Loan and loan guarantees
Program size
Treasury Secretary authorized to make loans, loan guarantees, and other investments in support of eligible businesses, States, and municipalities that do not, in the aggregate, exceed $500bn.
Allocation among industries
Passenger air carriers
Paragraph (1): not more than $25bn to make loans and loan guarantees for passenger air carriers, eligible businesses that are certified under part 145 of title 14, Code of Federal Regulations, and approved to perform inspection, repair, replace, or overhaul services, and ticket agents (as defined in section 40102 of title 49, United States Code).
Cargo air carriers
Paragraph (2): not more than $4bn to make loans and loan guarantees for cargo air carriers.
Businesses critical to national security
Paragraph (3): not more than $17bn to make loans and loan guarantees for businesses critical to maintaining national security.
Lending to eligible businesses
Paragraph (4): not more than the sum of $454bn and any amounts available under paragraphs (1), (2), and (3) that are not used as provided under those paragraphs to make loans and loan guarantees to, and other investments in, programs or facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, States, or municipalities by:
- purchasing obligations or other interests directly from issuers of such obligations or other interests;
- purchasing obligations or other interests in secondary markets or otherwise; or
- making loans, including loans or other advances secured by collateral.
Terms and conditions
Treasury approves terms
A loan, loan guarantee, or other investment by Treasury shall be made in such form and on such terms and conditions and contain such covenants, representations, warranties, and requirements (including requirements for audits) as Treasury determines appropriate.
Interest rate
Any loans made by Treasury shall be at a rate determined by Treasury based on the risk plus the current average yield on outstanding marketable obligations of the United States of comparable maturity.
No forgiveness of principal
The principal amount of any obligation issued by an eligible business, State, or municipality under a program described herein shall not be reduced through loan forgiveness.
No covered entity is eligible
No covered entity may be eligible for any such loan, loan guarantee or other investment.
The term "covered entity" means an entity in which a covered individual directly or indirectly holds a controlling interest. For the purpose of determining whether an entity is a covered entity, the securities owned, controlled, or held by 2 or more individuals who are related (as described in paragraph (B) below) shall be aggregated.
The term "covered individual" means— (A) the President, the Vice President, the head of an Executive department, or a Member of Congress; and (B) the spouse, child, son-in-law, or daughter-in-law, as determined under applicable common law, of an individual described in subparagraph (A).
The term "controlling interest" means owning, controlling, or holding not less than 20 percent, by vote or value, of the outstanding amount of any class of equity interest in an entity.
Loans and loan guarantees under paragraphs (1), (2) and (3)
Treasury may enter into agreements to make loans or loan guarantees to one or more eligible businesses under paragraphs (1), (2) and (3) if Treasury determines that, in Treasury's discretion—
- Eligible business: (A) the applicant is an eligible business for which credit is not reasonably available at the time of the transaction;
- Prudence: (B) the intended obligation by the applicant is prudently incurred;
- Pricing reflects risk: (C) the loan or loan guarantee is sufficiently secured or is made at a rate that— (i) reflects the risk of the loan or loan guarantee; and (ii) is to the extent practicable, not less than an interest rate based on market conditions for comparable obligations prevalent prior to the outbreak of the coronavirus disease 2019 (COVID–19);
- Maximum duration: (D) the duration of the loan or loan guarantee is as short as practicable and in any case not longer than 5 years;
- Limitation on purchase of equity securities: (E) the agreement provides that, until the date 12 months after the date the loan or loan guarantee is no longer outstanding, neither the eligible business nor any affiliate of the eligible business may purchase an equity security that is listed on a national securities exchange of the eligible business or any parent company of the eligible business, except to the extent required under a contractual obligation in effect as of the date of enactment of the CARES Act;
- Limitation on dividends and other distributions: (F) the agreement provides that, until the date 12 months after the date the loan or loan guarantee is no longer outstanding, the eligible business shall not pay dividends or make other capital distributions with respect to the common stock of the eligible business;
- Maintain employment: (G) the agreement provides that, until September 30, 2020, the eligible business shall maintain its employment levels as of March 24, 2020, to the extent practicable, and in any case shall not reduce its employment levels by more than 10 percent from the levels on such date;
- Located in United States: (H) the agreement includes a certification by the eligible business that it is created or organized in the United States or under the laws of the United States and has significant operations in and a majority of its employees based in the United States; and
- Continued operation in jeopardy: (I) for purposes of a loan or loan guarantee under paragraphs (1), (2), and (3), the eligible business must have incurred or is expected to incur covered losses such that the continued operations of the business are jeopardized, as determined by Treasury.
