Fourth COVID-19 Relief Bill Enacted: Overview of the New Paycheck Protection Program and Heath Care Enhancement Act and Related Developments

On April 24, 2020, a fourth COVID-19 relief bill, titled the Paycheck Protection Program and Heath Care Enhancement Act (the “Act”), was signed into law. As summarized below, the Act appropriates additional funds for the Paycheck Protection Program (the “PPP”) and for emergency Economic Injury Disaster Loan (“EIDL”) grants; mandates a certain “set-aside” for qualifying small and midsize PPP lenders; and makes other appropriations, including for a Department of Health and Human Services COVID-19-related “emergency fund.” Certain other recent PPP-related developments are discussed below as well.

Summary of the Act

Increase in appropriations and expansion of eligibility. The Act increases appropriations for PPP loans from the $349,000,000,000 originally provided in the Coronavirus Aid, Relief, and Economic Security (CARES) Act to $670,335,000,000. It also increases appropriations for emergency EIDL grants from the $10,000,000,000 originally provided in the CARES Act to $20,000,000,000. The Act expands the types of entities eligible to receive emergency EIDL grants to include agricultural enterprises with not more than 500 employees.^[1]

Reservation of PPP loans for small and midsize lenders. The Act requires the Small Business Administration (“SBA”) to allocate certain of its PPP loan guarantees to small and midsize lenders, in accordance with the following terms:

• at least $30,000,000,000 in loans made by (i) insured depository institutions with consolidated assets between $10,000,000,000 and $50,000,000,000 and (i) credit unions with consolidated assets between $10,000,000,000 and $50,000,000,000; and
• at least at least $30,000,000,000 in loans made by (i) community financial institutions (as defined in the Act);^[2] (ii) insured depository institutions with consolidated assets of less than $10,000,000,000; and (iii) credit unions with consolidated assets of less than $10,000,000,000.

Appropriation of funds for healthcare industry and SBA. The Act makes appropriations for the Department of Health and Human Services, including $100,000,000,000 for a “Public Health and Social Services Emergency Fund,” subject to terms and conditions set forth in the Act. Finally, the Act appropriates certain additional amounts for the SBA for salaries and expenses, direct loans authorized by section 7(b) of the Small Business Act, and emergency EIDL grants.

Certain other recent and upcoming developments

Admonishment of PPP borrowers with access to capital. At the White House Coronavirus Task Force Briefing on April 21, 2020, Treasury Secretary Mnuchin commented on “big businesses” receiving PPP loans:

“I will comment there have been some big businesses that have taken these [PPP] loans. . . . We will be putting out some FAQs. There is a certification that people are making, and I asked people, just make sure the intent of this was for business that needed the money. We will put out an FAQ, but again, the intent of this money is not for big, public companies that have access to capital. . . . There are severe consequences for people who do not attest properly the [economic necessity] certification.”^[3]

The “access to capital” element referenced in the above statement raised a degree of puzzlement in the market, especially given that the CARES Act specifically waives the “credit elsewhere” requirement that traditionally applies to 7(a) loans (i.e., that a small business concern may apply for a 7(a) loan only if unable to obtain credit elsewhere, as defined in section 3(h) of the Small Business Act). Subsequent to Secretary Mnuchin’s remarks, however, the Treasury Department released a Paycheck Protection Program Frequently Asked Questions (“FAQs”) on April 23, 2020, which elaborates on this “access to capital” consideration:

“Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’ Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”^[4]

Despite this additional guidance from the FAQs, it is not clear whether companies with access to capital will utilize that capital to retain unproductive employees, particularly those without highly specialized skills. As a result, too great a focus on the liquidity positions of PPP borrowers may ultimately undermine the purpose of the program – i.e., to encourage employers to retain employees who have temporarily been rendered idle as a result of the coronavirus pandemic – and as a result, solvent borrowers may forego or return PPP funding and terminate employees rather than expose the companies to the risk of accepting PPP loans.

PPP-related FAQs. In addition to the above “access to capital” issue, the FAQs provided guidance on 30 other specific questions. Some of the answers included in the FAQs were already clear from existing regulations and guidance, but it seems that, by including such answers in the FAQs, the Treasury Department intended to provide easily accessible explanations to a broad range of market participants. Of the 31 questions and answers included in the FAQs, below are summaries of the first 10, in each case subject to further conditions and explanations provided in the FAQs:

1. Lenders are not required to replicate every borrower’s calculations with respect to the average monthly payroll costs submitted in the borrower’s application.
2. Small business concerns (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) are not required to have 500 or fewer employees to be eligible borrowers.
3. A business does not 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.
4. Lenders are not required to make an independent determination regarding applicability of affiliation rules under 13 C.F.R. 121.301(f) to borrowers.
5. Borrowers are required to apply SBA’s affiliation rules under 13 C.F.R. 121.301(f).
6. If a minority shareholder irrevocably gives up the right to prevent a quorum or otherwise block action by the board of directors or shareholders, then it would not still be considered to be an affiliate of the business.
7. The exclusion of employee compensation in excess of an annual salary of $100,000 from the definition of payroll costs does not apply to all employee benefits of monetary value.
8. PPP loans cover paid sick leave.
9. In evaluating a borrower’s eligibility, a lender may consider whether a seasonal borrower was in operation on February 15, 2020 or for an 8-week period between February 15, 2019 and June 30, 2019.
10. The FAQs include guidance for eligible borrowers that contract with a third-party payer such as a payroll provider or a Professional Employer Organization (PEO) to process payroll and report payroll taxes.

Loan forgiveness. Loan forgiveness is increasingly becoming an area of keen interest on the part of market participants. The CARES Act states that the SBA must issue guidance and regulations specifically addressing loan forgiveness within 30 days of the enactment of the CARES Act (i.e., by April 26, 2020). Although such guidance and regulations should clarify numerous questions about the loan forgiveness process, the CARES Act includes some specifics. In particular, the CARES Act states that a PPP borrower seeking loan forgiveness must submit to the lender servicing the loan an application including payroll tax filings and various other specified items.^[5] The lender must issue a decision on the application with 60 days of receipt, and absent manifest error, such decision will be final.

Within one month of the CARES Act’s enactment, the PPP is not only operational but in extreme demand. At the same time, further guidance is clearly needed. It is expected that such guidance will continue to be issued in a iterative fashion. We will continue monitor and provide updates.