiven under this program will be considered canceled indebtedness by an authorized section 7(a) lender.[53] However, the amounts of the forgiveness will not be includible in the borrower’s income for federal income tax purposes.[54]

The Interim Debt Service Program

The Act provides temporary relief applicable to section 7(a) loans—other than the new §636(a)(36) loans described above that are eligible for deferment and forgiveness—loans to state development companies (i.e., under 15 U.S.C. §695), and loans made under the SBA’s Microloan Program (i.e., 15 U.S.C. §636(m)), including those already in the secondary market.[55]

Lenders are encouraged to provide payment deferments and to extend the maturity of these loans during the national emergency declared by the President with respect to the Coronavirus Disease 2019 (COVID-19).[56]

Nonetheless, the SBA will pay the principal, interest and other associated fees for these loans, provided the loan is not in default, for a period of six months (commencing within 30 days after the applicable payment is due):

  • if the loan was made before March 27, 2020 and has not been deferred, the SBA will pay these amounts on behalf of the borrower for six months beginning with the next payment due;
  •  if the loan was made before March 27, 2020 and has been deferred, the SBA will pay these amounts on behalf of the borrower for six months after the deferment period ends; and
  • if the loan was made between March 27-September 27, 2020, the SBA will pay these amounts on behalf of the borrower for six months beginning with the first required payment.[57]

Regulatory Easing

While these interim payments are being made by the SBA, federal and state regulators are encouraged not to require the lenders to increase their reserves on account of receiving these payments from the SBA.[58]

The SBA will waive the statutory limits on maximum loan maturities applicable to these loans, if, between March 27, 2020-March 27, 2021, the lender provides a deferral and extends the maturity date.[59]

Additionally, the SBA will extend lenders’ site visit requirements—(i) up to 60 days (or more, at the SBA’s discretion) after the occurrence of an adverse event, other than a payment default, causing a loan to be classified as in liquidation, and (ii) up to 90 days after a payment default—to accommodate higher volumes, travel restrictions, and the inability to access some properties due to the COVID-19 pandemic.[60]

What’s Next?

The SBA must issue regulations and guidance carrying out the Keeping American Workers Paid and Employed Act by April 11, 2020, without regard to the general notice requirements under §535(b) of the Administrative Procedures Act, and the Treasury Secretary, SBA Administrator, and Farm Bureau Credit Administration may issue additional regulations and guidance.[61]

What Does This Mean for Participating Banks?

For starters, the forgiveness of indebtedness under the paycheck protection program does not otherwise modify the terms of the covered loan.[62] Hence, the borrower is still liable for payment of unforgiven principal and interest, and banks need to ensure their loan documents comply with applicable law (for example, usury savings clauses). In addition to assistance in finalizing and closing lending transactions, banks should have outside counsel review a borrower’s forgiveness applications for compliance with the CARES Act and any regulations or guidance issued by the SBA and issue opinions that the applications meet these requirements.

[1] The text of the CARES Act is available at As of this post, the National Archives and Records Administration has not yet assigned a public law number.

[2] The SBA regulation is available at–IFRN%20FINAL.pdf. (“SBA Regulation”).

[3] H.R. 748, §1102(a); the provisions of §1102(a) are now codified as 15 U.S.C. §636(a)(36).

[4] 15 U.S.C. §636(a)(36)(A)(ii)-(iii).

[5] H.R. 748, §1102(a)(1). The SBA’s participation in other section 7(a) loans is limited to 75-85%. 15 U.S.C. §636(a)(2)(A).

[6] Id. §636(a)(36)(F)(ii)(I).

[7] SBA Regulation § III.3.a.

[8] Id.

[9] Id.

[10] Id. §636(a)(36)(A)(vii), (ix) and (D)(i).

[11] Id. §636(a)(36)(D)(iii).

[12] 13 C.F.R. §121.103.

