April 24, 2020 | Covid-19 | Posted by Ascentis
What to Know About the New “Corona-3a” Bill
At noon on April 24, 2020, the President is expected to sign the much-anticipated H.R. 266 - “Paycheck Protection Program and Health Care Enhancement Act”, which adds $484 billion to the $2.2 trillion already spent in COVID-19 response by the federal government. The bill passed the Senate by unanimous voice vote on April 21, and the House by a roll-call vote of 388-5 on April 23.
The overall division of funding for this new allocation includes:
- $321 billion additional allocation for the Paycheck Protection Program (PPP), which ran out of available loan funds in just 13 days under the original allocation authorized by the CARES Act. Notably, $60 billion of this amount is earmarked for distribution to small businesses by community banks, alternative financial organizations, and credit unions.
- $60 billion additional allocation for the Emergency Injury Disaster Loan (EIDL) program, $50 billion of it for loans (non-forgivable), and $10 billion for emergency grants (no repayment required).
- $75 billion in emergency relief for hospitals
- $25 billion for Coronavirus testing
Controversial PPP Loans
The PPP loan program extension now expands to a total of $670 billion in funds – both committed and available. From the text of the bill, the PPP will continue to carry the same provisions as the original PPP program did, including eligibility requirements, base payroll calculations to determine eligible loan amount, forgiveness calculations, conditions putting forgiveness at risk, and steps employers can take to reclaim forgiveness. Note that this last aspect of the PPP, reclaiming forgiveness, requires employers to take certain actions by June 30, 2020, and if all new PPP funds are not lent by April 30, will likely need to be extended for the provisions to continue to make sense timeline-wise. We expect further guidance from the IRS about that soon.
The eligibility criteria for the Paycheck Protection Program has come under intense public scrutiny in the short time since the original fund allotment was exhausted on April 16. The original program terms simply required loan applicants to certify that “…current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant…” – a relatively low bar. Additionally, the expedited nature of the of the loan rollout, combined with long-standing banking anti-fraud regulations (e.g., “Know-Your-Customer”), resulted in many companies simply choosing to accept PPP loan applications solely from existing customers with established credit lines with their bank.
The PPP also included a well-intended exception for so-called “Sector 72” employers – companies with NAICS codes beginning with “72,” largely hospitality and restaurant employers. The exception was to headcount eligibility. While all other employers must have no more than 500 employees company-wide, sector 72 employers could have 500 or more employees company-wide providing that no single establishment had more than 499 employees.
Perception often overriding reality, the public saw large, recognizable restaurant chains reporting that they had secured large PPP loans and perhaps had been considered for those loans ahead of smaller single storefront employers without the same well-established banking relationships. Then the money from the first PPP allotment ran out, and the stories of these large employer loans began surfacing. As a result, within a matter of days, companies like Ruth’s Chris Steakhouses, Shake Shack, J Alexander, Sweetgreen, and Carrols – a company that owns more than 1,000 Burger King franchises, have all decided to return their PPP loan proceeds immediately.
Earlier this week, the Treasury Department made the observation that it was, “unlikely that a public company with substantial market value and access to capital markets" could sign the certification in good faith, or to prove that a federal loan was necessary for it to stay afloat. Sharpening that directive, on the same day that the House passed the PPP Extension, Treasury Secretary Mnuchin announced that publicly traded companies must pay back loans intended for “small businesses” by May 7 or face “severe consequences.” While this bright-line test is seen by some as welcome clarification, still others who might have relied on previous guidance and received a PPP loan will want to revisit this issue with their lenders.
Here is the specific guidance, verbatim, as issued by Treasury on April 23, 2020, in pertinent part:
31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. 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.
Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any 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.