Q&A for Lenders: CARES Act Paycheck Protection Program

Kirsten Spira | 03.30.20

Following is a detailed Q&A about the Paycheck Protection Program (Program). The Program will provide up to $349 billion in funding to eligible ​“small” businesses to help deal with the financial impact of COVID-19. This article has been updated to include information from U.S. Small Business Administration’s Interim Final Rule (Interim Final Rule) issued on April 2, 2020. This Q&A is subject to change if further guidance is issued. We will continue to update this Q&A through our blog as additional information becomes available.

Updates from the Interim Final Rule

The Interim Final Rule provided more details about which lenders are qualified to make loans under the Program and the steps certain lenders must take to become automatically qualified. See Question 1 for more details. Importantly, financial institutions in a Troubled Condition or those who are subject to a formal enforcement order that addresses unsafe or unsound lending practices are not allowed to participate. Before for a federally insured depository institutions or federally insured credit unions or Farm Credit System institution are eligible under the Program, they must transmit to SBA a CARES Act Section 1102 Lender Agreement (SBA Form 3506). The Interim Final Rule clarified that the loans will be issued on a first-come, first-serve basis, so borrowers have been encouraged to apply quickly. Additionally, the Interim Final Rule outlined more eligibility requirements that borrowers must meet in addition to having 500 or fewer employees. These requirements are detailed in Question 4. Entities that have or whose owners are delinquent or have defaulted within the last seven years on a direct or government guaranteed loan and caused a loss to the government are not eligible. Additionally, the Interim Final Rule provided a formula for how to calculate the amount that an eligible borrower can be loaned under the Program. This formula is outlined in the last paragraph in Question 7.

Importantly, the Interim Final Rule increased the interest rate on these loans to 1% fixed, as opposed to the 0.5% fixed interest rate that was released by the U.S. Treasury Department earlier this week. It further confirmed that the loan term will be 2 years, although the rule did not address the amortization schedule to be used. 

The Interim Final Rule also established that a borrower must use at least 75% of the loan proceeds to pay for payroll costs, limiting the amount that borrowers can spend on non-payroll costs to 25%. A borrower must spend loan proceeds in this manner otherwise it will affect the borrower’s forgiveness amount. This is detailed in Question 9 and Question 27 below.

The Interim Final Rule established that borrowers can use e‑sign and e‑consent and that lenders are not required to verify a borrower’s certification (See Questions 13 and 14). Further, the Interim Final Rule clarified the payroll documentation that borrowers must supply to support their application. This is discussed in Question 15. The final borrowers Paycheck Protection Program loan application is available here. The Interim Final Rule also discussed lender underwriting requirements, establishing that federally insured depository institutions and federally insured credit unions should follow their existing BSA protocols when making loans. The Interim Final Rule also provided more details on the transmission of the borrower’s application to SBA through the SBA Form 2484 or the Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty. These issues are discussed in Question 17 and Question 18, respectively.

Question 28 outlines the process that lenders must follow in order for SBA to purchase expected forgiveness amounts from lenders. A lender must request SBA purchase the expected loan forgiveness of a loan or pool of loans at the ender of the seventh week after loan origination. The Interim Final Rule established that lenders are not required to verify the accuracy of the documentation that borrowers submit to support loan forgiveness and SBA will hold harmless any lender who relied on a borrower’s attestations and documentation. See Question 29 for more details on this subject.

If a borrower uses loan proceeds in a prohibited manner, SBA will direct the borrower to repay the loan and the borrower could face liability through fraud charges. The Interim Final Rules does not discuss a lender’s remedies if the borrower uses loans in an unauthorized manner (See Question 33). Finally, the Interim Final Rule establishes that loans made under this Program may be sold on the secondary market after loans are fully disbursed. See Question 36 where this topic is discussed in more detail. SBA will issue further guidance regarding any advance purchase loans sold on the secondary market. 

1. How do these loans generally work?

From February 15, 2020 to June 30, 2020, SBA will provide loans to eligible businesses to assist in covering certain costs, such as payroll costs, mortgage payments, rent obligations, and utility payments. This Program will allow SBA to offer loans directly to small businesses or delegate authority to process loans to private institutions. This Program allows SBA to guarantee covered loans on the same terms, conditions, and processes as loans made under SBA’s current Business Loan Program. SBA has no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment except to the extent that the shareholder, member, or partner uses the loan proceeds for unauthorized purposes. As soon as these loans are made available, funds received by a recipient under the SBA’s Disaster Loan Program on or after January 31, 2020 may be refinanced as part of a covered loan under this Program.

