Federal Reserve Relaxes Rules to Facilitate PPP Lending to Bank Insiders

Financial Services "Quick Hits" Series

20 Apr 2020

On April 17, 2020, the Federal Reserve published an interim final rule exempting certain Paycheck Protection Program (PPP) loans from the definition of an “extension of credit” for purposes of Regulation O’s restrictions on loans to insiders. The exemption applies to PPP loans made between February 15 and June 30, 2020 that are not otherwise prohibited by lending restrictions imposed by the Small Business Administration (SBA). Such loans may still be subject to additional restrictions on loans to executive officers imposed by section 215.5 of Regulation O.

Under the PPP, lenders (including banks and other depository institutions) may extend loans to certain qualifying small businesses for payroll and other purposes. These loans are guaranteed by the SBA and may be forgiven if they meet certain requirements.

On April 14, 2020, the SBA issued an interim final rule permitting lenders to extend PPP loans to businesses owned by outside directors and holders of less than 30% equity of the lender if certain conditions are met. Such loans are normally prohibited by SBA lending restrictions.

If made by a bank, these loans may also be subject to Regulation O’s quantitative and qualitative limits, and may require prior approval of the bank’s board. However, the exemption announced by the Federal Reserve generally harmonizes Regulation O’s restrictions on loans to bank insiders (i.e., executive officers, directors, principal shareholders, and their related interests) with the SBA’s lending restrictions as applied to PPP loans.



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