SBA Expands Eligibility Under CARES Act Paycheck Protection Program And Federal Reserve Offers Further Support - Financing

On April 3, 2020, in response to concerns that the new Paycheck Protection Program's eligibility requirements—and, in particular, the US Small Business Administration's (SBA) existing affiliation rules—were too restrictive, the SBA issued a second interim final rule (the Second PPP Rule).

Also, on April 6, 2020, the US Federal Reserve announced that it would support the Paycheck Protection Program by providing term financing to bank originating loans thereunder. The terms of the Federal Reserve's financing facility are expected to be released later this week.

The Paycheck Protection Program is a new program created under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).¹

Clarification, Expansion in the New Rule

The Second PPP Rule clarifies:

That to be an eligible borrower under the Paycheck Protection Program (emphasis added):

An entity generally is eligible for the PPP if it, combined with its affiliates, is a small business as defined in section 3 of the Small Business Act (15 U.S.C. 632), or (1) has 500 or fewer employees whose principal place of residence is in the United States or is a business that operates in a certain industry and meets applicable SBA employee-based size standards for that industry, and (2) is a tax-exempt nonprofit organization described in section 501(c)(3) of the Internal Revenue Code (IRC), a tax-exempt veterans organization described in section 501(c)(19) of the IRC, a Tribal business concern described in section 31(b)(2)(C) of the Small Business Act, or any other business concern.²

And that:

This rule exempts otherwise qualified faith-based organizations from the SBA's affiliation rules, including those set forth in 13 CFR part 121, where the application of the affiliation rules would substantially burden those organizations' religious exercise.

And further that:

[T]he SBA's affiliation rules, including those set forth in 13 CFR part 121, do not apply to the relationship of any church, convention or association of churches, or other faith-based organization or entity to any other person, group, organization, or entity that is based on a sincere religious teaching or belief or otherwise constitutes a part of the exercise of religion. This includes any relationship to a parent or subsidiary and other applicable aspects of organizational structure or form.

Further Confirmation in the FAQs

On April 6, 2020, the SBA posted updated FAQs regarding the Paycheck Protection Program. The expansion of eligibility to include entities with 500 or fewer US-resident employees is confirmed by the SBA response to question 3 in the updated FAQs, which states:

Question: Does my business have to qualify as a small business concern (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) in order to participate in the PPP?
Answer: No. In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States, or the business meets the SBA employee-based size standards for the industry in which it operates (if applicable). Similarly, PPP loans are also available for qualifying tax-exempt nonprofit organizations described in section 501(c)(3) of the Internal Revenue Code (IRC), tax-exempt veterans organization described in section 501(c)(19) of the IRC, and Tribal business concerns described in section 31(b)(2)(C) of the Small Business Act that have 500 or fewer employees whose principal place of residence is in the United States, or meet the SBA employee-based size standards for the industry in which they operate.

Importantly, the FAQs also confirm that lenders under the Paycheck Protection Program are not required to verify an applicant's eligibility and may rely on a good faith certification by the applicant. Question 4 of the FAQs states:

Question: Are lenders required to make an independent determination regarding applicability of affiliation rules under 13 C.F.R. 121.301(f) to borrowers?
Answer: No. It is the responsibility of the borrower to determine which entities (if any) are its affiliates and determine the employee headcount of the borrower and its affiliates. Lenders are permitted to rely on borrowers' certifications.

Concluding Thoughts

Given this clarification and expansion, it seems likely that more small businesses will have access to Paycheck Protection Program loans.

The Second PPP Rule is effective immediately, but the SBA invites comments on the rule.

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¹ Described in our prior Perspectives at https://www.retainedinterest.com/2020/03/small-business-loans-under-the-cares-act/, https://www.covid19.law/2020/03/paycheck-protection-program-faqs-for-small-businesses/ and https://www.retainedinterest.com/2020/04/cares-act-payroll-protection-program/. The FAQs and other useful materials are available at https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses.

² The Second PPP Rule at p.5.

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