SBA Issues Crucial Guidance for Payday Protection Loans

April 3, 2020 at 9:06 am Leave a comment

It’s Here!

It’s not often that the credit union industry awaits a guidance more eagerly than an eight year old expecting a new X-box on Christmas morning, but last night, the SBA provided guidance on how to implement the Paycheck Protection Program (PPP). Now we can stop speculating and start implementing. Here are some answers to some of the key questions.

  1. Can my credit union participate as a lender in the program?
  2. Yes it can. If you are one of the approximately 15 credit unions already authorized to make so -called SBA §7a loans, you are automatically qualified. Consistent with the need to get these loans out the door quickly, even if you are not already an SBA certified lender, you are qualified as an additional lender under the regulation so long as you are not currently classified as in “Troubled Condition” or subject to an enforcement action for an unsafe or unsound practice by your primary federal regulator. Don’t let the language confuse you too much; as federally insured institutions, state chartered credit unions may also participate in the program. In addition, institutions without existing §7a certification are consider qualified upon transmission of the CARES Act Section 1102 Lender Agreement (SBA Form 3506).
  3. Is my credit union an eligible borrower?
  4. No. Although the CARES Act extended eligibility to 501(c)(3) organizations, this classification does not extend to credit unions. In addition, the statute left unchanged SBA regulations prohibiting financial institutions from being eligible borrowers under the program. The Association is advocating for SBA to change its existing regulations and has already alerted several elected officials to this situation.
  5. If I choose to be a lender under the program, what underwriting obligations do I have?
  6. Your obligations under this program are more analogous to the obligations of a mortgage processor who collects the necessary documentation than a mortgage originator or underwriter. You must collect the information required on the SBA PPP loan application form from applicants, verify that they had employees and paid payroll taxes on February 15, 2020, confirm the amount of applicable payroll and payroll taxes submitted with the application, and follow Bank Secrecy Act (BSA) rules. The key point is that you can rely on borrower certifications.
  7. How do I comply with my BSA requirements?
  8. What surprises yours truly most about this guidance is the emphasis it places on BSA compliance. Clearly, the administrators of this program recognize the potential for abuse and are counting on frontline lenders to mitigate this weakness. You have the same CIP requirements that you would for any other loan, which is particularly important since you may be dealing with businesses for the first time.
  9. How much interest can I charge on these loans?
  10. The interest rate is 100 basis points or 1%.
  11. What is the maximum loan amount?
  12. The maximum loan amount for any borrower is the lesser or $10 million or a multiple of the borrower’s payroll. The formula is laid out in the guidance. In addition, the program also has generous provisions under which the amount of the loan can be forgiven up to the full amount of the principal and interest “if the borrower uses all of the loan proceeds for forgivable purposes and employee compensation levels are maintained.”

Entry filed under: Compliance, Regulatory. Tags: , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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