SBA Paycheck Protection Program Rule Issued: What Lenders Need to Know

On April 2, 2020, the U.S. Small Business Administration (SBA) issued an interim final rule (the “Interim Final Rule”) relating to the new Paycheck Protection Program (PPP) added to the SBA 7(a) Loan Program under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed by President Trump on March 27, 2020. The CARES Act provides emergency assistance and health care response for individuals, families, and businesses affected by the COVID-19 pandemic. Loans guaranteed under the PPP will be 100% guaranteed by SBA, and the full principal amount of the loans may qualify for loan forgiveness. The Interim Final Rule provides formal guidance to businesses interested in obtaining a loan under the PPP and to lenders that are interested in making loans under the PPP. For reference, please see our prior alerts relating to the PPP here, here, and here.

The Interim Final Rule was issued without advance notice and public comment as authorized by Section 1114 of the CARES Act. The Interim Final Rule solicits comments from interested members of the public on all aspects of the Interim Final Rule. Comments from the public must be received on or before 30 days after publication of the Interim Final Rule in the Federal Register, so it is possible that the Interim Final Rule may be modified in the future. In addition, as noted below, we also expect that additional rules regarding the PPP will be issued in the future.

This alert summarizes matters of particular relevance to lenders interested in making loans under the PPP. Our prior alert, SBA Paycheck Protection Program Rule Issued: What Borrowers Need to Know, includes additional information relevant to lenders that we have omitted here, including information on eligibility criteria, maximum loan amount, loan terms, and loan forgiveness.

Eligible Lenders

• All current SBA 7(a) lenders are automatically approved to make PPP loans on a delegated basis.
• The Interim Final Rule identifies additional types of lenders that have been determined by the Administrator of SBA and the Secretary of the Treasury to meet the criteria and are eligible to make PPP loans unless they currently are designated in Troubled Condition by their primary federal regulator or are subject to a formal enforcement action with their primary federal regulator that addresses unsafe or unsound lending practices.
• Certain of those additional eligible lenders will be automatically qualified under delegated authority by SBA upon transmission of CARES Act Section 1102 Lender Agreement (SBA Form 3506).

Underwriting Requirements

The Interim Final Rule requires that each lender:

• confirm receipt of borrower certifications contained in the Paycheck Protection Program Application form issued by the Administration;
• confirm receipt of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020;
• confirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application; and
• follow applicable Bank Secrecy Act and its implementing regulations (BSA) requirements, as described in the Interim Final Rule.

As stated in the Interim Final Rule, “[e]ach lender’s underwriting obligation under the PPP is limited to the items above and reviewing the ‘Paycheck Protection Application Form.’ Borrowers must submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.”

Importantly, and in response to an outpouring of feedback from lenders, the Interim Final Rule clarifies that lenders can rely on borrower documentation for loan forgiveness, stating that “[t]he lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs. The [SBA] Administrator will hold harmless any lender that relies on such borrower documents and attestation from a borrower. The [SBA] Administrator, in consultation with the Secretary, has determined that lender reliance on a borrower’s required documents and attestation is necessary and appropriate in light of section 1106(h) of the Act, which prohibits the [SBA] Administrator from taking an enforcement action or imposing penalties if the lender has received a borrower attestation.”

The Interim Final Rule also confirms that lenders are not required to apply the “credit elsewhere test”.

Loan Application Process and Documentation

Lenders must:

• submit the SBA Form 2484 (Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty) electronically in accordance with program requirements; and
• maintain the forms and supporting documentation in its files.

The CARES Act gives all lenders delegated authority and streamlining the requirements of the regular SBA 7(a) loan program.

For PPP loans, SBA does not require that lenders comply with 13 C.F.R. Sec. 120.150, which requires the applicant be creditworthy, considering:

• character, reputation, and credit history of the applicant (and the operating company, if applicable), its associates, and guarantors;
• experience and depth of management;
• strength of the business;
• past earnings, projected cash flow, and future prospects;
• ability to repay the loan with earnings from the business;
• sufficient invested equity to operate on a sound financial basis;
• potential for long-term success;
• nature and value of collateral (although inadequate collateral will not be the sole reason for denial of a loan request); and
• the effect any affiliates (as defined in 13 C.F.R. Sec. 121) may have on the ultimate repayment ability of the applicant.

According to the Interim Final Rule, “SBA will allow lenders to rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness. Lenders must comply with the applicable lender obligations set forth in this interim final rule, but will be held harmless for borrowers’ failure to comply with program criteria; remedies for borrower violations or fraud are separately addressed in this interim final rule.”

Because the SBA has not issued guidance on the documents necessary to evidence a loan made under the PPP, a lender may choose to use its own forms to document these loans.

Conclusion

The issues facing applicants and lenders in obtaining and making, respectively, loans under the PPP are complex. While the Interim Final Rule does clarify some issues, we believe additional guidance, which is forthcoming, will be necessary. Lewis Rice will continue to monitor these developments and provide updates as needed.

To stay abreast of the emerging legal issues raised by the coronavirus pandemic, Lewis Rice has formed a COVID-19 Task Force, which brings together subject matter authorities from various practice areas within the Firm who stand ready to assist our clients as they navigate these complex challenges. Our attorneys are closely monitoring these developments as they occur and will make regular updates to our COVID-19 Resource Center. If you have any questions about the federal government programs available, or the implications and disruptions of COVID-19 on your business, please reach out to one of the authors above or another member of the Task Force.