COVID-19 Response: PPP Loans and Main Street Lending Program - Current State of Play
The CARES Act created two major loan programs, the Paycheck Protection Program (PPP) and the Main Street Lending Program. This update provides an overview of current developments involving these programs. Borrowers should continue to closely monitor the changing requirements for these programs, which can have important implications for borrower eligibility and maximization of benefits, and seek expert counsel as needed.
Washington, D.C. (June 24, 2020) - The CARES Act created two major loan programs, the Paycheck Protection Program (PPP) and the Main Street Lending Program. While the PPP has been troubled by a rushed and rocky rollout and continually evolving rules, the Main Street Lending Program has also undergone multiple revisions and rule changes and no start date has yet been set. Both programs have generated widespread confusion, although the PPP has dispersed close to $515 billion in forgivable loans as of June 22. Previous Lewis Brisbois alerts have described these programs, and this update provides an overview of current developments. Borrowers should continue to closely monitor the changing requirements for these programs, which can have important implications for borrower eligibility and maximization of benefits, and seek expert counsel as needed.
The PPP Application and Forgiveness Processes
The Small Business Administration (SBA) and Department of Treasury (Treasury) continue to revise the PPP loan application and forgiveness processes, including new interim final rules released June 22 and June 24. Borrowers have through June 30 to submit applications for PPP loans. New borrowers as well as those who have already received PPP loans should pay close attention to the following key developments in the program:
- The loan term for PPP loans made on or after June 5 will be five years rather than two; borrowers who received loans before June 5 can extend their loan terms to five years if the lender agrees.
- The PPP forgiveness rules no longer require that 75% of loan proceeds be devoted to payroll (as opposed to mortgage interest/rent and utilities); the payroll component percentage has been lowered to 60%.
- Borrowers who received PPP loans before June 5 can select an 8-week covered period of their choosing (ending no later than December 31, 2020) for forgiveness calculations, instead of the 8-week period beginning with the date they received the loan. Borrowers who received PPP loans on or after June 5 can spend PPP funds over the course of a 24-week period and receive forgiveness over that time frame.
- The June 30, 2020 “safe harbor” deadline for loan forgiveness applications has been extended to December 31, 2020; this provision means that if a borrower was unable to restore employee headcount and 75% compensation levels to required benchmarks by the end of the covered period, it is still possible to receive full forgiveness if those levels are reached by December 31.
- Borrowers can apply for forgiveness earlier than the end of their relevant covered period, but must meet the employee headcount and compensation requirements within that time period or accept proportionally reduced forgiveness.
- Forgiveness will not be reduced, with respect to restoration of employee headcount and compensation, in documented situations in which an employee declined a written offer of reemployment, the employee was fired for cause, the employee was fired for good cause, the employee voluntarily resigned, or the employee voluntarily requested and received a reduction in hours. Similarly, forgiveness will not be reduced where the employer can document its inability to (a) rehire previous or similarly qualified employees, or (b) return to its previous level of business activity due to compliance with federal health requirements.
- Where forgiveness is reduced because the borrower falls short of meeting headcount or compensation benchmarks, it applies only to the portion of the decline in employee salary and wages that is not attributable to the headcount reduction, so there is no double reduction penalty.
- Accurate calculations of forgiveness amounts are the borrower’s responsibility; lenders are expected to perform a good faith review, but borrowers are responsible for providing documentation and verifying accuracy of payment for eligible costs.
- The SBA has reactivated its Lender Match Program, which seeks to connect small businesses with lenders interested in receiving PPP applications.
- On June 19, Treasury and the SBA announced, in a reversal of their previous position, that they will make public the names and amounts of PPP loans exceeding $150,000; this new policy will cover approximately 75% of PPP loans.
- Investigations of PPP loan misuse and fraud are continuing to expand, and borrowers should beware of pitfalls that may lead to investigations and prosecutions. See our previous alert on this topic.
Main Street Lending Program
The Main Street Lending program was established to support small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. It includes three types of loans: (1) the Main Street New Loan Facility (MSNLF), for businesses obtaining unsecured term loans originated after April 24, 2020; (2) the Main Street Expanded Loan Facility (MSELF), for businesses that need to expand a term loan that originated before April 24, 2020; and (3) the Main Street Priority Loan Facility (MSPLF), for businesses with greater leverage to obtain a new secured or unsecured term loan that originated after April 24, 2020. Key points are as follows:
- The program is complicated: a 66-page frequently asked questions document is available at the Federal Reserve Board’s website. Businesses are eligible if they either (1) have 15,000 or fewer employees or (2) had revenues of $5 billion of less in 2019. Loan terms include a five-year maturity, deferral of principal payments for two years, and deferral of interest payments for one year.
- The Federal Reserve Bank is currently accepting lender registrations. Registration instructions and the form loan participation agreement, form borrower and lender certifications and covenants, and other required form agreements can be found at the Federal Reserve Bank of Boston’s website.
- The program is still not operational for borrowers, and the Federal Reserve continues to work on building the necessary infrastructure. Once the program is up and running, borrowers can apply through eligible lenders. Information on borrower requirements will be available through the term sheets for the three Main Street Lending programs, available on the Federal Reserve’s website.
- The program is also expected to provide funds to nonprofit organizations, and a comment period on this aspect of the program closed on June 22.
The SBA recently announced that the Economic Injury Disaster Loan (EIDL) program, which exhausted its initial funds in the early days of the COVID-19 crisis, received an infusion of new funds in recently passed legislation, and has begun accepting new applications as of June 15. EIDL grants provide cash advances of up to $10,000 per application and do not need to be repaid; the funds are designed to provide economic relief to businesses that are currently experiencing a temporary loss of revenue. Any EIDL loan recipients who also apply for a PPP loan must identify the amount of the EIDL loan in the application, reducing the amount of the PPP loan request accordingly.
Conclusion and Takeaway
From the start, these stimulus programs, while necessary, well-intentioned, and solidly funded, have proven complicated and difficult for borrowers to navigate. That challenge is continuing. Pitfalls and traps for the wary abound, particularly as regulators have created new requirements that both narrowed and expanded the scope of coverage, changed interpretations, and added procedural complexity. The threat of government investigations and prosecutions has only increased the stakes for borrowers focused on trying to save their businesses while satisfying evolving compliance obligations. Lewis Brisbois’ team has worked with many clients to advise on program requirements and maximize benefits.
For more information on these programs, contact the authors of this alert. Visit our COVID-19 Response Resource Center for more alerts on the many areas of law impacted by the pandemic.
Karen C. Bennett, Partner
Thomas A. Brooks, Partner
Katherine I. Funk, Partner
Jane C. Luxton, Partner