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FAQ for Lenders: Paycheck Protection Program (PPP) Loans

 

Published:

May 05, 2020

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Disclaimer: This information is subject to forthcoming SBA regulations. We continue to monitor those developments, and will update this information as additional guidance becomes available. The SBA and the Treasury have also continued to post guidance and regulations. The information below is a summary only and is provided as of its date. All clients are encouraged to read and review the Interim Final Rules for more specifics.

This FAQ is intended to help answer lender-specific questions on making and entering into PPP loans under the CARES Act. Please also see the Borrower perspective FAQs for additional information on the PPP loan program.

Updated May 5, 2020

LENDER ISSUES RELATED TO PAYCHECK PROTECTION PROGRAM (PPP) LOANS UNDER THE CARES ACT

Q:   What is the application process?

A:    PPP loans will be made through an SBA-approved lender and will be guaranteed by the SBA. If the business has a relationship with a lender, it should immediately contact that lender to see if that lender will be making PPP loans. The business should immediately begin working with an SBA-approved lender to confirm eligibility and to start the application process. The SBA has released regulations making clear that lenders can use their internal forms and portals so long as they are asking the same questions and requesting the same information as the SBA application.

The PPP application, regulations and other guidance is posted on the Treasury’s website.

Q:   What lenders can make PPP loans under the CARES Act?

A:

  • Lenders already approved by the SBA to make 7(a) loans.
  • The following types of lenders so long as they are not currently designated as in “Troubled Condition” by or subject to a formal enforcement action addressing unsafe or unsound lending practices with their primary federal regulator:
    • Any federally insured depository institution or federally insured credit union.
    • Any Farm Credit System institution (other than the Federal Agricultural Mortgage Corporation) as defined in 12 USC 2002(a) that applies the requirements of the Bank Secrecy Act (BSA) and its implementing regulations.
    • Any depository or non-depository financing provider that
      • Originates, maintains, and services business loans or other commercial financial receivables and participation interests,
      • Applies the requirements of BSA,
      • Has been operating since February 15, 2019, and
      • Has originated, maintained or serviced at least $50,000,000 in business loans or other commercial receivables during a consecutive 12-month period in the last 36 months;
      • Or is a service provider to any insured depository institution that has a contract to support such institution’s lending activities in accordance with 12 USC 1867(c) and is in good standing with the appropriate federal banking agency.
      • *Additional guidance from the SBA states that a non-bank lender is eligible to be a PPP Lender if it has originated, maintained or serviced more than $10,000,000 in business loans or other commercial financial receivables during a 12-month period in the last 36 months, if the non-bank lender is:
        • A community development financial institution
        • Or a majority minority-, women-, or veteran/military-owned lender
        • Such lenders that meet this $10,000,000 threshold, but not the $50,000,000 threshold should leave blank the attestation on SBA Form 3507 and instead include and attestation stating “Lender attests that it has originated, maintained, or serviced more than $10,000,000 in business loans or other commercial financial receivables during a consecutive 12 month period in the past 36 months.”

Q:   Are lenders required to submit any special forms or paperwork with the application?

A:   

  • Yes.
  • All Lenders must submit Form 2484 with each PPP Borrower Application.
  • In addition to Form 2484, Federally Insured Depository Institutions, Federally Insured Credit Unions, Farm Credit System Institutions that were not previously SBA Lenders but meet the criteria set forth in the Interim Final Rule to be PPP Lenders, must submit Form 3506, the Lender application.
  • In addition to Form 2484, Non-Bank and Non-Insured Depository Institutions that were not previously SBA Lenders but meet the criteria set forth in the Interim Final Rule to be PPP Lenders, must also submit Form 3507.

Q:   What paperwork is required to document these PPP loans?

