We continue our efforts to keep you informed of key legal developments relating to COVID-19. Today, we highlight the most recent developments relating to the $349 billion U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).
For an overview of the PPP and other key provisions in the CARES Act, see our prior updates HERE.
Over the last ten days, the U.S. Department of the Treasury (the “Treasury”) repeatedly announced that SBA-approved lenders would begin accepting Paycheck Protection Program applications from small business owners and sole proprietorships on Friday, April 3rd. However, with the overwhelming demand for PPP loans and evolving guidelines from the federal government, many banks – including Citibank, Fifth Third Bank and Wells Fargo – have delayed accepting online applications until today (Monday, April 6th) or later. Even for customers of banks – such as Bank of America and JPMorgan Chase – that launched their online platforms last Friday, there are reports of confusion over application criteria and documentation requirements, as well as technology issues with the web-based platforms.
By and large, banks are accepting PPP applications only from their existing customers. Additionally, we have reports that certain banks have limited access further by requiring customers not just to have accounts, but also have outstanding business loans, with their institution. As of this writing, Wells Fargo had announced that it planned to disburse $10 billion in loans, but that it had already received enough applications to cover that amount; so, it is suspending the intake of new applications.
Despite the difficulties, the SBA Administrator, Jovita Carranza, tweeted on Friday evening that banks had begun processing PPP applications for 13,669 businesses in amounts totaling over $4.3 billion (see HERE). Over the weekend, Bank of America announced that it had received 185,000 loan applications for an amount of roughly $30 billion.
The SBA and the Treasury continue to update PPP forms and guidance for lenders and borrowers (see HERE). The Treasury also has begun to issue its own FAQs (see HERE). We highlight key developments below.
The Interim Final Rule (“Interim Rule”) applies to PPP applications through June 30, 2020 (or until PPP funds are exhausted). Comments will be accepted for 30 days after the rule is published in the Federal Register, and the SBA may revise the rule based on comments received. The rule provides important details for calculating loan amounts and sets forth additional requirements, notwithstanding that – in a few instances – its consistency with the statute’s language is questionable. We highlight key provisions below.
As a general rule, small businesses are classified as those with not more than 500 employees; however, for certain industries, the SBA uses a different employee count metric (see Table of Size Standards HERE). Moreover, under the CARES Act, a business with a NAICS code of 72 (e.g. food and hospitality industry) that has more than one location may also qualify for a PPP loan if each of its individual locations employ not more than 500 employees.
When determining an applicant’s number of employees, the SBA will consider that applicant together with its affiliates. The Affiliation Rules issued by the SBA on Friday night describe four (4) affiliation tests based on control that apply to business concerns and corporate entities applying for PPP loans. When one entity can control another, they are affiliates. When a third-party controls two entities, they are affiliated. The rule emphasizes that it “does not matter whether control is exercised, so long as the power to control exists.” Key points from the 4 tests include:
The Affiliation Rules do not apply to faith-based organizations when the relationship between the organization is based on a religious teaching, belief or “otherwise constitutes a part of the exercise of religion.”
Under the CARES Act, these affiliation rules are waived for (1) businesses that have a NAICS code of 72 at the time the loan is disbursed; (2) businesses operating a franchise that have been assigned a franchise identifier code by the SBA; and (3) businesses that receive financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958.
The current form of the PPP application requires applicants to identify in an Addendum A any business in which the applicant or any of its owners has an ownership interest or which have common management, but without requiring disclosure of the number of employees of any such disclosed business. It is not clear how banks or the SBA will utilize this information for purposes of applying the Affiliate Rules and processing PPP applications. Moreover, as of this writing, certain bank online application procedures do not provide for uploading of any Addendum A disclosure.
The rollout of the PPP evolves daily; in the coming days, we plan to report on further guidance available for independent contractors and self-employed individuals who may apply for PPP loans as early as Friday, April 10th.
We understand that federal, state and local officials are keenly aware of the need for further economic relief, as well as stimulus packages that fund improvements in America's infrastructure, including its health and digital infrastructure. We are monitoring these proposals and will report on further available information as the week unfolds.
We will continue to send periodic updates on topics that may be helpful to your businesses. If you have a particular issue that you’d like us to address or if you’d like to be removed from the distribution list, please let us know.
Feel free to contact us with any questions.
Gery Chico and Jon Leach