In response to the COVID-19 public health emergency, which has dramatically affected global commerce, the U.S. healthcare system, and the U.S. economy, on March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), a sweeping stimulus bill intended to bolster the U.S. economy, among other things, and provide emergency assistance to qualifying businesses and individuals. Among its many provisions, the CARES Act establishes two loan programs intended to provide liquidity to businesses in the United States: (A) The Keeping American Workers Paid and Employed Act, which creates the Paycheck Protection Program (PPP), and (B) The Coronavirus Economic Stabilization Act of 2020, which creates loan programs to be directed by the United States Department of the Treasury, including a loan program specifically intended to support programs or facilities created by the Board of Governors of the Federal Reserve System.
Q: What is the Coronavirus Economic Stabilization Act of 2020 (CESA)?
A: CESA is Title IV, Subtitle A of the CARES Act, created for the purposes of providing liquidity to the financial system that supports lending to eligible businesses, States or municipalities. The total amount appropriated for CESA is $500 billion.
Q: Is my business eligible to receive relief under CESA?
A: Your business is eligible to apply for relief under CESA if it is:
Q: How much funding is available?
A: CESA authorizes not more than $500 billion in assistance. This amount is allocated as follows:
Q: What criteria does my business need to satisfy to apply for relief under CESA?
A: With respect to businesses eligible for the Specified Treasury Loan Program, the Treasury must determine that:
Q: What forms of relief are available?
A: The Specified Treasury Loan Program will provide direct loans, loan guarantees, and other investments (including purchases of obligations or other interests both directly from issuers and in secondary markets).
For the Joint Treasury / Federal Reserve Loan Program, the loans must be direct loans to businesses as Borrowers and not part of:
Q: When will we know more about the application process?
A: With respect to Specified Treasury Loan Program, the Secretary of the Treasury is required to publish procedures for application to participate in the program within 10 days after enactment of the CARES Act. These procedures likely will include guidance to eligible businesses with respect the application process, including the timing for application submissions and the information or other materials necessary to be considered for relief.
With respect to Joint Treasury / Federal Reserve Loan Program, a specific time period for the application process has not been provided.
Q: If my business receives relief, what will the loan terms be?
A: Subject to the specific terms and conditions discussed below, the Treasury Department has been given broad discretion as to the form, terms and conditions, covenants, and requirements of the loans and loan guarantees. Notwithstanding this broad discretion, the CARES Act provides that loans or loan guarantees can have a term to maturity of no longer than five (5) years and the interest rate will be determined by the Treasury Department based on the risk and current average yield on outstanding marketable obligations of the US of comparable maturity. Further, loans originated under the Specified Treasury Loan Program, the loans should be sufficiently secured or be made at a rate that (1) reflects the risk incurred and (2) to the extent practicable, the interest rate cannot be less than the market rate for comparable obligations prevalent prior to the COVID-19 outbreak.
Note: There is no specific program for mid-sized businesses (500 to 10,000 employees), but the CARES Act does include language requiring the Treasury Department to endeavor to implement a program that provides financing to lenders who would make loans to eligible businesses. A more detailed summary will be created following program implementation.
Q: If my business receives relief, what Conditions will be attached?
A: Businesses that receive assistance under the Specified Treasury Loan Program must agree that they will:
Businesses that receive assistance under the Joint Treasury / Federal Reserve Loan Program must agree that they will:
Note: The CARES Act leaves a number of questions unanswered, including:
Q: What is The Paycheck Protection Program (“PPP”)?
A: PPP is Section 1102 of the Keeping American Workers Paid and Employed Act, which is Title I of the CARES Act. It creates a $349 billion package that expands the Small Business Administration’s (“SBA”) existing Section 7(a) loan program to provide loans and loan guarantees (“PPP loans”) of up to $10 million for small businesses, nonprofit organizations, sole proprietors, independent contractors and self-employed individuals (herein referred to as “Borrowers”), along with loan forgiveness for proceeds used for certain payroll and fixed costs. The last day to apply for and receive a loan is June 30, 2020 and funds will be allocated on a “first-come, first-served” basis until there are none remaining. Although the program is open until June 30, 2020, the SBA has explicitly encouraged businesses to apply as quickly as possible because the PPP program has a funding cap.
