U.S. Treasury Department Issues Preliminary Guidance for Paycheck Protection Loans Under the CARES Act

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On March 31, 2020, the U.S. Department of the Treasury (“Treasury”) issued preliminary guidance regarding implementation of the Paycheck Protection Program (“PPP”), which is the $349 billion program contained in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that provides forgivable loans to eligible small U.S. businesses to help them weather the coronavirus (“COVID-19”) crisis.  The guidance consists of three advisory documents: (i) an overview of the program; (ii) information for lenders about the PPP; and (iii) information for potential borrowers.  Additionally, the Treasury released a copy of the PPP application form.

While this initial guidance generally restates what is already contained in the CARES Act (as we reported here), the just-released documents provide the following clarifications and new information:

  1. The terms of all PPP loans will be the same for every borrower. The loans will have a term of two years with an interest rate of 0.5 percent, and payments will be deferred for six months, although interest will continue to accrue over this period. The interest rate is significantly lower than the 4 percent cap mandated in the Act.
  2. Banks may start processing applications on Friday, April 3, 2020 for eligible small businesses and sole proprietorships (i.e., employers with 500 or fewer employees, with exceptions for some larger businesses). Eligible independent contractors and self-employed individuals can apply for loans beginning April 10, 2020.
  3. While eligible entities have until June 30, 2020 to submit their PPP loan application and all required documentation to an approved lender, the guidance encourages early application as the program has a funding cap.
  4. With respect to the amount of the loan that may be forgiven, it is “anticipated” that, “due to the likely high subscription” to the loan program, not more than 25 percent of the forgiven amount may be used for non-payroll costs.
  5. Additional guidance may be issued with regard to the waiver of the Small Business Administration’s (“SBA”) affiliation standards (which the CARES Act waived for small businesses (i) in the hotel and food services industries, pursuant to NAICS code 72; (ii) that are franchises in the SBA’s Franchise Directory; or (3) that receive financial assistance from small business investment companies licensed by the SBA).
  6. The guidance provided for lenders concerns a variety of matters, including fees and underwriting.

It is expected that additional, formal regulations and/or more substantive guidance will be forthcoming.

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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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