Compensation limitations
Treasury may only enter into an agreement with an eligible business to make a loan or loan guarantee under paragraph (1), (2) or (3) if such agreement provides that, during the period beginning on the date on which the agreement is executed and ending on the date that is 1 year after the date on which the loan or loan guarantee is no longer outstanding:
(1) no officer or employee of the eligible business whose total compensation exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020):
- will receive from the eligible business total compensation which exceeds, during any 12 consecutive months of such period, the total compensation received by the officer or employee from the eligible business in calendar year 2019; or
- will receive from the eligible business severance pay or other benefits upon termination of employment with the eligible business which exceeds twice the maximum total compensation received by the officer or employee from the eligible business in calendar year 2019; and
(2) no officer or employee of the eligible business whose total compensation exceeded $3,000,000 in calendar year 2019 may receive during any 12 consecutive months of such period total compensation in excess of the sum of— (A) $3,000,000; and (B) 50 percent of the excess over $3,000,000 of the total compensation received by the officer or employee from the eligible business in calendar year 2019.
"Total compensation" includes salary, bonuses, awards of stock, and other financial benefits provided by an eligible business to an officer or employee of the eligible business.
Procedures to be published
As soon as practicable, but in no case later than 10 days after the date of enactment of the CARES Act, Treasury shall publish procedures for application and minimum requirements, which may be supplemented by Treasury in Treasury's discretion, for making loans, loan guarantees, or other investments under paragraphs (1), (2) and (3).
Consideration
Treasury may not issue a loan to, or a loan guarantee for, an eligible business under paragraph (1), (2), or (3) unless:
(A) (i) the eligible business has issued securities that are traded on a national securities exchange; and (ii) Treasury receives a warrant or equity interest in the eligible business; or
(B) in the case of any eligible business other than an eligible business described in subparagraph (A), Treasury receives, in the discretion of Treasury— (i) a warrant or equity interest in the eligible business[1]; or (ii) a senior debt instrument issued by the eligible business.
The terms and conditions of any warrant, equity interest, or senior debt instrument so received shall be set by Treasury and shall meet the following requirements:
(A) Such terms and conditions shall be designed to provide for a reason able participation by Treasury, for the benefit of taxpayers, in equity appreciation in the case of a warrant or other equity interest, or a reasonable interest rate premium, in the case of a debt instrument.
(B) For the primary benefit of taxpayers, Treasury may sell, exercise, or surrender a warrant or any senior debt instrument received under this subsection. Treasury shall not exercise voting power with respect to any shares of common stock acquired under this provision.
(C) If Treasury determines that the eligible business cannot feasibly issue warrants or other equity interests as required by this subsection, Treasury may accept a senior debt instrument in an amount and on such terms as Treasury deems appropriate.
Loans and loan guarantees under paragraph (4)
Program to finance bank loans to medium-sized businesses
Treasury shall endeavor to seek the implementation of a program or facility described in paragraph (4) that provides financing to banks and other lenders that make direct loans to eligible businesses including, to the extent practicable, nonprofit organizations, with between 500 and 10,000 employees.
Federal Reserve may structure the program to take advantage of public or private leverage in order to increase the total funds available.
Direct loans
"Direct loan" means a loan under a bilateral loan agreement that is:
(I) entered into directly with an eligible business as borrower; and
II) not part of a syndicated loan, a loan originated by a financial institution in the ordinary course of business, or a securities or capital markets transaction.