A: 

  • PPP application SBA Form 2483.
  • All lenders must submit SBA Form 2484.
  • If not previously an SBA approved Lender, depending on the type of Lender, either SBA Form 3506 or SBA Form 3507; see above question.
  • Promissory Note SBA Form 147.
  • The SBA has stated that if a lender processed and submitted an application prior to all of these forms being available, they do not need to resubmit.
  • SBA Form 1502 for Lenders to report PPP disbursements and fees due to the Lender pursuant to the CARES Act. SBA Form 1502 must be filed within 20 calendar days of May 18, 2020 (if loan approved prior to SBA Form 1502 being available) or within 20 calendar days after the loan is approved by the SBA). In order for the Lender to receive its processing fee:
    • PPP Loan must be fully disbursed
    • PPP Loan must not be cancelled before disbursement
    • PPP Loan was not voluntarily cancelled and repaid after disbursement
  • In addition to the Treasury webpage listed in the above question, forms have been posted on the SBA website.

Q:   What percentage of PPP loans are guaranteed by the SBA?

A:    100% of amount not forgiven (see discussion on forgiveness, below); however, at least 75% of the forgiven amount must have been used for payroll.

Q:   Are PPP loans secured?

A:    No.

Q:   Are PPP loans under the CARES Act limited to a certain timeframe?

A:   Yes, loans made from February 15, 2020 to and including June 30, 2020. The CARES Act contains a requirement that a PPP loan be registered with the SBA within 15 days of closing on the loan, so the SBA will need to clarify how to qualify loans between February 15, 2020 and the date of enactment of the CARES Act.

Q:   What is the maximum principal amount of the PPP loans?

A:           

  • Up to $10,000,000. The formula for determining the amount is the lesser of (1) $10,000,000; and (2) 2.5 times the average monthly payroll costs (see below for definition) incurred during the one-year period before the date on which the loan is made.
  • Please note that for seasonal employers, as determined by the SBA, the measurement period is either (1) the 12-week period beginning February 15, 2019 or (2) March 1, 2019 to June 30, 2019, at the election of the borrower.
  • If the business was not operating during the period from February 15, 2019 until June 30, 2019, the relevant measurement period is January 1, 2020 through February 29, 2020.
  • In addition, if a business took out an Economic Injury Disaster Loan (EIDL) between February 15, 2020 and June 30, 2020 and wants to refinance that loan into a PPP loan, the outstanding amount of the EIDL loan can be added to the amount of the PPP loan. Amount may be limited by prior PPP loans previously received by Borrower during covered period (February 15, 2020 to and including June 30, 2020).
  • See CARES Act SBA Loan Programs FAQs for additional details.
  • See Interim Final Rules for examples of calculation.

Q:   What is the maximum interest rate lender can charge on a PPP loan?

A:    1.0%.

Q:   What is the maximum maturity for a PPP loan?

A:    2 years.

Q:   What underwriting is a lender required to do for a PPP loan?

A:   

  • Review application.
  • Confirm receipt of borrower certifications contained in the applications.
  • It is the borrower’s responsibility to determine if any of the affiliation rules apply to them.
  • Confirm receipt of information demonstrating borrower had employees for whom borrower paid salaries and payroll taxes on or around February 15, 2020.
  • Confirm dollar amount of average monthly payroll costs for preceding calendar year by reviewing the payroll documentation submitted with application.
    • Lenders are expected to perform a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning average monthly payroll cost.
    • If borrower uses a third-party payroll processing service, lender should request payroll documentation provided by the payroll provider that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees, including:
      • Schedule R (Form 941),
      • Allocation Schedule for Aggregate Form 941 Filers, attached to the payroll provider’s Form 941,
      • Employer’s Quarterly Federal Tax Return, if available;
      • If the above are not available, the borrower should obtain a statement from the payroll provider documenting the amount of wages and payroll taxes.
  • Follow applicable BSA requirements.
    • Federally insured depository institutions and federally insured credit unions should continue to follow their existing BSA protocols when making PPP loans.
    • Not required to re-verify existing customers unless otherwise indicated by institution’s risk-based approach to BSA compliance.
    • If federally insured depository institutions and federally insured credit unions eligible to participate in the PPP program have not yet collected beneficial ownership information on existing customers, such institutions do not need to collect and verify beneficial ownership information for those customers applying for new PPP loans, unless otherwise indicated by the lender’s risk-based approach to BSA compliance.
    • If entity not presently subject to BSA compliance, required to establish compliance program.
  • Review application form.

Q:   What liability does a lender have for failure of a borrower to comply with the PPP requirements or lender’s underwriting and due diligence actions?

