Lewis Kappes

On April 21, 2020, Congress approved $310 billion in additional funding for the Paycheck Protection Program (“PPP”). The U.S. Small Business Administration (“SBA”) resumed accepting PPP loan applications on April 27, 2020. With limited funding and overwhelming demand from small businesses, it is expected that the additional funds will be depleted. The implementation of the new PPP has left many borrowers and lenders with an abundance of questions and uncertainty.
The SBA released two new Interim Final Rules and a SBA Procedural Notice to supplement the first PPP Interim Final Rule released on April 3, 2020. The Interim Final Rules and SBA Procedural Notice come in response to both borrower and lender confusion over several important issues raised in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the first PPP Interim Final Rule.
Second Interim Final Rule: Additional PPP Eligibility Criteria and Requirements for Certain Pledgees of Loans
The SBA released a Second Interim Final Rule on April 14, 2020. The text of the Second Interim Final Rule can be found here. The Second Interim Final Rule provides the following for PPP loans:

Individuals with self-employment income who file a Form 1040, Schedule C, are eligible for a PPP loan if they meet certain requirements. The Second Interim Rule also provides guidance on how these individuals calculate their loan amount, the eligible use of PPP loan proceeds, and the amounts eligible for forgiveness.
SBA regulations (including 13 CFR 120.110 and 120.140) do not apply to PPP loans to prohibit an otherwise eligible business owned (in whole or part) by an outside director or holder of a less than 30 percent equity interest in a PPP Lender from obtaining a PPP loan from the PPP Lender on whose board the director serves or in which the equity owner holds an interest, provided that the eligible business owned by the director or equity holder follows the same process as any similarly situated customer or account holder of the Lender. However, this provision does not apply to a director or owner who is also an officer or key employee of the PPP Lender.
The requirements for loan pledges under 13 CFR 120.434 do not apply to PPP loans pledged

for borrowings from a Federal Reserve Bank (FRB) or advances by a Federal Home Loan Bank (FHLB).
Third Interim Final Rule: Requirements for Promissory Notes, Authorizations, Affiliation, and Eligibility
The Third Interim Final Rule was released on April 24, 2020. The text of the Third Interim Final Rule can be found here. The guidance set forth in the Third Interim Final Rule provides the following for PPP loans:

Lenders may use their own promissory note or an SBA form of promissory note.
While lenders do not need a separate SBA Authorization to issue PPP loans, lenders must have executed the Lender Application Form (SBA Form 2484) to issue PPP loans and receive a loan number for each originated PPP loan.
Hedge funds and private equity firms are not eligible for PPP loans.
While private equity funds may be eligible for PPP loans, borrower must apply the affiliation rules that apply in 13 CFR 121.301(f) and carefully review the required certifications on the Borrower Application Form (SBA Form 2483).
Hospitals owned by government entities are not considered ineligible for PPP loans due to ownership by a state or local government if the hospital receives less than 50% of its funding from state or local government sources, exclusive of Medicaid.
Businesses that are otherwise eligible for PPP loans are not ineligible due to receipt of legal gaming revenues and 13 CFR 120.110(g) is not applicable to PPP loans.
A business’s participation in an ESOP (as defined in 15 U.S.C. § 632(q)(6)) does not result in an affiliation between the business and the ESOP.
If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding either at the time the application is submitted for before the loan is disbursed, the applicant is not eligible for a PPP loan.
Any borrower who repays a PPP loan in full by May 7, 2020, will be deemed by the SBA to have made the certification pertaining to economic uncertainty in good faith.

SBA Procedure Notice: Guidance on Participation Sales for PPP Loans
The SBA released a new Procedural Notice on April 24, 2020 pertaining to participation sales for PPP loans. The Procedural Notice provides lenders with additional guidance regarding the sale of participating interests in PPP loans. The text of the SBA Procedural Notice can be found here. The SBA Procedural Notice provides the following guidance:

Lenders are permitted to sell participating interests in PPP loans to other participating lenders.
SBA’s prior written consent is not needed for lenders to sell participations of up to 100 percent of the principal balance of PPP loans.
Lenders who are purchasing participating interests in PPP loans must have a signed SBA Form 750, SBA Form 3506, or SBA Form 3507.
The originating lender must continue to hold the note, the loan documents, and retain all servicing rights.
The originating lender will be responsible to the SBA with respect to all servicing actions, including requests for advance purchases and loan forgiveness, and will be the party eligible for the guarantee purchase of a PPP loan.
The originating Lender must also provide SBA’s Office of Credit Risk Management (OCRM) with prior written notice of any such participating interest sale.
The originating Lender will be considered to meet the good standing and satisfactory performance requirements of 13 CFR § 120.433 for purposes of PPP loans only.

The SBA Attorneys at Lewis Kappes continue to monitor the developments to SBA programs and the CARES Act as a result of the COVID-19 pandemic. For more information regarding the CARES Act, or any other matters related to the SBA or matters concerning your business, contact: Chris Poling at cpoling@lewiskappes.com.

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