Best Practices: Six Month Loan Payment Subsidy under the CARES Act

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was passed into law.  This legislation provides various forms of government aid to small businesses adversely impacted by the Coronavirus Disease 2019 (“COVID-19”) and the COVID-19 Emergency Declaration issued by President Trump on March 13, 2020.

Under Section 1112 of the CARES Act, the Small Business Administration (“SBA”) will provide a six month loan payment subsidy for “covered loans” in regular servicing status.  “Covered loans” include SBA 504 loans, microloans and SBA 7(a) loans (including loans made under the Community Advantage Pilot program).  However, loans made under the Paycheck Protection Program are not covered loans and are not included in this subsidy.

SBA will pay principal, interest and associated fees for covered loans in regular servicing status for six months beginning with the first payment due on a loan after March 27, 2020 as follows:

• For existing Borrowers who are not in a period of payment deferment: SBA will pay six months of principal, interest and associated fees beginning with the next payment due on the loan after March 27, 2020.
• For existing Borrowers who are in a period of payment deferment: SBA will pay six months of principal, interest and associated fees beginning with the next payment due after the deferment period. However, Borrowers may choose to end their deferment period early to begin the six months of payments from SBA.  Lenders must inform Borrowers of their options to either continue with the deferment or to end the deferment period early to begin the six month “subsidy.”
• For new Borrowers who receive covered loans within the first six months after the enactment of the CARES Act (i.e. March 27, 2020): SBA will pay the first six months of payments of principal, interest and associated fees.

The six months of payments made by SBA will be applied to the loan so that a Borrower is relieved of its obligation to make these six months of payments.  If a Borrower makes a payment after March 27, 2020, Lender must provide Borrower with the choice of Lender returning the loan payment to the Borrower or using the payment to pay down the balance of the loan after the six months of payments from SBA are applied.

Under the CARES Act, SBA will begin making the required payments within 30 days after the first applicable payment due date.  SBA has issued guidance that Lenders will need to provide the gross monthly loan payment amount due to Colson, but the industry is still waiting for guidance as to the mechanism and date by which Lenders will need to submit such information.  For questions regarding Section 1112 of the CARES Act, contact the attorneys at Starfield & Smith at 215-542-7070.