- Paycheck Protection Program
- Subsidies for Other SBA Loans
- Moratorium on Evictions
- Community Development Lending
- Extensions of Temporary Relief from TDR and CECL Accounting Requirements
A long-awaited bipartisan stimulus bill was signed into law by President Trump on December 27, 2020. Included in the law, known as the Consolidated Appropriations Act, 2021 (the “Act”), are economic stimulus measures and a number of provisions designed to provide relief to banks and their customers in the wake of the continuing COVID-19 pandemic. Below is a summary of the COVID-19 relief provisions of the Act that will most directly impact the banking industry and the financial services sector in general. Click here for the entire text of the Act.
1. Paycheck Protection Program
The Act makes significant changes to the existing Paycheck Protection Program (PPP), and gives an opportunity for certain businesses to seek a second PPP loan (a “second draw loan”) if they meet specific financial metrics. Perhaps the single biggest change is the modification to the IRS’s position on the deductibility of expenses that were paid with a PPP loan. Any forgiveness of a PPP loan (including a second draw loan) is not taxable and expenses paid with a PPP loan, such as compensation and rent, that would otherwise have been deductible will remain deductible. With this clarification, Congress has overruled the IRS’s prior position that such expenses could not be claimed as deductions. The SBA will provide a short-form application for forgiveness of PPP loans of less than $150,000 that requires the borrower to only report the (i) number of employees retained, (ii) amount of the loan used for payroll costs, and (iii) total loan amount. Generally, second draw loans will have a similar process for obtaining forgiveness as the original PPP loans. Furthermore, the safe harbors for restoring full-time equivalency (FTE) employee headcount and reduced compensation are extended to enable borrowers to comply with such safe harbors prior to the end of the covered period on the second draw loan. It is expected that the Treasury Department will issue further guidance clarifying the extent and dates related to the safe harbors, including the broad safe harbor forgiving loss of FTE headcount if the borrower was unable to return to pre-COVID-19 levels of business. Click here for our comprehensive summary of the changes to the Paycheck Protection Program.
Nutter Notes: To be eligible for a second draw loan, in addition to satisfying the eligibility requirements for the original PPP loan (including the applicable affiliation rules), a borrower must meet the following criteria:
- The borrower employs fewer than 300 people—however, borrowers classified under NAICS code 72 (accommodation and food services) with more than one physical location may receive a second draw loan for each location that employs fewer than 300 people;
- The borrower’s “gross receipts” for one of the first, second, or third quarters of 2020 are at least 25% less than the corresponding fiscal quarter in 2019 (applications made after January 1, 2021 may use fourth quarter data and exceptions are made for borrowers that were not in business for all or any part of 2019);
- The borrower is not primarily engaged in lobbying or other political activities;
- Any person or entity created in or with significant operations in the People’s Republic of China (China) or the Special Administrative Region of Hong Kong does not own more than 20% of the equity of borrower;
- No member of the borrower’s board of directors is a resident of China; and
- The borrower is not the recipient of a grant under the Shuttered Venue Operator Grant program, which is also being authorized under the stimulus package.
The maximum amount of a second draw loan is 2.5 multiplied by the average monthly payroll costs for either (i) the year preceding the date of the loan or (ii) calendar year 2019 (at the option of the borrower); provided that the second draw loan may not exceed $2 million. Borrowers that are in lodging or food and beverage service businesses (classified under NAICS code 72) may receive loans of up to 3.5 times average monthly payroll costs.
2. Subsidies for Other SBA Loans
The Act renews the subsidies established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) for up to $9,000 per month of principal and interest (P&I) payments on small business loans that are not made under the PPP. These include loans made under SBA 7(a) loan programs, including the Community Advantage pilot program, SBA 504 loan programs, and loans and grants pursuant to the SBA Microloan program pursuant to Section 7(m) of the Small Business Act. The renewed P&I subsidies will start in February 2021. The P&I payments are capped at $9,000 per month. Certain types of businesses that are considered to be underserved—generally, borrowers with SBA microloans or Community Advantage loans, and borrowers with SBA 7(a) or 504 program loans in the industries deemed to be hit hardest by the pandemic as measured by the severity of job losses, such as the food service and accommodation, arts, entertainment and recreation, education, and laundry and personal care services sectors—are eligible for five months of additional P&I subsidies. The Act provides that the P&I subsidies will not be taxable income and no expenses will be disallowed as a result of the income exclusion.