The U.S. Treasury Department issued guidance stating that while the Program is open until June 30, 2020, borrowers are encouraged to apply quickly because there is a funding cap and lenders will need time to process loans.

2. What lenders qualify to make these loans?

In addition to the financial institutions already eligible to make 7(a) loans, the Interim Final Rule provides that the following lenders are eligible to make Program loans unless they are currently designated in Troubled Condition by their primary federal regulator or are subject to a formal enforcement action with their primary federal regulator that addresses unsafe or unsound lending practices:

• Any federally insured depository institutions or federally insured credit unions;
• Farm Credit System institutions, other than the Federal Agricultural Mortgage Corporation, that applies the requirements under the Bank Secrecy Act and its implementing regulations (BSA) as a federally regulated financial institution, or functionally equivalent requirements that are not altered by this rule;
• Any depository or non-depository financing provider that originates, maintains, and services business loans or other commercial financial receivables and participation interests; has a formalized compliance program; applies the requirements under the BSA as a federally regulated financial institution, or the BSA requirements of an equivalent federally regulated financial institution; has been operating since at least February 15, 2019, and has originated, maintained, and serviced more than $50 million in business loans or other commercial financial receivables during a consecutive 12-month period in the past 36 months, or is a service provider to any insured depository institution that has a contract to support such institution’s lending activities in accordance with 12 U.S.C. § 1867(c) and is in good standing with the appropriate Federal banking agency.

The first two lenders listed above must transmit to SBA the CARES Act Section 1102 Lender Agreement (SBA Form 3506) and, upon transmission, will be automatically qualified to make these loans.

3. What businesses qualify for the loans?

A business is only eligible if its principal place of residence is in the United States. Eligible businesses for the new program include:

• Any business with 500 or fewer employees or the number of employees established by SBA for the industry in which the entity operates;
• Non-profits with 500 or fewer employees;
• Veterans’ organizations with 500 or fewer employees;
• Tribal businesses with 500 or fewer employees;
• Businesses in the Accommodation and Food Services Sector (NAICS Code 72) with up to 500 employees at each location; and
• Sole proprietors, the self-employed, and independent contractors.

The Act also waives SBA regulations on entity affiliations during the covered period for Businesses in Sector 72 under the NAICS with 500 or fewer employees; franchise businesses with SBA franchisor identifier codes; and any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act. The Interim Final Rule did not address the affiliation rules; however, indicated that SBA intends to promptly issue additional guidance.

Based on the statute and guidance, it appears that tax status of an otherwise eligible business (e.g. S‑Corporation, Partnership, C‑Corporation) does not impact the eligibility of the loan. The Act waives the requirement that the borrower cannot find credit elsewhere.

Eligible businesses must have been in operation on February 15, 2020 and either had employees for which it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.

The loans will be issued on a first-come, first-serve basis.

4. Are there other eligibility requirements that borrowers must meet?

Yes, an otherwise eligible borrower is ineligible for a loan under the Program if the borrower:

• Engaged in any activity that is illegal under federal, state, or local law;
• Is a household employer such as an individual who employs household employees such as nannies;
• Has an owner who holds 20% or more of the business’ equity and is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges could be brought in any jurisdiction; or had been convicted of a felony within the last five years; or
• Has or owns or controls a business or has an owner that has obtained ever a direct or guaranteed loan from the SBA or any other federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government or if any

5. How are the number of employees counted to determine whether a business has fewer than 500 employees?

According to SBA’s website, the number of employees is calculated as the average number of individuals employed for each pay period over the business’s last 12 calendar months. SBA counts all individuals employed regardless of whether they are employed on a full-time, part-time, or other basis. SBA notes that every employee on the payroll must be included as one employee regardless of the number of hours the employee works or whether the employee worked on a temporary status. For a business that has been operating for less than 12 months, the average number of employees is the average for each pay period that the business has operated.

6. Does a financial institution qualify for a loan under the Program?

No, under SBA regulation, banks are ineligible for SBA business loans.

