CARES Act SBA Deferment
The recently passed Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allocates approximately $17 billion in relief to subsidize six months of payments for: (a) small businesses with existing SBA loans; and (b) small businesses soon to obtain an SBA loan.
The act encourages lenders to provide payment deferments to its borrowers and extend the maturity dates of SBA loans to avoid impending balloon payments. In return, the SBA will provide, as coverage to the lender, the payment of principal, interest and any fees as follows:
- On a loan made before enactment of the act and not on deferment, for six months beginning with next payment of the covered loan.
- On a loan made before enactment of the act and on deferment, for the six-month period beginning with next payment due after the deferment period.
- On a loan made within six months of enactment of the act, for six-month period beginning with the first payment due on the covered loan.
The only eligibility requirement is the borrower must have an SBA loan in regular servicing status, and the act expressly covers SBA loans already sold to the secondary market. (This is a change from SBA Information Notice 5000-20004 dated March 10, 2020, which originally limited the deferment to 90-days for SBA loans sold to the secondary market.) However, this program does not cover a loan procured through the SBA arising under the Paycheck Protection Program provisions of the act.
Logistically, the SBA will pay the lender no later than 30 days after the date on which the borrower would have paid the lender and such payment shall be applied toward the covered loan, relieving the borrower from the payment obligation.
Whether or not such relief to the borrower will be considered taxable income remains to be seen.
For the lender, the act encourages (but does not mandate) the FDIC, Office of the Comptroller of the Currency and respective state bank regulators not require lenders to increase their reserves on account of receiving these payments from the SBA. The act also waives statutory limits on maximum loan maturities for any covered loan durations where the lender provides a deferral and extends the maturity of covered loans during the one-year period following the date of the enactment of the act. Finally, the act extends lender site visit requirements in the event of a default.
Should you have any questions concerning the SBA deferment program under the CARES Act, please do not hesitate to contact one of our business attorneys.
At the date of publication the above information was correct. It is quite possible the information above has changed as COVID-19 is a rapidly evolving situation.
The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.