The Coronovirus Aid, Relief, and Economic Security (CARES) Act has provided relief to many businesses, employees and other stakeholders. One provision benefiting small businesses that has not received as much attention as the high-profile Paycheck Protection Program is Section 1112, which is titled “Subsidy for Certain Loan Payments.”
While the Paycheck Protection Program authorizes new loans to help businesses offset the cost of providing employees with paid leave, Section 1112 requires the SBA to pay the principal, interest and any associated fees that are owed on certain existing SBA loans for a six-month period beginning with the next payment due on these loans. The existing SBA loans that qualify are:
- 7(a) (including the Community Advantage Pilot Program for underserved communities)
- 504 Certified Development Company Loan Program
- Microloan Program.
If a qualifying loan is on deferment, the SBA is required to make these loan payments beginning with the next payment due after the deferment period. The SBA will also make six months’ worth of loan payments for new qualifying loans made within the first six months of enactment (between March 27, 2020 and September 27, 2020). Paycheck Protection loans, however, will be forgiven using different parameters.
In addition, under the Section 1112 program, the SBA is required to make these loan payments on every qualifying loan, even if the loan has been sold on the secondary market.
The payments to be made by the SBA are not deferments. These payments will be forgiven, and borrowers will not be expected to make these payments at a later date. The SBA has 30 days from the next payment due dates to make these payments. The CARES Act does not require borrowers to notify their lenders or “opt in.” However, eligible borrowers, or borrowers who believe they are eligible, should still check with their lenders to confirm their eligibility before foregoing their next payments.
In addition to the loan forgiveness provided under Section 1112, this section encourages lenders to defer certain payments and to extend the maturity dates on qualifying loans. To prevent borrowers from being harmed by such deferments and extensions, the CARES Act:
- Temporarily waives statutory limits on maximum loan maturities for loan deferments and extensions made within one year of enactment
AND
- Due to the travel restrictions and other limitations caused by COVID-19, extends the time for lenders to visit distressed loan sites to:
- Not more than 60 days after the occurrence of a liquidation event (unrelated to a payment default)
AND
- Not more than 90 days after a payment default.
Given the uncertainty of when the COVID-19 limitations will end, the SBA, in its discretion, may extend the time to visit sites due to liquidation events.
Section 1112 of the CARES Act provides immediate relief to small businesses with existing SBA loan obligations as they work through closures, furloughs, and the inability to meet other ongoing obligations, such as rent and utilities. In some instances, this relief may allow businesses to forego applying for one of the new Paycheck Protection Program loans, Emergency Economic Injury Disaster loans, or other available loan and grant programs. Alternatively, Section 1112 will provide a lifeline for small businesses while they wait to receive one of these loans or grants. For Paycheck Protection loans, in particular, the actual disbursement of funds may not occur for another 4-6 weeks from the date of enactment. Loan closings may be delayed even longer depending on how much time it takes lenders to implement the newly received guidance from the SBA, sort through applications and underwrite the anticipated enormous number of loans. As time is undoubtedly of the essence, Section 1112 of the CARES Act provides a welcome slice of the stimulus pie for starving small businesses.
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