7. How much can an eligible business borrow?

The maximum loan amount a recipient can receive is capped at $10 million. The amount a recipient can receive is the lesser of:

• 2.5 times the average total monthly payroll costs incurred in the one-year period before the loan is made plus the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program; or
• For seasonal employers, as defined by SBA, the average monthly payroll costs for the 12 weeks beginning on either, at the election of the borrower, February 15, 2019 or March 1, 2019 to June 30, 2019 plus the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program; or
• If requested, for businesses that were not in existence during the period from February 15, 2019 to June 30, 2019, 2.5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020 plus the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program; or
• $10 million.

The Treasury Department Guidance for borrowers states that the loan is calculated as up to two months of the borrower’s average monthly payroll costs from the last year plus an additional 25% of that amount. Note that is simply another way of stating the calculation as outlined in the Act and should result in the same loan amount.

For example, if a borrower’s average total monthly payroll costs were $10,000, then following the calculation in the Act, the borrower would be entitled to $25,000 (10,000 x 2.5). If a lender follows the calculation provided in the Treasury Guidelines, the amount would also be $25,000 ((10,000 + 10,000 + (20,000 x 0.25)).

The Interim Final Rule instructs a borrower to first aggregate payroll costs from the last twelve months for employees whose principal place of residence is the United States. Then, the borrower must subtract any compensation paid to an employee in excess of an annual salary of $100,000 and any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year. Next, the borrower must divide that amount by 12 to calculate the average monthly payroll costs and multiply the average monthly payroll costs by 2.5. Finally, the borrower must add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, minus the amount of any ​“advance” under the EIDL COVID-19.

8. What are the required/​permissible loan terms?

Loans will be guaranteed under the same terms, conditions, and processes as other 7(a) loans except that these loans will require not collateral or personal guarantees.

• Term?
  • The loan term is 2 years.
• Interest rate?
  • The interest rate is 1% fixed.
• Fees?
  • Lenders cannot require application fees, closing costs, collateral, or personal guarantees. Further all guaranty and annual servicing fees are waived. Prepayment fees are waived. Further there are no subsidy recoupment fees and there will be no fee payable to SBA for any guarantee sold into the secondary market.

9. What can borrowers use funds for?

Funds can only be used for:

• Payroll costs, costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums, employee salaries, commissions, or similar compensation;
• Interest on mortgage obligations incurred before February 15, 2020;
• Rent obligations for leases entered into before February 15, 2020;
• Utilities for services that began before February 15, 2020; and
• Interest on any other debt obligations that were incurred before February 15, 2020 and/​or
• Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020. 

At least 75% of the PPP loan proceeds must be used for payroll costs.

Borrowers who received SBA EIDL loans since January 31, 2020 for purposes other than paying payroll costs may also receive assistance under this Program. However, borrowers used their EIDL loans for payroll costs must use their loan under this Program to refinance their EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

Payroll costs include salary, wage, commission, or similar compensation for employees whose principal place of residence is in the United States; payment for vacation, parental, family, medical, or sick leave; severance payments; employee group health care benefits, including insurance premiums; retirement benefits; state and local payroll taxes; and compensation to sole proprietors or independent contractors (including commission-based compensation) that is not more than $100,000 in a 1‑year period, as prorated for the covered period.

Payroll costs do not include certain federal taxes; compensation of employees whose principal place of residence is outside of the US; and qualified sick leave or family for which credit is allowed under the Families First Act. Payroll costs also exclude compensation of an individual employee in excess of an annual salary $100,000, prorated for the covered period. Further, the Interim Final Rule provides that independent contractors do not count as employees for the purposes of a borrower’s loan calculation because they have the ability to apply for a loan under the Program.

10. Does the Program have restrictions on executive pay, dividends, stock buy-backs, etc.?

The Act does not contain any restrictions on dividends, stock buy-backs, etc. However, the Act provides that payroll costs do not include the compensation of any individual employee in excess of an annual salary of $100,000, as prorated for the covered period.

11. When can borrowers start applying?

Small businesses and sole proprietorships can start applying for and receiving loans through existing SBA lenders on April 3, 2020. Independent contractors and self-employed individuals can start applying for and receiving loans through existing SBA lenders on April 10, 2020.

