On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. Among other things, the CARES Act creates the “Paycheck Protection Program” (PPP), which provides up to $349 billion to expand the Small Business Administration’s (SBA’s) existing 7(a) loan program to support new loan guarantees and subsidies. The terms of the PPP are described in more detail here.
The CARES Act allows the SBA and the Secretary of the Treasury to authorize additional lenders to make paycheck protection loans if they determine such additional lenders have the necessary qualifications to process, close, disburse and service loans made with the guaranty of the SBA. Details regarding the application process are expected to be provided in the next week. Treasury Secretary Steven Mnuchin publicly stated in an interview with Fox News yesterday that he “expects to have a program up on Friday.”
Fintech lenders presumably could qualify as additional PPP lenders. In his remarks to Fox News yesterday, Secretary Mnuchin emphasized: “Let me just be clear, this is not just normal SBA lenders, any FDIC bank, any credit union, any Fintech lender will be authorized to make these loans, subject to certain approvals.” It is unclear whether this will be a practical option for fintech lenders. Most fintech lenders’ systems are not set up to service SBA loans and changing their systems to allow for SBA servicing and administration may be impractical. Additionally, many fintech lenders already partner with banks that are SBA-eligible lenders so may already have the ability to indirectly participate in the PPP.
In addition, the categories of eligible borrowers under the PPP have been expanded to include other business concerns, nonprofit organizations, veterans organizations or Tribal business concerns (in addition to “small business concerns” under the SBA) as well as sole proprietors, independent contractors and eligible self-employed individuals. Eligible borrowers, however, must make certain certifications.
Borrowers must certify that the loan is necessary due to the uncertainty of current economic conditions; that proceeds will be used to retain workers and maintain payroll or make mortgage, rent or utility payments; and that they are not receiving money from another SBA program for the same uses (so borrowers may also apply through the SBA for Economic Injury Disaster Loans (EIDL) as long as they cover different expenses).
Lenders under the PPP will benefit from a 100% guaranty of the loan forgiveness amount. A lender may report an amount of expected loan forgiveness to its borrower to the SBA for a loan or pool of loans and, upon such report, the SBA will purchase such amount of the loan from the lender. The loans will also receive the benefit of a regulatory capital risk weight of 0% and temporary relief from accounting rules that might otherwise require treating deferral of PPP loans as troubled debt restructurings.
Additionally, the PPP appears to facilitate the financing of loans made under the PPP by making such loans eligible to be sold in the secondary market. The PPP provides that during the covered period—February 15, 2020 to June 30, 2020—with respect to any covered loan that is sold on the secondary market, if an investor declines to approve a deferral requested by a lender under the provisions of the PPP requiring lenders to provide specified deferment relief to impacted borrowers, then the SBA shall exercise the authority to purchase the loan so that the impacted borrower may receive the specified deferment relief.
The CARES Act and PPP create a number of opportunities for banks, credit unions, fintechs and other lenders to participate in delivering much needed loans to small businesses, while benefiting from a US government guaranty and beneficial capital treatment. As additional guidance from the SBA and the Treasury becomes available in the coming days, we anticipate that many lenders and investors will be developing programs on their own, or in partnership with others, to take advantage of these opportunities.