CARES ACT PASSEs – Details on Paycheck Protection – Part 2



Loan Forgiveness and Payment Deferral Relief

The CARES Act requires lenders to provide payment deferment relief (for principal, interest, and fees) for impacted borrowers for six months to one year. Lenders are required to provide such relief during the covered period.

In addition, the program loans qualify for the CARES Act’s broader loan forgiveness provisions in Section 1106. Specifically, indebtedness is forgiven in an amount (not to exceed the principal amount of the loan) equal to the following costs incurred and payments made during the covered period:

  • Payroll costs;
  • Interest payments on mortgages;
  • Rent; and
  • Utility payments.

Forgiveness amounts will be reduced for any employee cuts or reductions in wages.

The reduction in forgiveness for reduced number of employees is calculated as follows:

  • Total loan principal,
  •  Multiplied by a fraction calculated as:
    o The average number of full-time equivalent employees (FTE) for the 8-week period beginning on the date of the origination of a covered loan,
    o Divided by the average number of FTE for the period from February 15, 2019 thru June 30, 2019 (or at the election of the borrower, the average number of FTE for the period January 1, 2020 through February 29, 2020).
  • For example, assume the following fact pattern:
    Average FTE for 8-week period = 90
    Average FTE for period February 15, 2019 thru June 30, 2019 = 100
    Average FTE for the period January 1, 2020 thru February 29, 2020 = 80
    Loan Principal = $500,000
    Loan Principal forgiveness = $450,000, calculated as follows:
    $450,000 = $500,000 (loan principal) x (90/100)

The reduction in forgiveness for reduced wages is calculated as follows:

  • Reduction in total salary or wages of any employee during the covered period that is in excess of 25% of the employee’s salary/wages during the employee’s most recent full quarter of employment before the covered period (for purposes of this paragraph, “employee” is limited to those employees who did not receive during any single pay period during 2019 a salary or wage at an annualized rate of pay over $100,000).

There is relief from these forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020.

There is also a required process to apply for loan forgiveness. Borrowers seeking forgiveness of amounts must submit to their lender –

  • Documentation verifying full-time equivalent employees (FTEE) on payroll and their pay rates;
  • Documentation on covered costs/payments (e.g., documents verifying mortgage, rent, and utility payments);
  • Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
  • Any other documentation the Administrator may require.

Forgiveness amounts that would otherwise be includible in gross income, for federal income tax purposes, are excluded.

Borrower Requirements

There are very few borrower requirements to obtain a loan under the new program. Those requirements include a good-faith certification that:

  • The loan is needed to continue operations during the COVID-19 emergency;
  • Funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments;
  • The applicant does not have any other application pending under this program for the same purpose; and
  • From February 15, 2020 until December 31, 2020, the applicant has not received duplicative amounts under this program.

SBA Express Loan

SBA Express Loans provide an accelerated turnaround time for SBA review and are a simple way to receive expedited, amortized government-guaranteed financing for small businesses. SBA Express loans can be in the form of either a term loan or a line of credit. The Act increases the maximum loan under an SBA express Loan from $350,000 to $1 million through December 31, 2020.

Emergency Economic Injury Disaster Loans

In addition to expansion of the SBA’s Business Loan Program described above, the CARES Act expands the EIDL program. The covered period for this section is January 31, 2020 to December 31, 2020. In addition to current eligible entities, the following may receive SBA disaster loans:

  • A business with 500 or fewer employees;
  • Sole proprietorships, with or without employees, and independent contractors;
  • Cooperatives with 500 or fewer employees;
  • ESOPs with 500 or fewer employees; and
  • Tribal small business concerns.

The CARES Act makes the following additional changes to the EIDL program during the covered period for loans made in response to COVID-19:

  • Waives rules related to personal guarantees on advances and loans of $200,000 or less for all applicants;
  • Waives the “1 year in business prior to the disaster” requirement (except the business must have been in operation on January 31, 2020);
  • Waives the requirement that an applicant be unable to find credit elsewhere; and
  • Allows lenders to approve applicants based solely on credit scores (no tax return submission required) or “alternative appropriate methods to determine an applicant’s ability to repay.”

Entities applying for loans under the Disaster Loan Program in response to COVID-19 may, during the covered period, request an emergency advance from the Administrator of up to $10,000, which does not have to be repaid, even if the loan application is later denied. The Administrator is charged with verifying an applicant’s eligibility by accepting a “self-certification.” Advances are to be awarded within three days of an application.

Advances may be used for purposes already authorized under the SBA Disaster Loan Program, including:

  • Providing sick leave to employees unable to work due to direct effect of COVID-19;
  • Maintaining payroll during business disruptions during slow-downs;
  • Meeting increased supply chain costs;
  • Making rent or mortgage payments; and
  • Repaying debts that cannot be paid due to lost revenue.

If an entity that receives an emergency advance transfers into, or is approved for, a loan under the SBA Business Loan Program (described in the section above), the advance amount will be reduced from any payroll cost forgiveness amounts.

The CARES Act would deem all states and their subdivisions to have sufficient economic damage to small business concerns to qualify for assistance under this loan program (rather than the current state declaration and certification approach).