Coronavirus Aid, Relief and Economic Security (CARES) Act – Update 03-25-2020

We are closely monitoring the progress of the CARES Act (Coronavirus Aid, Relief and Economic Security) Act. The CARES Act is in the legislative process and acticipated to be signed into law in the coming days. Important note: these programs are NOT available until signed into law by the President. 

The sections of the stimulus bill that are relevant to small business lending:

  • $350 billion in loan forgiveness grants through community banks to small businesses and non-profits to maintain existing workforce and help pay for other expenses like rent, mortgage, and utilities. The loans would be available during an emergency period  ending June 30, and would be forgiven if the employer continued to pay workers for the duration of the crisis.
  • $10 billion for SBA emergency grants of up to $10,000 to provide immediate relief for small business operating costs.
  • $17 billion for SBA to cover 6 months of payments for small businesses with existing SBA loans.

The section 7(a) grants are the bulk of the funding and are the vehicle for forgivable loans, so a deeper dive on that:

  • Establishes the maximum 7(a) loan amount to $10 million through December 31, 2020 and provides a formula by which the loan amount is tied to payroll costs incurred by the business to determine the size of the loan.
  • Specifies allowable uses of the loan include payroll support, such as employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent, and utility payments.
  • Increases the government guarantee of 7(a) loans to 100 percent through December 31, 2020, at which point guarantee percentages will return to 75 percent for loans exceeding $150,000 and 85 percent for loans equal to or less than $150,000.
  • Allows complete deferment of 7(a) loan payments for at least six months and not more than a year, and requires SBA to disseminate guidance to lenders on this deferment process within 30 days.
  • Requires the SBA to provide a lender with a process fee for servicing the loan. Sets lender compensation fees at five percent for loans of not more than $350,000; three percent for loans of more than $350,000 and less than $2,000,000; and one percent for loans of not less than $2,000,000.

And specific to loan forgiveness, Section 1106:

  • Establishes that the borrower shall be eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.
  • Amounts forgiven may not exceed the principal amount of the loan. Eligible payroll costs do not include compensation above $100,000 in wages. Forgiveness on a covered loan is equal to the sum of the following payroll costs incurred during the covered 8 week period compared to the previous year or time period, proportionate to maintaining employees and wages:
  • Payroll costs plus any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation) plus any payment on any covered rent obligation + and any covered utility payment.
  • The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their prior year compensation. To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.
  • Allows forgiveness for additional wages paid to tipped workers.
  • Borrowers will verify through documentation to lenders their payments during the period. Lenders that receive the required documentation will not be subject to an enforcement action or penalties by the Administrator relating to loan forgiveness for eligible uses.
  • Upon a lender’s report of an expected loan forgiveness amount for a loan or pool of loans, the SBA will purchase such amount of the loan from the lender.
  • Canceled indebtedness resulting from this section will not be included in the borrower’s taxable income.
  • Any loan amounts not forgiven at the end of one year is carried forward as an ongoing loan with terms of a max of 10 years, at max 4% interest. The 100% loan guarantee remains intact.

Read the full bill

Summary Document

The CARES Act is in the legislative process and acticipated to be signed into law in the coming days. Important note: these programs are NOT available until signed into law by the President.