Q: Am I or my business eligible to receive a PPP loan?
A: An eligible Borrower is a business concern that (taking into account SBA’s affiliation rules at 13 C.F.R. 121.301 except where inapplicable):
(i) a small business concern as defined in Section 3 of the Small Business Act; (ii) has 500 or fewer employees whose principal place of residence is in the United States; or (iii) is a tax-exempt 501(c)(3) nonprofit organization, a tax-exempt 501(c)(19) veterans organization, a Tribal business concern;[19 and
Individuals who operate under sole proprietorships, as independent contractors, or are self-employed are also eligible to apply if they were in operation on February 15, 2020. Private equity or venture capital investors should be particularly focused on issues of affiliation as the SBA frequently finds investors to be affiliated with not only a single small business, but also with the other portfolio businesses held by that investor. Investors, including passive investors, who hold majority interests in a concern are likely to be affiliated with that business. The PPP provides that the SBA should issue guidance to lenders that prioritizes Borrowers in underserved and rural markets, including veterans, those in the military community, small businesses owned by socially and economically disadvantaged individuals, women and businesses that have been in operation for less than two years. Note that, unlike under CESA, the Borrower does not need to show that it was unable to obtain credit elsewhere. Also note that other SBA programs, including economic injury and disaster loans, remain available as well.
Q: Are there other grounds on which a Borrower May Be ineligible?
A: Yes. Among other reasons, a Borrower may be ineligible if:
Q: What affiliation rules apply for purposes of determining eligibility?
A: The applicable affiliation rules are in 13 C.F.R. 121.301.
Q: What entities are exempt from these affiliation rules?
A: The following types of entities are not subject to affiliation considerations:
Q: What can my business use PPP loan proceeds for and do any of those uses qualify for loan forgiveness?
A: The proceeds of PPP loans can be used for the following purposes, most of which qualify for loan forgiveness if such costs are incurred within eight weeks of origination of the PPP loan:
At least 75% of the PPP loan proceeds must be used towards payroll costs. Borrowers can receive forgiveness of the principal of the PPP loan in an amount equaling the costs incurred or paid during the eight week period following the origination of such loan that relate to payroll costs, mortgage interest, rent, or utilities owed, not to exceed the PPP loan principal. The amount of principal forgiven will be reduced by an amount calculated pursuant to a formula that is based upon the Borrower’s failure to maintain an average number of full-time equivalent employee positions per month during the eight week period following the origination of the PPP loan, compared to the average number of full-time equivalent employees per month employed by the Borrower during the period of either February 15, 2019 through June 30, 2019, or January 1, 2020 through February 29, 2020 (as selected by the Borrower). The amount of principal forgiven will also be reduced by an amount equal to any employee’s salary reduction that exceeds 25% of such employee’s salary during the most recent quarter (excluding employees making over $100,000 per year). Borrowers can reinstate these jobs and pay levels by June 30, 2020 to recover credit towards loan forgiveness. The amount of forgiven principal will be increased by an amount equal to any increases in wages a Borrower gives to tipped employees. Forgiveness of PPP loans is not considered cancellation of indebtedness income for the purposes of the Internal Revenue Code, and is therefore excluded from gross income for tax purposes.
Q: What are the terms of the PPP loans?
A: The maximum principal amount is the lesser of:
The interest rate is the same for all Borrowers and, as currently set by the Secretary of the Treasury, is a 1% per annum fixed rate. The maturity period for PPP loan amounts that are not forgiven, as discussed above, has currently been set by the Secretary of the Treasury as two (2) years from the date of the Borrower’s application for forgiveness. Borrowers may pay off the loan earlier than the scheduled maturity date, as there are no prepayment penalties. Lenders must defer all payments (including principal, interest and fees) for a period of six (6) months, during which period interest will accrue. No personal guarantees or collateral are required for PPP loans.  There is no personal liability on the PPP loan obligation for any individual shareholder, member or partner of the Borrower, except to the extent that such party uses the proceeds of the PPP loan for unauthorized purposes. The SBA’s guarantee fee and yearly fee are waived for PPP loans.
