SUMMARY ON CURRENT FUNDING INITIATIVES FOR BUSINESSES IN THE CARES ACT AND PENNSYLVANIA COVID-19 ECONOMIC RELIEF EFFORTS
Many businesses are stuck between the proverbial rock and a hard place, making all efforts to stop the spread of COVID-19 and stay healthy, all while trying to maintain their production or services, meet payroll, pay rents and debts, stay solvent and plan for the uncertain future. Fortunately, my experience has been that borrowers and lenders, debtors and creditors alike, will work with their counterparts during difficult times such as these—in a crisis that impacts all sides of the consumer and commercial equation.
In response to the COVID-19 pandemic and its impact on the U.S. healthcare system, economy, and small businesses, on March 27, 2020, President Donald Trump signed into law the Coronavirus Aid, Relief and Economic Security Act, also referred to as the “CARES Act” (Pub. L. 116-126). The CARES Act provides small businesses, lenders, creditors, and landlords with financial support through expansion of SBA funding and programs.
It should be noted that the Commonwealth of Pennsylvania has also taken steps to provide funding for small businesses through its Working Capital Access Program announced March 25, 2020, and that Pennsylvania Attorney General Josh Shapiro is currently developing a PA Care Package seeking to expand consumer protections. It is possible that Pennsylvania and other states will pass laws mirroring, supplementing, or extending the CARES Act in due time.
(1) FINANCIAL SUPPORT TO SMALL BUSINESSES AND FORECLOSURE AND EVICTION MORATORIUM UNDER THE CARES ACT
The CARES Act provides additional funding under the U.S. Small Business Administration “SBA” to assist small businesses. The CARES Act authorizes $349 billion dollars for small businesses through the U.S. Small Business Administration for the time period of February 15, 2020 through June 30, 2020, and makes significant relief available to small businesses that are at risk of defaulting, or have defaulted, on financial obligations.
(A) The Paycheck Protection Program (“PPP”) Loan (a Potentially Forgivable Loan)
The SBA’s 7(a) loan program is its primary business loan program by which an SBA-approved lender will provide an SBA guaranteed loan to a small business. The CARES Act adds a new type of SBA guaranteed loan, the PPP loan, to the 7(a) program.
Under the PPP, eligible small businesses with under 500 employees (subject to existing SBA industry size standards), in operation on February 15, 2020, which were economically harmed by COVID-19, may apply for a PPP Loan. The PPP loan will be fully guaranteed by the SBA for benefit of the lender and will not require the payment of a SBA guaranty fee or annual servicing fees by the borrower. The purpose of the PPP loan is to incentivize small businesses directly to keep employees on the payroll. Non-profits, sole proprietors, contractors and self-employed individuals are also eligible. Of high significance, the PPP loan may be forgiven if all requirements of the loan are met.
PPP Loan Terms: An eligible business may apply for a PPP loan up to 2.5 times its average monthly payroll costs for a one (1) year period before the date of the loan (capped at a maximum of $10 million). The loan must be used for payroll costs (including wages, salary and commission), group healthcare benefits, retirement benefits, mortgage interest, debt interest incurred before February 15, 2020, state or local employee compensation taxes, rent or utilities. The loan may not be used for compensation of any individual employee in excess of an annual salary of $100,000, payroll or income taxes, or compensation of employees who reside outside of the United States. The legislation provides that the maximum term of the loan is ten (10) years and the maximum interest rate is four percent (4%). There is no prepayment penalty and loan payments may be deferred up to six (6) months. Recent communications from the SBA and U.S. Treasury have indicated that PPP Loans may have a maturity of two (2) years and .5 percent interest.
PPP Loan Forgiveness: If all employees are kept on payroll for eight (8) weeks following the date of the loan, then the portion of the PPP loan used for payroll costs, rent, mortgage interest or utilities is forgivable.
Per the U.S. Treasury, small businesses and sole proprietors may begin to apply for PPP loans as of April 3, 2020, and starting April 10, 2020, independent contractors and self-employed individuals may begin to apply. Applications for PPP loans may be made through existing SBA 7(a) lenders or through any federal insured depository institution, federally insured credit union or participating Farm Credit System institution.
(B) SBA (7a) Debt Relief Program
The CARES Act provides for the SBA to make full payments of principal and interest on existing 7(a) and 504 loans for six (6) months which are in repayment. Businesses with existing 7(a) loans in repayment will not be required to repay the SBA payments, and loan payments are to be applied as if they were received in the ordinary course from the business borrower. Further, the SBA will pay principal and interest of new 7(a) loans issued after the passage of the CARES Act and before September 27, 2020. Loans in deferment will receive the six (6) months of payment on the month after deferment ends.
