House Passes a $484 Billion Relief Package; Treasury and the SBA Release New Guidelines for PPP Loans

On Thursday, April 23, 2020, the U.S. House of Representatives voted in favor of the $484 billion relief package that passed in the Senate earlier this week. Once signed into law, the legislation will revive the Small Business Administration (SBA) Paycheck Protection Program (PPP), which had its initial $349 billion in appropriated funding exhausted just days after the application process began. The new package, titled the Paycheck Protection Program and Health Care Enhancement Act (the “Act”), adds an additional $310 billion in funding to the PPP. In addition, it increases the amounts appropriated under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) for economic injury disaster loans (EIDLs), emergency grants, hospital and other medical providers’ recovery and COVID-19 testing. Of particular relevance to small businesses, the Act doubles the amount allocated for EIDLs, authorizing $20 billion in funding (instead of $10 billion). Qualifying businesses that have been impacted by the COVID-19 emergency may apply for EIDLs in addition to PPP loans. The EIDL program also allows qualifying businesses to apply for EIDL advances that can serve as bridge liquidity while business owners wait for more substantial or more permanent sources of financing.

The PPP, which we have written about previously, provides aid to qualifying small businesses in the form of loans with terms favorable to borrowers, including provisions for loan forgiveness if the proceeds are spent on payroll and other qualifying expenses. Other relief programs are available for mid-size and larger businesses under the CARES Act that are administered by the Treasury Department and Federal Reserve.

In a set of additional FAQs released earlier today, the Treasury Department and SBA provided additional guidance on PPP eligibility, motivated in part, it seems, by recent negative publicity about large and well-capitalized businesses taking out additional funding. In addressing a question as to whether companies with adequate sources of liquidity might qualify for PPP loans, the agencies provided the following clarification:

Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

The FAQ went on to clarify that if a company that previously applied for a loan now believes, based on this additional guidance, that it should return a loan, “[a]ny borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.” In addition, lenders need not perform additional research in order to rely on the borrower’s certification that the loan was necessary.

The SBA is likely to face a significant application backlog when processing restarts, which could lead to increased wait times for businesses seeking relief. Even with the additional appropriation, there is uncertainty about how long the new funding will last before it, too, is exhausted. There is overwhelming interest in the program as small businesses around the country seek relief from the economic disruptions of the COVID-19 public health emergency. A number of applications are also still in queue to be processed, on hold from when the last round of funding expired. Should this additional funding be quickly depleted, Congress may soon face a choice of whether to authorize some form of perpetual funding for the program or else face the prospect of returning to the negotiating table every few weeks until the crisis abates.