Q. Are there any other requirements of Borrowers?
A: A Borrower must make a good faith certification that:
Q. How can Borrowers apply for loans?
A: Borrowers can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union or Farm Credit System Institution that is participating in the PPP program (and certain other approved lenders specified by the U.S. Department of the Treasury),  by submitting the SBA Form 2483 application form developed by the Treasury Department and such other information required by such lender, and specified payroll documentation. This payroll documentation could include things such as payroll processor records, payroll tax filings or income and expenses from a sole proprietorship. Through existing SBA 7(a) lenders, small businesses and sole proprietors may begin applying on April 3, 2020 while independent contractors and self-employed individuals are eligible to apply beginning April 10, 2020. As new participating lenders are approved under the PPP program, they will also become available to make these loans.
Q. Can Borrowers Apply for Multiple Loans?
A: No. Borrowers can only receive one PPP loan and so the SBA encourages applicants to apply for the maximum amount that they wish to receive.
Q. How can borrowers apply for loan Forgiveness?
A: Borrowers should submit a request to the lender servicing the loan that includes documents verifying the number of full-time equivalent employees and pay rates, as well as payments on true eligible mortgage, lease, and utility obligations. Borrowers must certify (a) that these documents are accurate and (b) that the forgiveness amount was used to keep employees and make eligible mortgage interest, lease and utility payments. The lender must make a decision on the forgiveness within 60 days. 
Q. Are electronic signatures acceptable?
A: Yes, e-signatures and e-consents can be used.
Q. Are There Restrictions on The Use of Agents During the Application Process?
A: Yes. Among other restrictions, agents may not collect fees from the Borrower or be paid out of the PPP loan proceeds.
Also published in Pratt's Journal of Bankruptcy Law.
 H. R. 748 (2020), §4003, p. 190
 Id., §4002, p. 189
 Id., §4003, p. 190
 Id., §4003, p. 191
 Id., §4003, p. 192
 Id., §4003, p. 190
 Id., §4003, p. 192
 Id., §4003, p. 191
 Id., §4003, p. 191; Id., §4003, p. 194
 Id., §4003, p. 192. Note: This restriction on purchases applies to the eligible business and “any affiliate of the eligible business.” Because the term “affiliate” is not defined in §4003, this restriction, without clarification, could be construed to prohibit executive officers and directors of the eligible business from purchasing equity securities of such eligible business or its parent company.
 Id., §4003, p. 192
 Note: The CARES Act limitation on the payment of dividends or other distributions does not exempt companies that are required to make dividends or distributions to maintain compliance with applicable provisions of the Internal Revenue Code, such as real estate investment trusts and master limited partnerships.
 Id., §4003, p. 193
 Id., §4004, p. 196
 Id., § 1102, p. 6
 Small Business Administration, Business Loan Program Temporary Changes; Paycheck Protection Program, 13 CFR Part 120, Interim Final Rule SBA-2020-0015, https://home.treasury.gov/system/files/136/PPP--IFRN%20FINAL.pdf (the “Interim Final Rule”), p. 4
 Id., p. 13
 U.S. Department of the Treasury, Paycheck Protection Program (PPP) Information Sheet, https://home.treasury.gov/system/files/136/PPP--Fact-Sheet.pdf (the PPP Fact Sheet”)
 15 U.S.C. 632, §3; 15 U.S.C. 632, §31(b)(2)(C); Small Business Administration, Business Loan Program Temporary Changes; Paycheck Protection Program, 13 CFR Part 120, Interim Final Rule SBA-2020-[ ], https://home.treasury.gov/system/files/136/SBA%20IFR%202.pdf (the “Second Interim Final Rule”), pp. 5-6.