(C) SBA Economic Injury Disaster (“EID”) Loan
The SBA offers EID loans to small businesses to repair or replace business assets or cover small business costs after a declared disaster. Under the EID program, loans can be made at favorable interest rates in an amount up to $2 million dollars with maturity of up to thirty (30) years. Because COVID-19 is being declared a disaster, small business owners across the country may apply for an EID loan.
Additionally, under the CARES Act, an eligible small business applying for an EID loan may request an advance of up to $10,000 within three (3) days of the loan application, to be used for employee sick leave, payroll costs, mortgage or rent payments, increase in costs due to disruption of supply chains or repayment of obligations as a result of loss of revenue. Of significance, the advance does not have to be repaid, even if the EID loan is denied.
(D) Other Financial Support
Through the SBA Express Bridge Loan Pilot Program, small businesses with an existing SBA lender relationship may apply for an Express Disaster Bridge Loan of up to $25,000. Under the CARES Act, the maximum amount of a SBA express loan (which may be processed within days of application) was increased from $350,000 to 1 million dollars through December 31, 2020.
Additionally, the CARES Act provides business owners with tax credits for employee retention and paid sick leave, tax payment deferral on social security tax and other tax benefits.
(E) Federally Backed Mortgage Loans and Evictions
The CARES Act provides that borrowers with federally backed mortgage loans may request a forbearance of mortgage payments due to financial hardship imposed by COVID-19.
A federally backed mortgage loan is defined as any first lien on residential property insured by the Federal Housing Administration, the National Housing Act, or guaranteed by the Housing and Community Development Act, Department of Veteran Affairs or U.S.D.A, or purchased by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.
A borrower in financial distress “directly or indirectly” as a result of COVID-19 may request forbearance, regardless of whether the borrower is already in default by submitting a request to the lender or servicer, and certifying that he/she is in finical distress because of COVID-19.
The lender must, without any further documentation other than the borrower’s certification, grant the request without penalties fees or interest for up to 180 days, subject to another 180 day extension by the borrower. Foreclosure of federally backed mortgages is prohibited for sixty (60) days beginning March 18, 2020.
Additionally, multifamily backed federal mortgagors may also request forbearances up to ninety (90) days with extension, subject to additional provisions in the act.
The CARES act also prohibits evictions on covered properties, defined as those same federally backed mortgages, a covered housing program under the Violence Against Women Act of 1994 or a rural housing voucher program under section 542 of the Housing Act of 1949. Evictions are prohibited for one hundred and twenty (120) days from March 27, 2020, lessors may not charge late fees related to payment of rent and lessors may not provide a notice to vacate (required to be thirty (30) days in length) until after the expiration of the 120 day period.
(2) FINANCIAL SUPPORT TO SMALL BUSINESSES AND COVID-19 CONSUMER PROTECTIONS IN THE COMMONWEALTH OF PENNSYLVANIA
(A) The COVID-19 Working Capital Access Program (“CWCA”) administered by the Pennsylvania Industrial Development Authority (“PIDA”)
The Commonwealth of Pennsylvania has created an emergency loan fund to provide working capital to small businesses in the Commonwealth adversely impacted by COVID-19. All CWCA applications are to be made to local Certified Economic Development Organizations.
CWCA Terms: The maximum amount of loan is $100,000. Loan terms are three (3) years, with a twelve (12) year amortization. No payments are due in the first year, with a balloon payment at the end of the third year. There is no interest on the loan except for agricultural producers, which will pay a fixed 2% rate for the duration of the loan. The loan must be used by the small business borrower for business operations as opposed to fixed assets, production machinery and equipment.
(B) The PA CARE Package
On March 30, 2020, Pennsylvania Attorney General Josh Shapiro announced the launch of the PA Care Package. The PA Care Package is meant to be an extension of the federal CARES Act.
Under the initiative, the Pennsylvania Bureau of Consumer Protection will work with banks and financial institutions to offer an expansion of small business loan products, as well as additional economic protections to consumers. These protections (which are still evolving, and which are in addition to already existing statutory consumer protections) include an extended ninety (90) day grace period for mortgage payments not covered under the 180 day moratorium in the CARES Act, a ninety (90) day grace period on consumer loans, such as auto loans, a ninety (90) day window for relief from overdraft fees and late charges, a sixty (60) day moratorium on evictions, foreclosures and vehicle repossessions, and a prohibition against adverse credit reporting for obtaining relief on consumer loans.
Please check back for more information on these topics and others. The Bankruptcy and Creditors’ Rights attorneys at Burns White are closely monitoring the current situation, and will provide updates periodically. Our attorneys remain available and accessible to handle any immediate and future needs.