Best Practices: Last Call for Section 1112 Closings

Lenders and borrowers only have a few days left to take advantage of the subsidy loan payments provided by Section 1112 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  The CARES Act acknowledged that all borrowers were adversely affected by COVID-19 and provided relief to borrowers in the form of loan payment subsidy.  The Administrator was appropriated $17,000,000,000 to carry out the requirements of Section 1112 which provides six months of subsidized loan payments for “covered loans.” Covered Loans are defined in the CARES Act as loans that are made under the SBA 7(a) Program (including the Community Advantage Pilot Program of the Administration), loans made under the SBA 504 Program, and microloans.  Loans made under the Paycheck Protection Program are specifically excluded from the subsidy.  The CARES Act directs the Administrator to pay the principal, interest and any associated fees that are owed on a covered loan in regular servicing status for six months, as more particularly set forth below.

SBA Procedural Notice 5000-20017 provides additional clarity on what constitutes a loan in regular servicing:

A loan in “regular servicing status” includes:

1. any loan that has been moved from “approval” status (governed by SOP 5010) to “regular servicing” status, which occurs when the loan has been closed and the final loan disbursement has been made (revolving lines of credit are considered fully disbursed when the loan has been closed and the initial loan disbursement has been made);
2. a loan in “regular servicing status” does not include any loan that has beenmoved from “regular servicing” into “liquidation” status, or any loan that should have been moved pursuant to SBA Loan Program Requirements from “regular servicing” into “liquidation” status prior to the first payment due date covered by section 1112;
3. generally, a loan in “regular servicing status” should not include any loanthat is more than 120 days past due (as counted back from the first payment due date covered under section 1112).

For covered loans made prior to March 27, 2020, as long as the borrower was not on deferment, the borrower was to receive six months of subsidized loan payments beginning with the next payment that was due on the covered loan.  

For covered loans made prior to March 27, 2020 and on deferment, the borrower will receive six months of subsidy loan payments for the six month period beginning with the next payment due on the covered loan after the deferment period.

For covered loans made from March 27, 2020 through September 27, 2020, the borrower will receive six months of subsidized loan payments for the six month period beginning with the first payment due on the covered loan.  In order to qualify for six months of subsidized loan payments, a term loan must meet all requirements and be fully disbursed by September 27, 2020.  In order to qualify for six months of subsidy loan payments, a revolving line of credit must meet all requirements and the initial loan disbursement must be made by September 27, 2020.  Lenders should take care to make sure that their loans are all properly documented and disbursed by September 27, 2020 in order take advantage of the six months of subsidy payments.

For assistance with PPP and SBA lending matters, contact the attorneys at Starfield & Smith, PC at 215.542.7070 or visit us at www.starfieldsmith.com.