Interest rate
An annualized interest rate that is not higher than 2 percent per annum
United States businesses
A program or facility in which Treasury makes a loan, loan guarantee, or other investment under paragraph (4) shall only purchase obligations or other interests (other than securities that are based on an index or that are based on a diversified pool of securities) from, or make loans or other advances to, businesses:
(1) that are created or organized in the United States or under the laws of the United States and
(2) that have significant operations in and a majority of its employees based in the United States.
Eligible borrower
Any eligible borrower applying for a direct loan must make a good-faith certification that:
(I) the uncertainty of economic conditions as of the date of the application makes necessary the loan request to support the ongoing operations of the recipient;
(II) the funds it receives will be used to retain at least 90 percent of the recipient's workforce, at full compensation and benefits, until September 30, 2020;
(III) the recipient intends to restore not less than 90 percent of the workforce of the recipient that existed as of February 1, 2020, and to restore all compensation and benefits to the workers of the recipient no later than four months after the termination date of the public health emergency declared by Treasury of Health and Human Services on January 31, 2020, under section 319 of the Public Health Services Act (42 U.S.C. 247d) in response to COVID–19;
(IV) the recipient is an entity or business that is domiciled in the United States with significant operations and employees located in the United States;
(V) the recipient is not a debtor in a bankruptcy proceeding;
(VI) the recipient is created or organized in the United States or under the laws of the United States and has significant operations in and a majority of its employees based in the United States;
(VII) the recipient will not pay dividends with respect to the common stock of the eligible business, or repurchase an equity security that is listed on a national securities exchange of the recipient or any parent company of the recipient while the direct loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of the CARES Act;
(VIII) the recipient will not outsource or offshore jobs for the term of the loan and two years after completing repayment of the loan;
(IX) the recipient will not abrogate existing collective bargaining agreements for the term of the loan and two years after completing repayment of the loan; and
(X) that the recipient will remain neutral in any union organizing effort for the term of the loan.
Limitation on equity repurchases
Treasury may make a loan, loan guarantee, or other investment under paragraph (4) as part of a program or facility that provides direct loans (except pursuant to a waiver necessary to protect the interests of the Federal government) only if the applicable eligible businesses agree—
(I) until the date 12 months after the date on which the direct loan is no longer outstanding, not to repurchase an equity security that is listed on a national securities exchange of the eligible business or any parent company of the eligible business while the direct loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of the CARES Act;
(II) until the date 12 months after the date on which the direct loan is no longer outstanding, not to pay dividends or make other capital distributions with respect to the common stock of the eligible business; and
(III) to comply with the limitations on compensation described above.
Main street lending program
Board of Governors of the Federal Reserve System authorized to establish a main street lending program or other similar program or facility that supports lending to small and midsized businesses on such terms and conditions as the Board may set consistent with Section 13(3) of the Federal Reserve Act, including any such program in which Treasury makes a loan, loan guarantee, or other investment under paragraph (4).
Section 13(3) of the Federal Reserve Act
The Board has established policies and procedures governing emergency lending under Section 13(3). Such policies and procedures shall be designed to ensure that any emergency lending program or facility is for the purpose of providing liquidity to the financial system, and not to aid a failing financial company, and that the security for emergency loans is sufficient to protect taxpayers from losses and that any such program is terminated in a timely and orderly fashion.
The policies and procedures established by the Board shall require that a Federal reserve bank assign, consistent with sound risk management practices and to ensure protection for the taxpayer, a lendable value to all collateral for a loan executed by a Federal reserve bank under Section 13(3) in determining whether the loan is secured satisfactorily for purposes of Section 13(3).
The Board shall establish procedures to prohibit borrowing from programs and facilities by borrowers that are insolvent. Such procedures may include a certification from the chief executive officer (or other authorized officer) of the borrower, at the time the borrower initially borrows under the program or facility (with a duty by the borrower to update the certification if the information in the certification materially changes), that the borrower is not insolvent.
