COVID-19 and the CARES Act – FAQ for Community Banks

April 1, 2020 | Article

By Michael Holdren

Information regarding the CARES Act is still being released and developed. As we wait for more information to be released, here’s what community banks can do regarding SBA lending programs under the CARES Act.

The CARES Act has provisions for both individuals and businesses alike.

  1. What programs are available to our small business customers?

    The CARES Act established and modified various SBA loan programs. Our insight What You Need to Know About the SBA Loan and Relief Efforts has specific information on small business relief provided under the CARES Act regarding SBA loans.
  1. How do I know what is the right relief for my customer?

    Ask the following questions to your small business customer:

    1. Do you need funds immediately in order to keep your business operational?

      If yes, you should consider an Emergency Economic Injury Grant, which provides $10,000 of funding within three days of submitting an Economic Injury Disaster Loan directly through the SBA.See program information discussed in FAQ #1 above.

    2. Do you need funds for payroll?

      If yes, the Paycheck Protection Program (PPP) is your best option. See program information discussed in FAQ #1 above.

    3. Do you need longer-term funding to keep up with payments and supplement working capital shortfalls?

      If yes, provisions under the Small Business Debt Relief Program provide support. For new loans originated (within six months of the signing of the CARES Act) under the traditional SBA 7(a), 504 and microloan programs, the SBA will make the first six months principal and interest payments on the loan. These payments do not apply to loans made through the 7(a) program under the Paycheck Protection Program.Additionally, all borrowers with existing SBA loans will also receive this benefit with principal and interest payments made by the SBA beginning with their next payment due. If an SBA loan is in deferment, the six months of payments will begin with the first payment after the deferral period ends.
  1. What should we do to become an SBA approved lender?

    Reach out to your local SBA district office and speak directly with SBA officials. There is time to get registered before the loan application will be approved and released. It is our understanding that the bank will need access to the Capital Access Financial System (CAFS). Instructions for registering are found here. Begin this process now by reaching out to your local SBA staff so you are ready to serve your customers once the SBA loan application and process is finalized.
  1. What are the characteristics of the loans issued under the PPP?

    Loans issued will have a maturity of two years. The interest rate will be 0.5%, require no collateral and no personal guarantees and carry a 100% SBA guarantee. They are assigned a zero percent risk weighting for capital purposes, have no borrower fees or lender fees payable to SBA.

    The first payment will be deferred for six months, will be eligible for sales on the secondary market, and there are no prepayment penalties.
  1. What are the underwriting requirements of PPP loans?

    Applicants for PPP loans will be approved based on eligibility and borrower certification.

    Generally, eligible small businesses have the following:

    • Less than 500 employees (see specific guidelines in the Eide Bailly Insight referenced in FAQ #1)
    • Were in operation on February 15, 2020, and
    • Had employees for whom the borrower paid salaries and payroll taxes or paid independent contractors as reported on Form 1099-MISC
    Borrower certification includes the following:
    • The uncertainty of the current economic conditions makes the funds necessary for ongoing operations
    • the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments,
    • No pending applications for the same purpose for duplicative funds
    • Has not received funds under this program for the same purpose

    Credit worthiness is not a consideration for approval for a PPP loan.

There’s much to consider when it comes to the impact of COVID-19.

  1. How does loan forgiveness work?

    A borrower will submit a loan forgiveness application through the lending bank with supporting documentation proving the funds were used for eligible expenses (payroll costs, interest expense, rent/lease payment and utility payments). Within 15 days of receipt of the forgiveness application, the SBA will purchase the forgiven amount for the lending bank. Amounts forgiven may not exceed the principal balance of funding provided. Amounts forgiven will not be included in gross income for federal tax purposes.
  1. Do banks receive origination/servicing fees for making loans under the PPP?

    The SBA will reimburse lenders under the following schedule based upon the balance of the financing outstanding at the time the loan is disbursed:
    • 5% on loans less than $350,000
    • 3% on loans between $350,000 and $2,000,000
    • 1% on loans greater than $2,000,000
    The bill states that reimbursement shall be made no later than five days after the disbursement of the loan.
  1. What information will my customer need for the application process?

    The loan application has not yet been developed and released, however we anticipate the following documents are likely to be necessary given the eligibility requirements and calculations needed to determine loan amounts. As a result, we would recommend small business customers begin aggregating the following documents in anticipation of information necessary for SBA loan applications.
    1. Articles of incorporation/organization
    2. By-laws/operating agreement
    3. Copies of payroll tax reports filed with the IRS (including Forms 941, 944, state income and unemployment tax filing reports) for the entire year of 2019 and first quarter of 2020 (if available)
    4. Copies of payroll reports for each pay period for the preceding 12 months.Such reports should include gross wages including PTO (which might include vacation, sick, and other PTO).This includes payroll reports through the pay period preceding the origination of the SBA loan
    5. Documentation reflecting the health insurance premiums paid by the company under a group health plan including owners of the company for the immediately preceding 12 months prior to the date of the SBA loan origination
    6. Documentation of all retirement plan funding by the employer for the immediately preceding 12 months
    7. A detailed profit and loss statement for the year ended 2019 and YTD 2020
  1. How will funding PPP loans impact bank liquidity?

    Because the PPP loans are facilitated through banks participating in the loan program, banks will be using existing funds to make loans to eligible borrowers. This could create hurdles for banks with higher levels of liquidity risk. Banks will need to consider their existing liquidity positions and the impact of loan growth on their overall balance sheet positions. The CARES Act does allow for these loans to be sold on the secondary market, which could alleviate some funding burden. It is also important to understand the eligible portion of loans forgiven will be purchased by the SBA after a loan forgiveness application is submitted. This could be submitted in as little as eight weeks, which would result in a portion of the loan balances being short-term in nature. FHLB or other liability based alternative funding options could be considered for banks not wanting to utilize on balance sheet liquidity. These sources of funds can be raised quickly and match the anticipated funding term of PPP loans originated.
  1. What other items should a financial institution be considering?

    Operationally, with many bank branches functioning at reduced staffing levels, bankers should be considering how they are going to meet the needs of their customers without endangering the health and well-being of their employees and customers alike.
    • Are their electronic means by which the bank can receive information from customers?
    • Should the bank consider establishing a drop box or some other means for customers to exchange information?
    • Does the bank have a secure email system in which they can collect information?
    • Does the bank have a process for obtaining electronic signatures (if allowed by the final SBA approved application)?
    Additionally, banks should consider what customers are eligible under the program.Have account officers, loan analysts and loan assistants be proactive in reaching out to customers encouraging them to gather the information highlighted in FAQ #8. Time will be of the essence, and creating an efficient and effective process for meeting customer expectations will be of the utmost importance.

Understanding the Impact of SBA Loans and COVID-19 on Your Institution

With staffing levels disrupted by the COVID-19 pandemic, bankers should give strong consideration to reallocating staff to respond to small business requests under the PPP. Staff that may otherwise not have duties under “drive-up only” operations should be provided with guidance on how they can assist in answering questions, collecting documentation and otherwise providing assistance under the PPP. This is an opportunity to serve your communities while providing idle staff with an opportunity to serve the customers they know best.

We’re here to help sort through it all.

We can help your organization prepare for lending obligations in the wake of SBA relief loans.

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