Understanding Title I of the CARES ACT, Including the Paycheck Protection Program

On March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), a third piece of emergency legislation aimed at providing Americans with relief from the Coronavirus pandemic, which continues to sweep across the country relentlessly leaving lost lives, fractured families, and bankrupt businesses in its wake. The legislation is enormous – close to 900 pages – and contains hundreds of provisions that amend numerous federal statutes and appropriates $2.2 trillion in financial relief to address the public health and economic crises caused by the Coronavirus pandemic.

The Act contains two sections:

Division A contains five major titles, including:

(1) Keeping American Workers Paid and Employed Act.

(2) Assistance for American Workers, Families and Businesses.

(3) Supporting America’s Health Care System in the Fight Against the Coronavirus.

(4) Economic Stabilization and Assistance to Severely Distressed Sectors of the U.S. Economy.

(5) Coronavirus Relief Funds.

Division B appropriates additional funds to the several federal agencies tasked with addressing the country’s public health crisis and economic emergencies during the Coronavirus pandemic.

This blog discusses Title 1 of Division A. Future blogs will discuss the other four titles as well as Division B. As additional bills moving through the House and Senate are enacted into law we will cover them for you here.

Title 1. Keeping American Workers Paid and Employed Act.

Paycheck Protection Program

Title I amends the Small Business Act to create the Paycheck Protection Program (“PPP”), which provides up to eight weeks of cash flow assistance to small businesses through federally guaranteed loans to employers who maintain their payrolls. Congress initially appropriated $349 billion to fund the program. The Senate bill supplements this amount an additional $310 billion. The House is yet to act.

The program authorizes the Small Business Administration (“SBA”) to guarantee 100 percent of all PPP loans made between February 15, and June 30, 2020, which is the “covered period.” During this time, any business concern (including a small business concern), non-profit organization, veterans organization, or tribal business concern is eligible to receive a PPP loan if it (1) employs fewer than 500 employees, or (2) employs the standard number of individuals the SBA has established for the industry in which it operates. The statute includes an expansive definition of “employee” to include individuals employed full-time, part-time or on any other basis.

The objective of offering fully guaranteed PPP loans to provide desperately needed cash small businesses has not been fulfilled because the 500 employee limit applies to each physical location of a business operating in the food service or lodging industries. This loophole allows large hotel and restaurant chains – think Marriott, Ruths’ Chris – to benefit from the program at the expense of genuinely small businesses. Even Harvard University appears to have secured an $8 million PPP loan. The SBA’s affiliation rules have also been waived during this period of time, which opens up the program to large companies and their affiliates. This has allowed well-known national franchises like Shake Shack and Potbelly to secure PPP loans. Individuals who operate as sole proprietors or independent contractors, as well as certain self-employed individuals, are also eligible to receive PPP loans. Initial data reported by the SBA, however, indicate that much of the $349 billion thus far appropriated has been loaned to large national hotel and restaurant chains, including almost 100 publicly traded companies. It seems few funds have been made available to genuinely small businesses and sole proprietors, which will hit some communities quite hard.

Under the PPP, the maximum loan amount offered is calculated by adding average monthly payroll (multiplied by 2.5) and any outstanding SBA loan balance before a PPP loan is made. That amount cannot exceed $10,000,000. The loans can be used to pay (1) payroll costs, (2) continuation of group health care benefits, (3) employee salaries, commissions, and similar compensation, (4) rent or mortgage, (5) utilities, and (6) interest on debt incurred before the covered period.

When evaluating a potential borrower, lenders must consider a number of factors, including (1) whether the borrower was operating on February 15, 2020, (2) whether it had employees or independent contractors to whom it paid compensation, (3) whether the borrower can certify the current economic conditions make a loan necessary to continue operating, (4) whether the borrower can certify the funds will be used to retain workers and maintain payroll or make mortgage, lease or utility payments, (5) whether the borrower can certify it has only one application pending for a loan, and (6) whether the borrower can certify that from February 15 through December 31, 2020, it won’t receive funds under the PPP for the same purposes.

During the covered period, the requirement that a small business concern cannot obtain credit elsewhere does not apply to PPP loans, which means a borrower can apply for credit from private lenders at the same time it applies for a PPP loan. A borrower need not provide a personal guarantee or collateral to secure a PPP loan. The interest on a loan cannot exceed 4 percent. A PPP loan can be used to refinance an existing SBA loan. The SBA has no recourse against an individual shareholder, member or partner of a borrower so long as they use the funds for the purposes permitted under the Act.

During the covered period, lenders of PPP loans are required to defer repayment of those loans – including principal, interest and fees – for not less than 6 months and not more than 12 months after repayment would otherwise be due. There are no pre-payment penalties for early payments made on covered loans. Recipients of PPP loans are also eligible to receive economic injury disaster loans (“EIDL”) so long as EIDL funds are not used for the same purposes as PPP funds.