A:   

  • Lenders may rely on certifications of the borrower in order to determine eligibility and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for forgiveness.
    • ​​​​​​​This includes a Borrower’s representation on the PPP Application that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the [Borrower].”
  • Lenders held harmless for borrowers’ failure to comply with program criteria.
  • Administrator cannot take enforcement action or impose penalties if the lender has received a borrower attestation.
  • The general anti-fraud provisions and penalties of the SBA statute still apply.

Q:   Can the lender submit an application for approval for a Borrower that is involved in bankruptcy proceedings at the time the application is made?

A:   No, if the Borrower or the owner of the Borrower is involved in bankruptcy proceedings at the time of the application, that business is not an eligible Borrower for a PPP Loan. Additionally, if the Borrower becomes involved in a bankruptcy proceeding after the application, but before funds are disbursed, it is the Borrower’s obligation to inform the Lender and the Lender must not disburse the funds to the Borrower. The Lender may rely on the Borrower’s representations regarding its or an owner’s involvement in bankruptcy proceedings at the time of the application.

Q:   Can the lender accept electronic signature on PPP loan applications or related documents?

A:   Yes; however, the authorized representative is signing on behalf of the borrower and each owner of 20% or more of the applicant’s equity, so if more than one signatory is necessary, contact your bank for an additional signature form.

  • Lenders may accept any electronic signatures that comply with the requirements of the Electronic Signatures in Global and National Commerce Act (P.L. 106-229).

Q:   Can PPP loans be sold on the secondary market?

A:    Yes, once the PPP loan is fully disbursed, the PPP loan may be sold on the secondary market at par, premium or discount. The SBA will not collect any fee for any guarantee sold on the secondary market, according to lender guidelines posted by the U.S. Treasury Department on its website on March 31, 2020. The SBA regulations issued April 2, 2020 state that further guidance will come.

Q:   Can PPP loans be syndicated or participated?

A:    It is unclear. The SBA has not addressed this issue. Other Section 7(a) Loans have very specific requirements for participations.

Q:   Are there restrictions on the types and amounts of fees and expenses that the lender may charge to the borrower or to the SBA?

A:    Yes.

  • The SBA will reimburse the lender for “processing” based on the principal amount of the loan at the time of disbursement, as follows:
    • 5.00% up to not including $350,000;
    • 3.00% from $350,000 to, but not including $2,000,000; and
    • 1.00% from $2,000,000 and up.
    • Such reimbursement shall be paid by the SBA within 5 days of the loan disbursement.
  • Agents that assist eligible borrower to prepare an application may not collect fees in excess of the limits established by the SBA, which are separate from the above processing fees. Agent fees cannot be paid by borrower or out of loan proceeds, but must be paid by the lender from the lender fees. Agent fees cannot exceed:
    • 1.00% for loans up to and not including $350,000;
    • 0.50% from $350,000 to, but not including $2,000,000; and
    • 0.25% from $2,000,000 and up.

Q:   What other limits are applicable to the terms of a PPP loan?

A:     

  • Deferral of payments for a period of 6 months, including payment of principal, interest and fees. Interest will accrue, but payments will not be required during the first 6 months.
  • No prepayment penalty.
  • Lenders must make one disbursement of the full PPP Loan amount. Multiple draws are not permitted. Loans that have not been disbursed due to Borrower’s failure to provide final loan documentation within 20 calendar days of the loan approval must be cancelled by the Lender.
  • If proceeds if a PPP Loan are being used to refinance an EIDL loan, such funds should be sent directly to the SBA, not to the Borrower.

Q:   How do PPP loans affect lender capital requirements?

A:    The CARES Act provides that PPP loans shall be given a risk weight of 0% with respect to Federal banking or National Credit Union Administration Board applying capital requirement under their respective risk-based capital requirements.

Q:   Can a director or officer of a lender who is also the owner of a business receive a PPP Loan?

A:   SBA guidance states that an otherwise eligible business owned in whole or in part by an outside director or holder of less than 30% equity interest in the PPP Lender may still obtain a PPP Loan from that Lender of which the individual is a director or equity owner. However, this does not apply to a director or owner who is an officer of key employee of the PPP Lender. The business of course may instead obtain a PPP Loan from a different lender if it cannot meet these requirements.

