Top 10 Frequently Asked Questions About CARES Act Loans
Updated May 18, 2020: The U.S. Treasury has just provided guidance on a safe harbor for PPP Loans. See New Treasury Guidance Provides Safe Harbor for PPP Loans.
The federal government enacted in late March legislation to help small businesses suffering from the COVID-19 crisis. The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) provides for the availability of $349 billion in Small Business Administration (SBA) loans.
There are currently two types of loans available: Economic Injury Disaster Loans (EIDL) and Paycheck Protection Loans (PPP).
The goal of the government was to get these loans into the hands of business as quickly as possible. But there have been delays in implementing the processes for issuing these loans. The overwhelming majority of businesses have not received any funds.
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Two issues have caused the holdup: First, banks are concerned that the regulations aren’t clear enough, and they need protection against fraud and (without expressly saying it) bad debt at the end of this crisis. Second, the process requires the SBA to review all loan applications and it is dealing with an unprecedented volume.
The following are the top 10 questions and answers about these loans:
- What is the status of the PPP loans?
On a call with Vice President Pence and SBA Administrator Jovita Carranza, hosted by the NFIB on April 7, 2020, Carranza stated that banks have held up disbursing funds as they wait for more clarity on loan guaranties and other regulations around the CARES Act. Banks are concerned about fraud as they claim the PPP loans don’t require the usual amount of background information or creditworthiness that come with conventional loan applications.
Former Fed Chair Janet Yellen told members of Congress this past week that banks need a “safe harbor” to protect them against fraud claims. The bankers have told the government that there’s also a need for a slower process with more due diligence.
- When can I reasonably expect the loans to be funded?
At this point, it is impossible to tell, but likely it will be a longer time frame than expected. If the banks do not receive some kind of assurance or “safe harbor” against future liability, they may sit on some applications or funds. And, perhaps more important, the SBA has to review the applications and approve them before banks can write promissory notes and release funds, and that could cause major delays.
In a typical year, the SBA processes about 1,000 loan applications for $20 billion; to date, approximately 250,000 PPP loan applications for the $349 billion program have already been filed. While the SBA is trying to outsource and ramp up, it could take weeks or longer.