[13] Id. §636(a)(36)(D)(iv)–(v). The SBA’s affiliation rules still apply to non-profits and veterans’ organizations. Id., §636(a)(36)(D)(vi).

[14] Id. §636(a)(36)(D)(ii).

[15] Id. §636(a)(36)(Q).

[16] Id. §636(a)(36)(E), (F)(iv); SBA Regulation § III.2.e. The portion of “payroll costs” for a sole proprietor or independent contractor allocated to wages, commissions, income, net earnings, or similar compensation, is likewise limited to $100,000 annualized for the covered period.  15 U.S.C. §636(a)(36)(A)(viii)(I)(bb). Additionally, qualified sick leave and family sick leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127) and taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period are excluded from the calculation of “payroll costs.” Id., §636(a)(36)(A)(viii)(II).

[17] Id. §636(a)(3)(A)(viii)(I)(bb).

[18] Id. §636(a)(36)(E).

[19] Id. §636(a)(36)(E)(i).

[20] Id. §636(a)(36)(F)(i).

[21] Id. §636(a)(36)(F)(v).

[22] SBA Regulation § III.2.o.

[23] 15 U.S.C. §636(a)(36)(F)(ii)(II).

[24] Id. §636(a)(36)(G); H.B. 748, §1109(f).

[25] Id. §636(a)(36)(I)-(J).

[26] Supra at footnote 13.

[27] Id. §636(a)(36)(L), (R); SBA Regulation § III.2.i.

[28] 15 USC §636(a)(36)(M). If a secondary market purchaser refuses to approve a deferral, the SBA will buy the covered loan to ensure deferrals for at least 6 months and up to a maximum of 1 year. Id.

[29] Id. §636(a)(36)(K); SBA Regulation § III.2.j.

[30] Id. §636(a)(36)(P)(i), (iii).

[31] Id. §636(a)(36)(H), (N).

[32] Id. §636(a)(36)(O).

[33] H.B. 748 §1102(c).

[34] H.B. 748 §1102(d)-(e).

[35] Id. §1106(a)(1), (3).

[36] Supra at footnote 11.

[37] H.B. 748, §1106(a)(2).

[38] Id. §1106(a)(4).

[39] Id. §1106(a)(7).

[40] SBA Regulation § III.2.o.

[41] Id.

[42] H.B. 748 §1106(d)(2). For a borrower with seasonal employees, its FTE/m for the covered period will be divided by its FTE/m for February 15-June 30, 2019.

[43] Id. §1106(d)(3).

[44] Id. §1106(d)(5). Additionally, the Secretary of the Treasury and the Administrator of the SBA may prescribe regulations granting de minimis exceptions. Id., §1106(d)(6).

[45] There are multiple “periods described in subsection (d)”: regarding the number of full-time equivalent employees, the “covered period” (i.e., 8-week period after the loan’s origination) and the period between either February 15-June 30, 2019 or January 1-February 29, 2020 (whichever the borrower selects – except that borrowers with seasonal employees must use the period between February 15-June 30, 2019); and, regarding employee payrates, the “covered period,” payrates during 2019, and payrates during the most recent full quarter prior to the “covered period.” Presumably, information for all these periods is required in the borrower’s application.

[46] Id., §1106(e)(1)-(2), (4).

[47] Id. §1106(f).

[48] Id. §1106(e)(3).

[49] Id. §1106(g).

[50] Id. §1106(h).

[51] Id. §1106(c)(3).

[52] Id. §1106(c)(4).

[53] Id. §1106(c)(1).

[54] Id. §1106(i).

[55] Id. §1112(a), (e).

[56] Id. §1112(b).

[57] Id. §1112(c)(1)-(3).

[58] Id. §1112(d)(1).

[59] Id. §1112(d)(2).

[60] Id. §1112(d)(3).

[61] Id. §1109(a)-(e), 1114; but see §1106(k) (requiring the SBA to issue regulations and guidance implementing §1106 by April 26, 2020.

[62] Id. §1106(j).