The dilemma of a PPP lender: what to do if a PPP loan is in default? | McCarter and English, srl

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The CARES Act established the Paycheck Protection Program (“PPP”) under Section 7 (a) of the Small Business Act (Section 7 (a)) to provide forgivable loans fully guaranteed by the Small Business Administration (“SBA”) in to help qualified small businesses keep workers on the payroll. As created by the CARES Act, if a borrower uses the proceeds of their PPP loan to fund payroll and other eligible operating expenses for a designated period of time (“Covered Period”), that portion of the proceeds of the loan until the entire loan amount will be forfeited. , which makes a PPP loan essentially a grant.

The PPP Flexibility Law (HR 7010) (the “Flexibility Act”) enacted earlier this month eases the remittance requirements of PPP by increasing the time a borrower has to spend loan proceeds, reducing the amount of proceeds that owe being used for payroll costs and providing additional havens for cuts to full-time equivalent employees. As a result of these improvements, it is likely that a higher percentage of PPP loans will be eligible for a discount of the full loan amount.

A PPP loan is unlike any other Section 7 (a) loan due to, among other things, its (i) discount feature, (ii) 100% SBA guaranteed, (iii) lower interest rate than market, (iv) lack of warranty requirements, and (v) limited simplified assembly procedures. These PPP features were designed to accelerate the relief of small businesses from the economic devastation caused by the pandemic. It is therefore surprising that in deploying the PPP, the SBA and the Treasury Department decided not to draft a new promissory note template for the PPP but rather to allow the use of the SBA promissory note for a loan. standard of Section 7 (a), Form SBA 147. Accordingly, the PPP Note SBA Form (“PPP Note”), used by banks and other lenders in the structuring of most PPP loans, contains a number of provisions which conflict with the very purpose of the PPP and have created unnecessary uncertainty for lenders. and PPP service providers.

In particular, the PPP Note provides, among others, for the following “events of default”: (i) default by the borrower on any other loan from the lender, (ii) default by the borrower on any loan or agreement with another creditor, if the lender believes that the default may significantly affect the borrower’s ability to repay the PPP loan, (iii) the borrower does not pay taxes when due, (iv) the borrower experiences an adverse change in its financial condition or business activities which, in the opinion of the lender, may significantly affect the borrower’s ability to repay the PPP loan, (v) the borrower reorganizes, merges, consolidates or otherwise modifies ownership or structure of the business without the prior written consent of the lender, (vi) the borrower is subject to a civil or criminal action which, according to the lender, may significantly affect the ability of the lender borrower to repay the PPP loan, and (vii) em borrower (a) is the subject of proceedings under any bankruptcy or insolvency law, (b) has an appointed worm or liquidator for any part of its business or property, or (c) makes an assignment for the benefit of creditors ((a) to (c) collectively, “Bankruptcy”).

In the event of default, the lender may, but is not required to, declare the loan immediately due and payable. The acceleration of the loan is not obligatory even in the event of default resulting from a Bankruptcy. In our experience, most debt instruments provide for immediate acceleration without any further action by a lender in the event of default caused by bankruptcy. In all cases, in the event of bankruptcy, a lender would require a waiver of the automatic stay to implement any recourse. This is because a debtor in Chapter 11 bankruptcy is generally allowed to continue to use the proceeds of the PPP loan to pay his payroll and other permitted operating expenses. See In Re Toojay’s Management LLC, et al.. Bankruptcy n ° 20-14792-EPK, Bankr. Ct. SD Fla. Decree of May 1, 2020.

When PPP lenders become aware of one or more circumstances that constitute an Event of Default or in which the lenders must determine whether the circumstance affects the borrower’s ability to repay the PPP loan and thus constitutes an Event of Default, the lenders are in a most difficult position. without receiving any guidance from the SBA. What does it mean to materially affect a borrower’s ability to repay a PPP loan, if almost all of the PPP loan is likely to be canceled? If, in the event of default, a lender accelerates a PPP loan during the period covered, it would appear that a borrower will not be able to have part of the PPP loan canceled – a primary objective of PPP in the first place.

Also, unlike all other Section 7 (a) loans in which the SBA guarantees up to 85% of the entire loan, a PPP loan is fully guaranteed by the SBA, so a lender PPP has “no skin in the game”. Essentially, a PPP loan is funded by the lender with the understanding that the SBA will repay the canceled portion of the loan and any outstanding balance that the borrower does not pay, in both cases with accrued interest. As a result, the SBA is the real interested party in a PPP loan, and it would seem to follow that the decision to accelerate the loan in the event of default, especially during the period covered and thereafter until the rebate amount was funded by the SBA – should be made by the SBA.

Most lenders have made PPP loans on the assumption that, as long as it reasonably follows the SBA’s guidelines in the origination and processing of the loan forgiveness request, the SBA would make the lender whole. Therefore, the primary concern of a lender is not to do any harm that might prevent the SBA from honoring its 100% guarantee. Unfortunately, without the guidance of the SBA, a lender cannot be sure that the SBA will guess its decisions and actions taken in connection with the occurrence of a default.

In the absence of other SBA guidelines, especially since, unlike most other Section 7 (a) loans, a PPP loan is not secured by any collateral or homeowner guarantee. ” a borrower, it would seem prudent in the event of a default that a PPP the lender should (a) promptly notify the borrower of the default but not expedite the loan until the SBA has funded any loan cancellation requests pending, (b) promptly notify the SBA of the default, and (c) “put” the loan to the SBA under its 100% guarantee, so that the lender can be withdrawn from the loan.

The SBA notification process is as follows:

1. Contact the SBA service center before requesting the SBA Honor Guarantee.

Contact the SBA service center to request that the loan be placed in liquidation and transferred to the National Guarantee Purchasing Center. Please visit SBA Service Centers.

2. Submit the SBA warranty purchase package and associated tab pages.

SBA designed the Guarantee purchase package and associated tabs (“Purchase Package”) to help 7 (a) loan lenders assemble SBA requests to honor loan guarantees. Complete and submit the associated tab pages, memorandum and certification electronically to the SBA using Send this file.

3. Submit the following documents with the purchase package and associated tab pages.

  • A memorandum detailing the event of default must be submitted with the purchase package. (See tab 7.2.)
  • Certification that the loan proceeds have been paid to the borrower in accordance with the following authorized PPP uses: to pay (1) salary costs, (2) certain health care benefits, (3) interest on bonds mortgage, (4) rent, (5) utilities, and (6) interest on any other existing debt incurred before February 15, 2020, for the applicable covered period, which has been extended to 24 weeks in accordance with the law on the flexibility of paycheck protection, unless the borrower chooses to keep the original 8 week period. (See tab 5.)

To note: The entire purchase package along with the associated tab pages, memorandum and certification must be submitted electronically to the SBA using Send this file.

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