12. Does the lender need to get any kind of verification from the borrower of how the funds are to be used?

When applying, borrowers make a good-faith certification that:

• The current economic uncertainty makes the loan request necessary to support the business’s ongoing operations;
• The funds will be used to retain workers, maintain payroll, make mortgage or lease payments, or pay utilities and that if the funds are used for unauthorized purchases, the federal government may pursue criminal fraud charges;
• The documentation verifying the number of full-time equivalent employees on the payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payment, and covered utilities for the eight-week period following the loan will be provided to the lender;
• Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. Due to likely high subscription, it is anticipated that not more than twenty-five percent (25%) of the forgiven amount may be for non-payroll costs;
• The applicant does not have any other applications pending under this program for the same purpose; and from February 15, 2020 until December 31, 2020, the applicant has not received duplicative amounts under the program;
• The information provided in the application and the information in all supporting documents and forms is true and accurate and that knowingly making a false statement to obtain a guaranteed loan from the SBA is punishable under 18 USC 1001 and 3571 by imprisonment of not more than five years and/​or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/​or a fine of not more than $5,000; and, if submitted to a Federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/​or a fine of not more than $1,000,000;
• The borrower acknowledges that the lender will calculate the eligible loan amount using tax documents submitted; that these tax documents are identical to those submitted to the IRS; that the borrower also understands, acknowledges and agrees that the lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.

This certification is included in the borrower’s application form. The application requires the business and each 20% or greater owner to make the certification by initialing next to each of the above certifications.

13. Can the borrower e‑sign or e‑consent?

Yes, e‑signature or e‑consents can be used regardless of the number of owners.

14. Are lenders required to verify a borrower’s certification?

No, SBA will allow lenders to rely on the certifications of borrowers and provided documentation in order to determine the borrower’s eligibility for the loan and the qualifying loan amount. The lender must comply with the applicable lender obligation, but SBA will hold lenders harmless for borrowers’ failure to comply with the Program’s criteria.

15. What information will the borrower need to include in the SBA application?

Borrowers will need to complete the Paycheck Protection Program loan application, available here. To establish that borrowers are eligible under the Program, borrowers will also be required to provide the lender with payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. Borrowers that do not have those documents must provide other supporting documentation, such as bank records, that is sufficient to demonstrate the qualifying payroll amounts.

16. What information can borrowers start compiling now?

Now that applications are available, borrowers can begin completing the application. Borrowers should start compiling information on payroll costs for the previous twelve months so that they can determine the maximum amount of the loan for which they are eligible and have the proper documentation to support their application.

17. How does the lender underwrite the loan?

The lender will need to confirm receipt of the borrower certifications contained in the Program Application. Further, lenders will need to verify that the borrower was in operation on February 15, 2020 and that the borrower had employees for whom the borrower paid salaries and payroll taxes and the dollar amount of the borrower’s average monthly payroll costs and follow all applicable Bank Secrecy Act requirements. Federally insured depository institutions and federally insured credit unions should follow their existing BSA protocols when making these loans to eligible new and existing customers. Program loans for existing customers will not require re-verification under applicable BSA requirements unless otherwise indicated by the lender’s risk-based approach to BSA compliance.

Entities that are currently not subject to the requirements of the BSA should, before engaging in lending activities under this program, establish an anti-money laundering compliance program equivalent to that of a comparable federal regulated institution.

Lenders should also verify that the borrower has not previously received a loan through the Program.

18. Does the lender file the application with the SBA? If so, how do they file it?

Borrowers will submit applications to an SBA-approved lender. The lender processes the application and performs its underwriting requirements. The lender then submits to SBA electronically the SBA Form 2484, the Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty, in accordance with program requirements. The lender must maintain the forms and supporting documentation in its files.

19. How long it will take to process the application?

Lenders may begin processing loan applications on April 3, 2020. The Treasury Department Guidance issued on March 31, 2020 does not explain how long it will take to process the application.

20. What happens if an application is not complete or doesn’t meet the requirements?

According to the application form, failure to submit a completed application will affect a determination regarding eligibility for financial assistance.

21. Once approved, how quickly does the lender need to disburse the funds?

The Treasury Guidance does not discuss this issue directly; however, the Guidance provides that a borrower may apply for and receive loans under the Program starting on April 3, 2020. Additional guidance is likely to be forthcoming on this issue.

22. Are there any ongoing loan requirements that the borrower or lender need to satisfy during the loan term?

Waiting on Guidance.

