PPP Restart: Changes for Banks
December 30, 2020
By: Mark A. Mangano
The Paycheck Protection Program (PPP) is back for a limited time. There is also a new program: Paycheck Protection Program Second Draw Loans (PPP Second Draw).
On December 27, 2020, the President signed HR 133 Consolidated Appropriations Act, 2021 into law. HR 133 includes the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Act). The Act reauthorizes the PPP that lapsed on August 8, 2020, and authorizes the PPP Second Draw. The PPP and PPP Second Draw are authorized through March 31, 2021.
The Act contains significant and complex changes to the existing PPP and provides extensive rules related to the PPP Second Draw. This article focuses more narrowly on significant issues for banks in the PPP restart and PPP Second Draw.
Reimbursement for processing
The reimbursement for PPP and PPP Second Draw loans originated after the enactment of the Act improves upon the original reimbursement scheme. The original scheme provided reimbursement to lenders at a rate of 5 percent for loans of not more than $350,000, 3 percent for loans of more than $350,000 and less than $2,000,000, and 1 percent for loans of $2,000,000 or greater.
The Act changes the reimbursement for loans of not more than $50,000. Banks will be reimbursed at the lesser of 50 percent of the balance of the financing outstanding at the time of disbursement of the covered loan or $2,500. This should improve reimbursement rates for more modest PPP and PPP Second Draw loans. The reimbursement rates for larger loans remain the same.
Lender eligibility for making second draw loans
Lenders approved to make loans under the original PPP are approved to make loans under both the PPP and PPP Second Draw.
Agent fee questions resolved
The Act resolves the issue of compensating agents assisting PPP borrowers in preparing applications. There has been a significant amount of litigation on the question of whether lenders were obligated under the original PPP to pay borrowers’ agents out of the lenders’ origination fees. The Act provides that if a borrower has knowingly retained an agent, such fees shall be paid by the borrower and may not be paid out of the proceeds of a covered loan. Further, a lender shall only be responsible for paying fees to an agent for services for which the lender directly contracts with the agent.
The Act appears to suggest greater certainty regarding the finality of reimbursement of loan origination fees. The original PPP left open a question of whether the reimbursement would need to be repaid for a loan later deemed to be made to an ineligible recipient. The Act provides the lender may not be required to repay a reimbursement unless the lender is found guilty of an act of fraud in connection with the covered loan.
The Act opens a new chapter in a complex program to provide critical funding to small businesses fighting to survive an historic health and financial crisis. Banks continue to shoulder this public responsibility with energy and integrity. Jackson Kelly welcomes the opportunity to assist lenders in navigating this new chapter.