The Federal Reserve today announced nine new or expanded lending programs totaling another $2.3 Trillion in loans to sustain the U.S. economy from the economic effects of the Coronavirus pandemic.
Among these, the Fed announced a new Paycheck Protection Program Lending Facility to facilitate continued lending by banks to small businesses under the Small Business Administration’s Paycheck Protection Program (PPP) that went into effect last week pursuant to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Under the new PPP Lending Facility, banks that provide PPP loans to small businesses can now borrow funds from the Federal Reserve Bank in their district on a non-recourse basis, using the PPP Loans as collateral.
The PPP Lending Facility will charge banks 35 basis points (0.35% interest rate) and no fees. Banks will pledge their PPP Loan principal as collateral, which will equal the principal amount of the loan from the Fed to the bank. There will be no recourse to the banks, and the PPP Loan will be assigned a 0% risk weight under federal banking agency capital rules, thereby allowing banks to exclude PPP Loans from required capital ratios. As a result, banks can make more PPP Loans with the liquidity provided by the Fed’s lending facility.
This could be welcome news for small businesses, as banks have been overwhelmed by the volume of PPP applications in the first week of the program, and some were already reaching their quotas. The deadline to apply for a PPP loan is June 30, 2020, but there has been growing concern that the $349 Billion program will run out well before. A further expansion of the PPP loan program is expected from Congress by the end of the month.
UPDATE ON PPP ELIGIBILITY FOR FOREIGNERS:
Our advisory of April 3, 2020 stated that the PPP loan eligibility requirements were that any individual shareholder, member or partner owning at least 20% of the business must be a U.S. citizen or resident. This requirement was eliminated on April 3, 2020. Therefore, there is no longer a citizenship or residency requirement for owners of small businesses applying for a PPP loan.
For further information on federal assistance for your business, feel free to contact us directly.