23. What is the compensation for participating lenders?

Based on the loan balance at the time of disbursement, compensation for participating lenders is:

• Five percent for loans of $350,000 or less;
• Three percent for loans above $350,000 and less than $2 million; and
• One percent for loans of $2 million and above.

24. Can a borrower be represented by an agent?

Yes, the Treasury Department Guidance states that an agent can be:

• An attorney;
• An accountant;
• A consultant;
• Someone who prepares an applicant’s application for financial assistance and is employed and compensated by the applicant;
• Someone who assists a lender with originating, disbursing, servicing, liquidating, or litigating SBA loans;
• A loan broker;
• Any other individual or entity representing an applicant by conducting business with the SBA.

25. How are agents compensated?

Agents may not collect fees from borrowers nor may they be paid out of loan proceeds. The total amount that an agent may collect from the lender for assistance in preparing an application, including for referring the borrower to the lender, may not exceed:

• Loans $350,000 and under: 1.00%
• Loans from $350,000 to $2 million: 0.50%
• Loans greater than $2 million: 0.25%

26. How does the deferral program work? Who decides how long the deferral period is? Does interest continue to accrue during the deferral period?

All payments will be deferred for 6 months; however, the SBA Interim Final Rule establishes that, due to the low interest rate, interest accrue over this period. This is different from the CARES Act, which provided that all payments and interest would be deferred. Businesses that were operating on February 15, 2020 and have a pending approved loan application under the Program are presumed to qualify for complete payment deferment relief for principal, interest, and fees for six months to a year.

Lenders are required to provide such relief from February 15, 2020 to June 30, 2020. If secondary market investors decline to approve a lender’s deferral request, SBA must purchase the loan. SBA has 30 days from the enactment of the CARES Act to provide guidance to lenders on this process.

27. How does the forgiveness program work? How long before a borrower can apply for forgiveness?

The Act provides borrower is eligible for forgiveness of the entire amount of the loan that the borrower spent in the 8‑week period following loan origination if the borrower spent the loan on eligible expenses such as:

• Payroll costs;
• Interest payments on mortgages incurred before February 15, 2020;
• Rent on leases executed before February 15, 2020; and
• Utility payments for servicers initiated before February 15, 2020.

Borrowers can exclude any forgiven loan amounts from their gross income.

For payroll costs, borrowers can receive loan forgiveness for the portion of their loan that is used for payroll costs for employees earning less than $100,000 per year. However, the amount forgiven will be reduced in proportion to any cuts in employment or reduction in wages/​salaries that were made between February 15, 2020 and 30 days after the enactment of the Act.

To calculate the amount forgiven for employment cuts, the total available forgiveness amount will be multiplied by the average number of full-time equivalent employees (FTEs) per month. Then, the borrower chooses whether to divide this number by either the average number of FTEs per month employed from February 15, 2019 to June 30, 2019 or the average number of FTEs per month employed from January 1, 2020 to February 29, 2020. For seasonal employers, as defined by the SBA, the number will be divided by the average number of FTEs per month employed from February 15, 2019 until June 30, 2019. To encourage the rehiring of employees who have already laid off because of COVID-19, the Act provides that the reduction in the forgiveness amount will not apply to borrowers that, by June 30, 2020, rehire the same number of employees who were laid off between February 15, 2020 and April 26, 2020.

For reductions in wages, the amount forgiven will be reduced proportionally to any salary or wage reductions in excess of 25% as compared to the employee’s most recent full quarter. This is limited to any employee who did not receive an annualized rate of pay, during any single pay period during 2019, over $100,000. Here again, this reduction in forgiveness does not apply if, by June 30, 2020, the borrower returns to their original rate any salaries and wages that were reduced between February 15, 2020 and April 26, 2020.

Small businesses with tipped employees may receive forgiveness for additional wages paid to those employees. Emergency advances receive under the expanded SBA Disaster Loan Program will be excluded from forgiveness amounts.

Because the SBA has determined that the core purpose of the Program is to ensure continued employment, the Interim Final Rule limits the non-payroll portion of the forgivable loan amount to 25%. Therefore, 75% of the forgiven amount must have been used for payroll costs. Further, independent contracts do not count as employees for the purposes of loan forgiveness.

