For Credit Unions, PPP Loans Are Low-Risk, NCUA Rule Says

Fox Rothschild LLP

Fox Rothschild LLP

The National Credit Union Administration (NCUA) issued an Interim Final Rule on April 27, 2020, regarding the treatment of loans made by credit unions under the SBA’s Paycheck Protection Program (PPP), which was created as part of the stimulus relief package pursuant to the Coronavirus Aid, Relief and Economic Security Act (CARES Act).

Pursuant to the Interim Regulation, PPP loans are low-risk. A credit union may therefore exclude loans pledged as collateral for a non-recourse loan that is provided under PPP from the calculation of total assets for the purpose of calculating its net worth ratio. For the purpose of this provision, a credit union's liability under PPP must be reduced by the principal amount of the loans pledged as collateral for funds advanced under the Facility.

The CARES Act, signed into law on March 27, provided much-needed stimulus relief for many sectors of the U.S. economy. The PPP was one of the more attractive programs available to businesses, self-employed individuals and independent contractors, providing access to short-term, low-interest loans, which are forgivable if the loan proceeds are utilized for purposes specified.

The program was so popular that the initial funding of $349 billion ran out on April 16, 2020. In response, the Paycheck Protection Program and Health Care Enhancement Act, (Enhancement Act) was signed into law on April 24, 2020 to provide a second round of approximately $310 billion in funding.

For credit unions and other financial institutions, the CARES Act provided more flexibility to participate as lenders in the PPP, which is funded and administered through the SBA. Many credit unions took the opportunity to extend loans under this program to their members. The Enhancement Act includes a provision earmarking $60 billion for small banks, credit unions and community lenders serving businesses in minority, under-served and rural communities. This provides another opportunity for credit unions to participate in this program as lenders to provide their members with a much needed infusion of cash for their businesses and employees.

As stated in the Interim Final Rule, because of the guaranty provided by the SBA with regard to these loans, the NCUA considers these loans to be low-risk to credit unions. The Interim Final Rule therefore provides that credit unions participating in the program and extending these loans to members will be able to exclude the amounts of these loans for purposes of calculating their net worth ratio.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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