The Act also enhances the SBA’s 7(a) loan programs, including Community Advantage pilot program, 504 loan programs, and Microloan program. For example, the Act increases to 90% the level of participation by the SBA in guaranteed loans until October 1, 2021. The Act increases the maximum loan amount under the Express Loan program from $350,000 to $1 million from January 1, 2021 until October 1, 2021, when it will revert to $500,000 permanently. The Act increases from 50% to 75% percent the Express Loan guaranty amount for loans of $350,000 or less until October 1, 2021. The Act directs the SBA to waive lender and borrower fees for the SBA 7(a) and 504 loan programs. The Act gives the SBA authority until September 30, 2023 to establish a 504 Express Loan Program for the most experienced and successful SBA 504 loan program lenders for loans of less than $500,000. Among other changes to the SBA’s Microloan program, the Act temporarily increases the amount of time that borrowers can repay their loans from six to eight years, and temporarily increases the outstanding aggregate amount each bank and other intermediary lender may borrow under the program from $6 million to $10 million to expand their lending capacity.
3. Moratorium on Evictions
The Act extends a moratorium on evictions made by an order issued by the Centers for Disease Control and Prevention (CDC) under the Public Health Service Act through January 31, 2021. The moratorium on evictions applies to certain “covered persons,” a term that includes any tenant, lessee, or resident of a residential property who provides to their landlord a declaration under penalty of perjury indicating that the person has used best efforts to obtain all available government assistance for rent or housing, meets certain income eligibility requirements, is unable to pay the full rent due to loss of income or extraordinary out-of-pocket medical expenses, is using best efforts to make timely partial payments, and for whom eviction would likely render the person homeless or force them into close quarters with other people in a shared living setting. The CARES Act imposed a 120-day moratorium on evictions that expired on July 24, 2020.
4. Community Development Lending
The Act establishes a $9 billion Emergency Capital Investment Program (ECIP), to be administered by the Treasury Department, to provide low-cost, long-term capital investments to banks that are community development financial institutions (CDFIs) and to banking organizations that are majority-owned by individuals who are members of a minority class, defined as minority depository institutions (MDIs) under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Under the ECIP, the Treasury Department will make investments in CDFIs and MDIs in the form of preferred stock or other financial instruments, to support loans, grants, and forbearances for small businesses, minority-owned businesses, and consumers, especially in low-income and underserved communities that may be disproportionately impacted by the COVID–19 pandemic. Participating banking organizations will be required to develop a plan to maintain or expand significant lending or investment activity in low- and moderate-income (LMI) minority communities. The terms of each investment will incentivize lending to LMI minority communities. The Act provides a narrow exemption from the Equal Credit Opportunity Act (ECOA) for the purpose of data collection to ensure compliance with ECIP’s plan to enhance lending to LMI minority communities. The Treasury Department is expected to issue guidance clarifying any additional eligibility requirements and application procedures for interested CDFIs and MDIs.
The Act also provides an additional $3 billion for the Treasury Department’s CDFI Fund to make direct grants to CDFIs for emergency COVID-19 relief and relief to minority communities and MDIs and other minority-owned lenders that have been disproportionately impacted by the COVID–19 pandemic.
5. Extensions of Temporary Relief from TDR and CECL Accounting Requirements
The Act extends the time that insured depository institutions and depository institution holding companies have to comply with the current expected credit losses (CECL) accounting standard until the earlier of the termination of the COVID-19 public health emergency or January 1, 2022. This is an extension from the optional compliance date of December 31, 2020 for banking organizations that were originally required to comply with the CECL methodology as of January 1, 2020. The Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses, Topic 326, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which introduced CECL to U.S. GAAP, in 2016. The effective date of ASU 2016-13, and therefore the mandatory use of the CECL methodology, varies for different banking organizations.
The Act extends the authority granted to banks under the CARES Act to elect to temporarily suspend the requirements under U.S. GAAP applicable to troubled debt restructurings (TDRs) for loan modifications related to the COVID-19 pandemic for any loan that was not more than 30 days past due as of December 31, 2019. Loan modifications that would otherwise be categorized as TDRs are not required to be reported as such, and banks are not subject to TDR impairment requirements for accounting purposes, if the bank elects to suspend TDR treatment. The suspension is permitted to be effective until the earlier of January 1, 2022, or the date that is 60 days after the date on which the COVID-19 public health emergency is terminated.