A borrower shall be considered insolvent for purposes of this subparagraph, if the borrower is in bankruptcy, resolution under title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or any other Federal or State insolvency proceeding.
A program or facility that is structured to remove assets from the balance sheet of a single and specific company, or that is established for the purpose of assisting a single and specific company avoid bankruptcy, resolution under title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or any other Federal or State insolvency proceeding, shall not be considered a program or facility with broad-based eligibility.
Payment holiday for direct loans
For the first six months after any such direct loan is made, or for such longer period as Treasury may determine in his discretion, no principal or interest shall be due and payable.
Paycheck Protection Program (PPP)
Small business concerns and others benefit
The PPP covers eligible small business concerns[2], business concerns, nonprofit organizations, veterans organizations individuals who operate as sole proprietors or independent contractors, self-employed individuals and tribal business concerns.
Availability
Loans under the PPP are available to eligible recipients through June 30, 2020, with streamlined eligibility criteria and without any collateral or personal guarantee.
Delegated authority to SBA lenders
Existing SBA lenders are delegated the authority to approve and make loans to eligible recipients that:
- were in operation on February 15, 2020; and
- had employees to which they paid salaries and for which they paid payroll taxes, or that paid independent contractors.
Borrower certifications
Borrowers also need to make good-faith certifications that:
- current economic uncertainty makes the loan necessary to support ongoing operations;
- the proceeds would be used for retaining workers, maintaining payroll or covering existing overhead costs, but would not need to show that credit was unavailable elsewhere; and
- they have not applied for or received amounts under the same facility for the same purpose.
Use of proceeds
Loan proceeds can be used for payroll support (including group health costs and insurance premiums), employee salaries, mortgage interest or rent payments, utility payments, and interest on existing debt obligations, rather than just the capital costs allowable under existing SBA Section 7(a) programs.
Interest rate
The loans will be at an interest rate no higher than 4 percent, with all loan fees, as well as collateral and personal guarantee requirements and subsidy recoupment fees, waived, and with 100 percent of loans guaranteed by the federal government.
Non-recourse lending
Lending is on a nonrecourse basis, unless an individual member of the borrower misuses the loan proceeds.
Employee size standards
The PPP includes a limit on the size of eligible recipients—the greater of 500 employees or the existing SBA size standard for employees for the industry in which the borrower operates. It also allows for some flexibility with respect to the implementation of these standards.
For instance:
- In applying these size guidelines, there are exceptions to the existing affiliation rules for (a) accommodations and food services business concerns with no more than 500 employees, (b) business concerns operating as franchises, and (c) business concerns that receive funding from small business investment companies.
- Other than these exceptions, the existing SBA affiliation rules continue to apply to loans under the PPP. These affiliation rules generally aggregate the employees of companies that are under common control, and, as a result, portfolio companies controlled by private equity sponsors and other investment firms may not be eligible to participate in the program.
- In addition, business concerns in the accommodations and food services industries that have more than one physical location and no more than 500 employees at each location would be eligible to receive a loan under the PPP.
- Separately, the bill would rescind the interim final affiliation rules, which the SBA published on February 10, 2020.
Loan amounts
The PPP would authorize loan amounts up to the lesser of (a) $10m or (b) 2.5 times average monthly payroll costs incurred in the one-year period before the loan is made (or shorter period in case of seasonal business or employer that was not in business between February and June 2019), plus the value of any outstanding amount under any existing EIDL loan received after January 31, 2020—i.e. PPP loans can be used to repay or refinance certain existing EIDL loans.
Payroll costs
The PPP sets out a comprehensive definition of “payroll costs” (e.g. salary, cash tips, leave benefits, insurance and retirement benefits)—a definition that excludes:
- any compensation for individual employees in excess of a salary of $100,000, as prorated for the period from February 15 to June 30, 2020;and
- compensation paid to employees residing outside the United States.