28. How does the lender get compensated for the amount of the forgiveness?

A lender may request that the SBA purchase the expected loan forgiveness amount of a loan or pool of loans at the end of the seventh week after loan origination. The expected forgiveness amount is the amount of loan principal the lender reasonably expects the borrower to expend on payroll costs, mortgage interest, rent, and utility payment during the eight-week period after loan disbursement. At least 75% of the expected forgiveness amount must be for payroll costs. To submit a loan or pool of loans for advance purchase, a lender must submit a report requesting advance purchase with the expected forgiveness amount to the SBA. The report must include:

• The Paycheck Protection Application Form (SBA Form 2483) and any supporting documentation that was submitted with the application;
• The Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty (SBA Form 2484) and any supporting documentation;
• A detailed narrative explaining the assumptions used in determining the expected forgiveness amount, the basis for those assumptions, alternative assumptions considered, and why alternative assumptions were not used;
• Any information obtained from the borrower since the loan was disbursed that the lender used to determine the amount of expected loan forgiveness, which should include documentation required to apply for loan forgiveness (See Question 28); and
• Any additional information SBA may require to determine whether the expected forgiveness amount is reasonable.

SBA must purchase the expected forgiveness amounts in those reports within 15 days of the date on which SBA receive a completed report that demonstrates that the expected forgiveness amount is reasonable.

Loan balances following any forgiveness reductions will continue to be guaranteed by the Administration in accordance with the Paycheck Protection Program.

29. What documentation are borrowers required to provide for forgiveness?

Borrowers seeking forgiveness of amounts must submit to their lender the following:

• Documentation verifying the FTEs on payroll and their pay rates including payroll tax filing reported to the IRS and state income, payroll, and unemployment insurance filings;
• Documentation on covered costs verifying mortgage, rent obligations, and utility payments;
• Certification from a business representative that the documentation is true and correct and that the amounts for which forgiveness is requested was used to retain employees and make payments on mortgage obligations, rent obligations, or utility payments; and
• Any other documentation the Administrator may require.

The lender must make a decision on forgiveness within 60 days of receiving the request.

30. Are lenders required to verify the accuracy of the documentation borrowers submit to support loan forgiveness?

No, lenders do not need to complete verification of the documentation that borrowers submit to support their request for loan forgiveness if the borrower attests that it has accurately verified the payments for eligible costs. The SBA will hold harmless any lender that relies on the borrower’s documents and attestation.

31. Are forgiven loan amounts considered taxable income?

No, the Act provides that any forgiven amounts will not be taxable as income.

32. Any important considerations for moving into this program?

Lenders should be ready so that they can move quickly once the Program is open for business so that customers do not go elsewhere for the loans. Lenders should be careful about making sure all the application steps are completed properly and loan requirements are satisfied. Lenders should also make sure they are ready technologically to get these filed.

33. What happens if the borrower uses the funds in a prohibited manner – if the SBA won’t reimburse the lender, what remedies does the lender have?

If the borrower uses loan proceeds in an unauthorized manner, SBA will direct the borrower to repay those amounts. The borrower will also be subject to additional liability through fraud charges. SBA will have recourse against a shareholder, member, or partner if the shareholder, member, or partner uses loan proceeds for unauthorized purposes.

The Interim Final Rule does not discuss a lender’s remedies if the borrower uses loan proceeds in an unauthorized manner. Future guidance may address this issue.

34. Can an applicant use a third-party loan packager?

See Question 24 and 25 above.

35. If the lender does not want to participate in the program, what happens to the loan covenants regarding no new debt it may have with its borrowers who obtain loans under this Program?

Lenders will have to take these issues under consideration when working with their borrowers. If a lender waives this requirement, it should consider notifying the borrower that it waives this requirement for this particular loan and the waiver does not constitute a waiver of all restrictions on debt.

36. Can a loan under this Program be sold on the secondary market?

Yes, loans made under this Program may be sold on the secondary market after the loan is fully disbursed. The loan may be sold at a premium or a discount to par value. SBA will issue guidance regarding any advance purchase for loans sold in the secondary market.

37. What other issues does the Act address?

For lender’s risk-based capital requirements, the Act also establishes that a covered loan will receive a zero percent risk weight. The Act establishes that lenders will temporarily not be required to comply with FASB’s troubled debt restructuring disclosure requirements if the lender modifies, on or after March 13, 2020, a covered loan in relation to COVID-19-related difficulties in a troubled debt restructuring. Compliance with the FASB’s troubled debt restructuring disclosure requirements will not be required until the lender’s regulator determines appropriate.

• Lending