Concerns from participating banks about the amount of interest they can charge for Payroll Protection Loans, and continued questions about eligibility and use of proceeds, forced the Small Business Administration (SBA) to issue revised loan guidelines late Thursday night.

The CAREs Act passed last Friday by Congress and signed into law by President Trump, set a term of 10 years and a 4% interest rate for Payroll Protection Loans (PPP). When rules came out this week, the interest rate was reduced to .5%. The interest rate was reset again at 1% yesterday. In a memo to participating lenders, the SBA said that 100 basis points was "an attractive interest rate relative to the cost of bank funding for comparable maturities." It cited the FDIC’s weekly national average rate for a 24-month CD deposit at 42 basis points and the yield on the Treasury two-year note at approximately 23 basis points. And, the department pointed out the "substantial" processing fee (5% on loans up to $350,000) provided ample inducement for lenders to participate in the PPP. 

A major change to the original CAREs Act framework was also made regarding the term of the loan. While the Act set a maximum maturity of up to ten years, SBA Administrator, Jovita Carranza, and Treasury Secretary, Steve Minuchin, determined that a two-year loan term was sufficient "in light of the temporary economic dislocations caused by the coronavirus." 

The revised loan guidelines issued by the SBA yesterday also mandate that not more than 25 percent of loan proceeds may be used for non-payroll costs. As previously disclosed, loan proceeds may go towards the payment of rents, utilities or interest on a mortgage, the SBA is requiring borrowers use a substantial portion of the loan proceeds for payroll costs, "consistent with Congress’ overarching goal of keeping workers paid and employed." 

The SBA has struggled to communicate its definitions for eligibility and size and said that it intends to promptly issue additional guidance with regard to the applicability of affiliation rules. However, it is clear that for an entity to be eligible for loans up to $10 million, it must have been in business on February 15, 2020 and had 500 or fewer employees. To avoid being caught up in the SBA’s labyrinth of complex affiliation rules, businesses that operate within NAICS industry code 72, which applies to hotels and restaurants, or those listed on the SBA’s Franchise Directory, are eligible on a per location basis, subject to the $10 million loan cap per entity.

Most restaurants and restaurant franchisees that have less 500 employees per location are still eligible to obtain PPP loans and should be in communication with their banks about making an application. The SBA expects lenders to start taking applications on Friday, April 3 and has issued a new application— Payroll Protection Program Form 2483, it’s third version of the application so far this week.

Note for lenders: Additional cover was given to lenders in the revised guidelines. SBA lenders will now be allowed to rely on certifications of their borrowers in order to determine eligibility, and they may rely on payroll documents provided by the borrower to determine the qualifying loan amount and eligibility for loan forgiveness. The Treasury Department said they would hold the lenders harmless "for borrowers" failure to comply with program criteria." 

Fearful of rampant fraud in the PPP program, the revised guidelines also introduce penalties for the unauthorized use of PPP loan funds and said the SBA would now have recourse against any shareholder, member, or partner in a company that misuses the funds. 

Read the Treasury Department’s final guidelines below.

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