 H. R. 748 (2020),§ 1102, p. 10; Interim Final Rule p. 6
 Interim Final Rule, p. 6
 H. R. 748 (2020), § 1102, p. 13
 Id., § 1102, p. 11; Interim Final Rule, p. 24
 Interim Final Rule p. 7
 Interim Final Rule p. 8; PPP Borrower Application form (available at: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf). p. 3.
 Interim Final Rule, p. 7
 Second Interim Final Rule, pp. 5-6.
 Second Interim Final Rule, pp. 10-11.
 H. R. 748 (2020),§ 1102, p. 16
 Id., p. 17
 Id., § 1102, p. 7; Interim Final Rule p. 10; Note that payroll costs excludes compensation to an individual employee in excess of an annual salary of $100,000 (prorated for the covered period), and compensation to any employee whose principal place of residence is outside of the United States. H. R. 748 (2020), § 1102, p. 7; Interim Final Rule p. 11; Note also that, for independent contractors or sole proprietors, payroll costs include wages, commissions, income or net earnings from self-employment or similar compensation. Interim Final Rule p. 10
 Interim Final Rule, p. 15
 H. R. 748 (2020), § 1102, p. 10; Interim Final Rule, p. 15
 Id.; PPP loans may also refinance loans that were made under the SBA’s Disaster Loan Program on or after January 31, 2020, and ending on the date that PPP loans are made available . Id.,
 Interim Final Rule, p. 15; Note that if a Borrower’s EIDL was not used for payroll costs, it does not affect a Borrower’s eligibility for a PPP loan. If a Borrower’s EIDL loan was used for payroll costs, the PPP loan must be used to refinance the EIDL loan and proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
 Interim Final Rule, p. 16
 We note that an inconsistency exists between the PPP and the Interim Rules, giving rise to the possibility that interest on the PPP loans, as well as the principal, may be forgiven. For example, H. R. 748 (2020), § 1106, p. 18-19, provides that “The amount of loan forgiveness under this section shall not exceed the principal amount of the financing…” (emphasis added). In addition, several provisions of the Interim Rule reference the forgiveness of the principal of the PPP loan (see, e.g., Interim Rule p. 1 (“… the Act provides for forgiveness of up to the full principal amount of qualifying loans…”) (emphasis added); and Interim Rule p. 4 (“the full principal amount of the loans may qualify for loan forgiveness.” (emphasis added)). However, the question “Can my PPP loan be forgiven in whole or in part” on page 13 of the Interim Rule provides that “The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest.” (emphasis added). Further advice from the U.S. Department of the Treasury may clarify this inconsistency.]
 H. R. 748 (2020), § 1106, p. 18-19; Note that with respect to mortgage interest and rent, the debt or lease agreement must have been entered into before February 15, 2020, and with respect to utility payments, service must have begun before February 15, 2020; Id., § 1106, p. 17
 Id., § 1106, p. 19; note that, if the Borrower is a seasonal employee, the test will be measured against the average number of full-time equivalent employees per month during the period of February 15, 2019 through June 30, 2019
 Id., § 1106, p. 19
 Id., § 1106, p. 19-20
 Id., § 1106, p. 21
 Interim Final Rule, p. 8. Note that this is potentially in tension with another provision of the IFR which states that payroll costs for this purpose will be calculated using “average monthly payroll costs for the preceding calendar
 H. R. 748 (2020), § 1102, p. 9-10; Interim Final Rule p. 8-10
 Interim Final Rule, p. 11
 Id. , p. 12
 H. R. 748 (2020), § 1102, p. 13
 Id., § 1102, p. 12; Interim Final Rule, p. 13
 H. R. 748 (2020), § 1102, p. 11; Interim Final Rule p. 25
 H. R. 748 (2020), § 1102, p. 11
 Interim Final Rule, p. 18; SBA Form 2483 (04/20), p.2.
 Id., p. 20;
 Id., p. 6
 PPP Fact Sheet
 Interim Final Rule, pp. 12-13
 Note, only interest payments on covered mortgage obligations are eligible for loan forgiveness. H. R. 748 (2020), §1102, p. 18
 Id., §1106, p. 21
 Interim Final Rule, p. 13
 Id., p. 25