The original article posted on Jan. 29, 2021 has been updated to reflect changes as of Feb. 16, 2021 related to the Section 1112 payments made for preexisting and certain future new SBA loans made through Sept. 30, 2021.
The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), a subpart of the larger Consolidated Appropriations Act, 2021, was signed into law on Dec. 27, 2020. In addition to providing changes to the original Paycheck Protection Program (PPP), now called a “First Draw” loan, and adding a second round of PPP funding, referred to as a “Second Draw” loan, the Economic Aid Act made several very noteworthy modifications to other Small Business Administration (SBA) loans, as discussed below. Please also review our earlier bulletins that contain background information on the impacts of the PPP and the SBA Disaster Loan Programs under the Economic Aid Act: SBA Part Thirty-One, SBA Part Thirty-Two, SBA Part Thirty-Three, SBA Part Thirty-Four, SBA Part Thirty-Five, and SBA Part Thirty-Six.
The Economic Aid Act helps small businesses utilizing SBA lending programs other than the PPP and the SBA Disaster Loan Programs, including the SBA 7(a), 504, and micro-loan programs initially established under the Coronavirus Aid, Relief and Economic Security Act (CARES Act). Please also review SBA Part Three that contains background information on the SBA 7(a), 504, or Micro-loan Programs under the CARES Act.
Extension of Existing SBA 7(a), 504, or Micro-loan Programs
The Economic Aid Act has extended the debt relief program established under the CARES Act, whereby the SBA was directed to use funds to make principal and interest (P&I) payments on qualifying small business loans guaranteed by the SBA under the 7(a), 504, and micro-loan programs for, previously, a period of six months from the next payment due date.
(Updated 2/18/21) Unfortunately, the SBA has determined that insufficient funds were allocated to this program. Therefore, the P&I payments (noted above) originally provided for in the Economic Aid Act have been adjusted by the SBA. The SBA released Procedural Notice 5000-20095, which is immediately effective, denoting the adjustments made to P&I payments. We have organized the changes by the initial and second round P&I payment opportunities and the dates of loan disbursement and funding that govern the category a borrower falls under. The changes include:
- First Round 7(a), 504, and Microloans (“Loans”) (organized by applicable dates):
- Loans approved on or before Sept. 27, 2020, but not fully disbursed until Sept. 28, 2020, or after – the SBA will make P&I payments for a three-month period instead of the original six-month period.
- Loans approved and fully disbursed on or before Sept. 27, 2020 – the SBA will continue to make P&I payments for a six-month period.
- Loans approved on Feb. 1, 2021 through Sept,30, 2021– the SBA will make the P&I payments for a three-month period, instead of the original six-month period, subject to fund availability.
- Second Round
- Second round P&I payments made by the SBA may cover past due amounts at the time the SBA makes its February Section 1112 payment, and is still subject to the monthly payment cap of $9,000.
- 504 and 7(a) Loans:
- 7(a) and 504 loans approved before March 27, 2020 (except for loans made under the Community Advantage Pilot Program) – the SBA will make P&I payments for a two-month period, instead of the original three-month period.
- Certain 504 or 7(a) borrowers that meet the timing requirement noted above and is assigned a NAICS code beginning with 61, 71, 72, 213, 315, 448, 451, 481, 485, 511, 512, 515, 532, or 812 (according to SBA records)– the SBA will make the additional P&I payments for a three-month period, instead of the original five-month period. These P&I payments begin immediately following the two-month period above. Lenders should note the SBA will not make these additional payments until it has provided lenders and CDCs with a list of respective borrowers that are assigned to one of the NAICS codes noted herein.
- Community Advantage Loans and Micro-loans:
- Borrowers with Community Advantage Loans and Micro-loans approved before March 27, 2020 – the SBA will make P&I payments for a five-month period, instead of the original eight-month period. For Community Advantage Loans, for Section 1112, February 2021 payments, the SBA will make a maximum of two months’ worth of payments, which may be applied to past due amounts. However, those past due amount cannot exceed 120 days. If additional funds are needed to cover past due amounts, the remaining three months of payments in March 2021 may be applied to cover additional past due amounts.
Additional Modifications to SBA 7(a), 504, or Micro-loan Programs
The Economic Aid Act further modifies covered loans as follows:
7(a) and Express Loan Programs
- Increases a lender’s guaranty to 90 percent of the loan amount on 7(a) loans, including for Community Advantage loans, until Oct. 1, 2021.
- Increased the Express Loan amount from $350,000 to $1 million on Jan. 1, 2021, through Sept. 30, 2021, at which point on Oct. 1, 2021, it will be reduced to $500,000.
- The Express Loan guaranty amount for loans of $350,000 or less is temporarily increased from 50 percent to 75 percent, and for loans above $350,000, the guarantee remains at 50 percent. On Oct. 1, 2021, the guarantee reverts to 50 percent for all Express Loans.
504 Low-Interest Refinancing
- Enhances the 504 refinancing rules in order to create reciprocity for refinancing between 504 and 7(a) programs.
- Grants authority through Sept. 30, 2023, for the SBA to establish a 504 Express Loan Program for the most experienced and successful 504 lenders to expedite 504 loans of less than $500,000.
Recovery Assistance Under the Micro-loan Program
- Enhances the micro-loan program to increase access to micro capital and technical assistance under the program for businesses impacted by the COVID-19 pandemic.
- Temporarily increases the amount of time that borrowers can repay their loans from six to eight years.
- Temporarily increases the outstanding aggregate amount each intermediary may borrow from $6 million to $10 million to expand their capacity to deploy more capital to small businesses.
- Allows intermediaries to access more technical assistance funding if they serve rural areas.
- Maximizes flexibility and reduces red tape for intermediaries by temporarily waiving the limitations for the technical assistance grants and the 50 percent limitation on pre-loan technical assistance.
- Provides $50 million in additional funding for Micro-loan Technical Assistance funding for lenders and $7 million to leverage about $64 million more in micro-loans to businesses.
Clarifying Program Eligibility and Increasing Program Integrity
The Economic Aid Act has included provisions intended to clarify eligibility and increase integrity for the program established under the CARES Act, including the following additional guidance:
- SBA payments should be made on any loan approved before the applicable deadline, and debt relief payments should be made only once the loan is fully disbursed.
- SBA may establish a minimum loan maturity period for each loan product covered under this section to prevent program abuse.
- Any business or applicant may only receive P&I payments for only one loan approved after the CARES Act enactment.
- SBA is required to place program information on its website, conduct outreach to all borrowers, report monthly to Congress on program spending, and educate lenders, borrowers, SBA district offices, and resources partners about the program.
While many changes were made in the Economic Aid Act to clarify existing SBA debt relief programs established under the CARES Act, further guidance may be issued. The SBA Task Force will provide updates as they occur.
For further information, please contact any member of Taft’s SBA Task Force.
Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.