For sole proprietors and independent contractors, “payroll costs” are similarly defined, and include any annual compensation, commissions or other similar payments up to $100,000, as prorated for the period from February 15 to June 30, 2020.
There are special provisions for seasonal businesses and businesses that were not in operation between February 15 and June 30, 2019.
Deferral
Lenders are required to defer payments on PPP loans for between six months and one year, with the Small Business Administration to issue deferment guidance to lenders within 30 days of enactment.
Potential forgiveness
The portion of loans used to cover payroll, mortgage, rent or utility costs from February 15 to June 30, 2020 are eligible for forgiveness, with the forgiven amount nontaxable.
Employment incentives
In order to incentivize the retention of employees at existing salaries, the amount of loan forgiveness is reduced by:
- Any reduction in the average number of monthly full-time equivalent ("FTE") employees employed by the loan recipient during the eight weeks following disbursement of the loan (the "covered period") as compared to the average number of monthly FTE employees employed by the recipient during, at the recipient’s election, either the period between February 15 and June 30, 2019 or the period between January 1 and February 29, 2020 (the "reference period"), with special rules for seasonal employers; for example, if the recipient had an average of 95 FTE employees during the covered period and an average of 100 FTE employees during the reference period, then the recipient would only be entitled to 95 percent of the loan forgiveness that would otherwise be available; and
- The amount of any reduction in total salary or wages of any employee during the covered period that is in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed (taking into account only employees who did not receive, during any single pay period in 2019, wages or salary at an annualized rate of pay in an amount more than $100,000).
In order to incentivize the rehiring of employees and the reversal of any recent salary reductions, loan forgiveness will be determined without regard to the reduction in the number of FTEs of a loan recipient and any reduction in salary or wages of employees of a loan recipient, in each case in between February 15, 2020 and 30 days after enactment of the CARES Act, that is eliminated prior to June 30, 2020.
There are detailed application and documentation requirements for borrowers seeking forgiveness, with lenders required to decide any such application within 60 days, with forgiveness capped at the amount of the loan principal.
To limit lender exposure, the SBA is required to remit the forgiven amounts to lenders within 90 days of the lender determining the amount of forgiveness.
Lenders can report anticipated forgiveness amounts to the SBA in advance of a formal determination, with the SBA required to purchase these reported amounts, including on a pooled basis, within five days.
There is a hold harmless provision insulating lenders from enforcement action or penalties with respect to forgiveness where the lender received verified documentation from an eligible recipient.
Processing compensation: 0 percent risk weight
Other forms of lender protection include:
- reimbursement by the SBA for processing at a rate of 1 percent to 5 percent of the financing amount outstanding at the time of loan disbursement, depending on loan size; and
- risk weighting of 0 percent for PPP loans in connection with the calculation of risk-based capital requirements.
No secondary sales
The sale of PPP loans on the secondary market is prohibited until a borrower requested forgiveness (i.e. only the remaining, non-forgiven balance could be sold on the secondary market), and the SBA would be required to fully guarantee the non-forgiveness balance of the loans, the maximum maturity of which would be 10 years.
SBA administration
The Small Business Administration will administer the PPP, with existing SBA lenders given the authority to make and approve loans thereunder. The authority to make these loans can be extended to additional Lenders upon determination of the Small Business Administration and the Secretary of the Treasury.
[1] Treasury directed to prescribe such regulations or guidance as may be necessary or appropriate to carry out the purposes of this section, including guidance providing that the acquisition of warrants, stock options, common or preferred stock or other equity under this section does not result in an ownership change for purposes of Section 382 of the Internal Revenue Code of 1986 [which limits use of net operating loss carryforwards and other tax assets arising prior to certain changes in ownership].
[2] “Small business concerns” are for-profit, independently owned and operated entities that are not dominant in their field of operation, and that meet the size requirements under the relevant SBA program. Nonprofits that receive Medicaid reimbursements are not eligible to receive loans under the PPP.