Q:   What amounts of a PPP loan can be forgiven?

A:   

  • At least 75% of the forgiven amount must have been used for payroll.
  • Forgiveness available for amounts incurred and payments made during the 8 weeks beginning on the date of origination of the loan related to:
    • payroll costs,
    • interest (not principal) on covered mortgage obligation,
    • covered rent obligation, and
    • covered utility payments, all as defined in the CARES Act.
  • The amount forgiven may not exceed the principal amount of the loan.
  • The amount of forgiveness is reduced by:
    • a formula tied to full-time equivalent employees during specific periods as elected by the borrower and
    • by amount of any reduction in total salary or wages of any employee during covered period in excess of 25% of total salary or wages during most recent full quarter during which EE was employed before the 8-week period beginning on the date of origination of the loan.
    • See CARES Act SBA Loan Programs FAQs for additional details.

Q:   How does loan forgiveness of a PPP loan work?

A:   

  • Option 1:
    • Lender may request that the SBA purchase expected forgiveness of a PPP loan or pool of PPP loans at the end of week 7 of the covered period.
    • Lender must submit a report to SBA including:
      • Original submitted PPP loan application and related materials.
      • Detailed narrative explaining:
        • Assumptions in determining forgiveness amount, including any information obtained from the borrower
          • Payroll tax filings
          • Cancelled checks
          • Other payment receipts
        • Basis for these assumptions.
        • Alternative assumptions considered and why disregarded.
    • SBA will purchase within 15 days of receiving the report and finding that the expected forgiveness amount is reasonable.
  • Option 2:
    • Borrower applies to lender for loan forgiveness, including requirements set forth in the CARES Act.
        • Additional guidance and rules and forgiveness are forthcoming.
        • The SBA has issued guidance stating that a Borrower whose files a Form 1040 Schedule C with employees should submit a Form 941 and state quarterly wage unemployment tax reporting forms or equivalent third party payroll processing records for the 8 Week Period. The 2019 Form 1040 Schedule C that was provided at the time of application must be used to determine the amount of net profit allocated to the owner over the 8 Week Period.
    • Lender’s decision due to borrower within 60 days of application.
    • SBA to pay lender within 90 days of date of forgiveness, the amount equal to the amount of forgiveness plus interest accrued through the date of payment.
    • Advance purchase of expected forgiveness amount also available – following request, within 15 days SBA shall purchase the loan as if the loans were guaranteed under Section 7(a) of the SBA.
    • Lender to treat amount forgiven as cancelled indebtedness.
    • See CARES Act SBA Loan Programs FAQs for additional details.

Q:   What happens to amount of PPP loan not forgiven?

A:    If there is a remaining balance on the PPP loan after application of the loan forgiveness parameters (as discussed above), the remaining amount is guaranteed by the SBA and has a maturity of 2 years.

Q:   Are PPP loans for existing customers considered new accounts for Financial Crimes Enforcement Network (FinCEN) Rule Customer Due Diligence (CDD) purposes?

A:   If the PPP loan is made to an existing customer and the necessary information was previously verified, lenders do not need to re-verify the information. Furthermore, if federally insured depository institutions and federally insured credit unions eligible to participate in the PPP program have not yet collected beneficial ownership information on existing customers, such institutions do not need to collect and verify beneficial ownership information for those customers applying for new PPP loans, unless otherwise indicated by the lender’s risk-based approach to BSA compliance.

Q:   Are there any timing rules on loan disbursements?

A:   Currently, guidance from the Treasury states that Lenders must make the first disbursement of the loan no later than ten calendar days from the date of loan approval. Given delays and rush of applications at the opening of the program, we are still waiting to see if this is a practical time frame. But this is the current guidance and instruction from the Treasury.

CARES Act updates

Husch Blackwell’s CARES Act resource team has reviewed the Act carefully and is developing content to help clients determine how best to access the available assistance. The team will add new content frequently as the Act is implemented through a number of agency rulemakings over the coming weeks.

Disclaimer: The issues discussed above are under further review, and guidance is not complete. Please continue to check back as we continue to update regularly.

Professionals:

Chrissie Simpson

Associate
 

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