Under the Act, borrowers of PPP loans are eligible to apply to their lender for forgiveness of indebtedness for amounts they spend on (1) payroll costs, (2) payments of interest on mortgage obligations, (3) rent, and (4) utilities during the eight-week period these loans are provided. The amount of loan forgiveness cannot exceed the principal amount of the financing made available under the applicable covered loan, and is subject to adjustments based on number of employees retained, salary and wages paid, payments to tipped workers, and employees re-hired. Within 60 days of receiving a borrowers application for loan forgiveness, the lender must make its decision. Within 90 days of the date on which an amount forgiven is determined, the SBA must remit to the lender an amount equal to that amount plus any interest accrued through the date of payment. The amounts forgiven are considered canceled indebtedness by a lender authorized under section 7(a) of the Small Business Act. Those amounts can be excluded from gross income for purposes of determining taxable income for that tax year.

Treasury can establish criteria to enable insured financial institutions that don’t otherwise participate in SBA lending programs to participate in the PPP loan program. What those criteria are, who they apply to, and how they differ from the SBA requirements will be closely watched to see if this program in any way undermines the SBA’s PPP program or provides guaranteed loans on better terms to politically favored industries or companies.

Grant Programs

The Act provides $265 million for two grant programs to help small businesses contend with the economic fallout from the Coronavirus. Section 1103 authorizes SBA to use $240 million for entrepreneurial development grants to small business development centers, women’s business centers, and state and local associations representing those organizations (so-called “resource partners”). The funds must be used to provide education, training and advise to small businesses and their employees on various subjects affecting their business, including (1) accessing and applying for resources provided by SBA and other agencies, (2) preventing the spread of the Coronavirus, (3) understanding the impact of the Coronavirus on supply chains and the distribution and sale of products, (4) managing and practicing telework, (5) managing and practicing remote customer service, (6) managing and mitigating the risks of cyber threats to remote customer service and telework, (7) mitigating the effects of reduced travel, and (8) any other relevant business practices needed to mitigate the economic effects of the Coronavirus. No matching funds are required to qualify for these grants.

Section 1103 authorizes SBA to award the remaining $25 million to state and local associations so they can create a single centralized hub in their jurisdictions to distribute Coronavirus information to their members and the public. These hubs must include a website that consolidates the resources and information available from all federal agencies about the Coronavirus useful to small businesses. The funds must also be used to create a training program to educate state and local associations and their members on the resources and information available via the website. Within six months of enactment of the Act, SBA must provide Congress with a report on the uses of the grant funds and the effectiveness of these programs.

The Act provides $10 million for the Minority Business Development Agency in the Department of Commerce to award grants to minority business centers and minority chambers of commerce to provide education, training, and advise to minority business enterprises and their employees on the same subjects discussed above under section 1103 of the Act. Again, no matching funds are required to qualify for these grants. Within six months of enactment of the Act, the Agency must provide Congress with a report on the uses of the grant funds and the effectiveness of these programs.

The Economic Injury Disaster Loan Program

Section 1110 of the Act expands the Economic Injury Disaster Loan (“EIDL”) program for the remainder of 2020 by adding $10 billion to the program. It now allows an “eligible entity” to receive assistance under the program, in addition to the small business concerns, private non-profits, and small agricultural cooperatives that were previously eligible. An “eligible entity” is a business, cooperative, ESOP, or tribal business concern with no more than 500 employees. It includes sole proprietorships and independent contractors.

The expanded program allows SBA to provide a qualified borrower an advance of up $10,000 on an disaster loan for which it has applied in response to the Coronavirus pandemic. To ensure borrowers receive funds quickly, the SBA will waive (1) the rules related to personal guarantees on advances and loans under a certain amount, (2) the requirement that an applicant be in business for the one-year period prior to the disaster so long as it was in operation on January 31, 2020, and (3) the requirement an applicant is unable to obtain credit elsewhere. SBA can issue the funds within three days of receiving an application.

The funds can be used for any purposes allowed under the section 7(b)(2) EIDL program, including (1) paying sick leave for employees who can’t work due to the Coronavirus, (2) maintaining payroll to retain employees during business disruptions or slowdown, (3) meeting increased costs for materials due to supply chain disruptions, (4) making rent or mortgage payments, and (5) repaying debts that can’t be me due to revenue losses. An applicant is not required to repay any amounts of an advance even if denied a loan.

Federal Subsidies for Certain Loan Payments

Section 1112 requires the SBA to pay the principal, interest, and any associated fees that are owed on certain new and existing SBA loans issued under sections 7(a) and (m) of the Small Business Act and Title V of the Small Business Investment Act for a period of six-months from when the next payment is due. This repayment program is based on Congress’ sense that all borrowers who received loans under these programs have been adversely affected by the Coronavirus pandemic and need financial relief. To qualify for such relief the loans must be in a regular servicing status. Any payments made by the SBA relieves the borrower of the obligation to repay those amounts. The SBA is directed to take additional steps to reduce the financial burden on both borrowers and lenders caused by this public health emergency. Congress had appropriated $17 billion to carry out this section of the law.

Amendments to U.S. Bankruptcy Code

Section 1113 of the Act amends certain sections of the U.S. Bankruptcy Code to expand bankruptcy relief for borrowers by (1) excluding from current monthly income any payments made under federal law relating to the national emergency declared by the President with respect to the Coronavirus, and (2) allowing the modification of a reorganization plan under Chapter 11 if the debtor is experiencing material financial hardship due to the Coronavirus pandemic. These provisions sunset one year after enactment of the section.