Note on ARPA and small business lending
Regulatory Note
American Rescue Plan – Small Business Loans
Early on Saturday, February 27, 2021, the House of Representatives passed the American Rescue Plan Act of 2021 (“ARPA”), H.R. 1319. Senate action is still pending. Together with recent policy decisions at the Small Business Administration, the legislation will make changes to the Paycheck Protection Program (“PPP”) in ways that may affect bank lending. ARPA also would revive the State Small Business Credit Initiative (“SSBCI”), a program that separately supports bank loans to small businesses. Every bank that makes small business loans should take these developments into account when setting near-term strategy.
Paycheck Protection Program
Both administrative and legislative changes to the PPP, particularly as it covers the smallest businesses, are in place or on the horizon. On February 22, the Biden Administration announced three sets of modifications to the PPP:
14-day loan window for businesses with fewer than 20 employees. A 14-day window opened on February 22 (and will close on March 10) during which only small businesses of this size may apply for PPP funding.
Sole proprietors, independent contractors, and the self-employed. The formula for calculating the amount of a PPP loan for these borrowers will be revised to allow for larger loans. In addition, SBA will set aside $1 billion in PPP funds for these individuals who are located in low- and moderate-income areas.
Changes to eligibility standards. SBA will eliminate two exclusions from participation in the PPP: the exclusion of owners who have been arrested or convicted of a felony in the past year (the exclusion for financial assistance fraud arrests or convictions will remain in place) and the exclusion of those who are delinquent on federal student loans. Additionally, non-citizen small business owners who are lawful U.S. residents and who use individual taxpayer identification numbers to pay their taxes are now clearly eligible.
ARPA would make other changes to PPP with respect to the eligibility of nonprofit organizations and digital news agencies.
Nonprofits. Section 6001(a) of ARPA would expand the types of 501(c) organizations eligible for PPP loans. Currently, PPP eligibility is largely limited to 501(c)(3) religious and charitable institutions (among others) and 501(c)(19) veterans organizations. Many but not all business leagues, chambers of commerce, and similar organizations that are tax exempt under 501(c)(6) also are eligible if they comply with certain restrictions on lobbying activities. ARPA would make nearly all other 501(c) organizations eligible – subject to the same restrictions on lobbying that apply to 501(c)(6) organizations. (1) ARPA would also allow nonprofits that otherwise exceed the limit on the number of employees to apply for PPP loans if they employ no more than 300 persons at any one location.
Digital news agencies. Section 6001(b) makes internet news entities and publishers eligible for PPP loans; eligibility previously had been limited to hard-copy news organizations.
State Small Business Credit Initiative
Our February 9 Regulatory Note described the provisions of ARPA that would reauthorize the State Small Business Credit Initiative (“SSBCI”). To recap, the Small Business Jobs Act of 2010 established the SSBCI, but Treasury’s authority to administer the program expired in 2017. In the new iteration, section 4201 of ARPA includes a $10 billion appropriation for allocation by the Treasury Department among the states through several channels in order to leverage up to $100 billion in small business loans (assuming a leverage ratio of slightly under 10%).
The Treasury Department would allocate most of the $10 billion appropriation -- $7 to 7.5 billion – in three phases among qualifying states in the same way that Treasury allocated funds under the Small Business Jobs Act. Of this amount, $500 million would be reserved for Tribal governments. In order to qualify for an allocation, a state would be required to submit a plan detailing the participation of community development financial institutions and minority depository institutions – including how the state will encourage such participation – as well as a pandemic response plan, and a technical assistance plan for the provision of legal, accounting, and financial advisory services to very small businesses.
Treasury would allocate another portion – $1.5 billion – of the $10 billion appropriation to support lending to business enterprises owned and controlled by “socially and economically disadvantaged individuals.” Socially disadvantaged individuals are those who have been subject to racial or ethnic prejudice or cultural bias; individuals who are Black, Hispanic, or members of certain other minority groups are presumptively considered socially disadvantaged. An individual who is socially disadvantaged and who falls below certain net worth, personal income, or asset ceilings is considered economically disadvantaged. Treasury’s allocation of the $1.5 billion would not be subject to the allocation formula for the $7 to $7.5 billion.
Treasury also would be required to set aside another $1 billion of the total $10 billion appropriation for an incentive program to supplement allocations to states that demonstrate “robust support” for disadvantaged business enterprises.
Finally, in making its allocations, Treasury would have to address two other considerations. First, under section 4201(c), Treasury must ensure that at least $500 million is spent on “very small businesses,” that is, businesses with fewer than 10 employees. Independent contractors and sole proprietors are included in the definition. Second, under section 4201(f), Treasury could but would not be required to reserve up to $500 million for technical assistance provided by the states or the Minority Business Development Agency.
1 501(c)(4) institutions, i.e., social welfare organizations and local associations of employees, remain ineligible.
Two other appropriations in ARPA could affect banks with outstanding mortgage loans to either homeowners or rental property owners as follows:
$10 billion in mortgage and other financial assistance to homeowners. Nearly all this amount would be provided to states, territories, and Tribes to assist homeowners with mortgage payments and various other housing-related costs.
$25 billion in emergency rental assistance. Of this amount, $19.05 billion would be provided to the Treasury Department, which would have broad discretion to allocate these funds both to stabilize renters and to help rental property owners cover their costs. Another $5 billion would be provided for emergency Housing Choice Vouchers to assist those at risk of homelessness or fleeing domestic violence or human trafficking. The remaining $950 million would support unassisted households in USDA-subsidized properties, housing needs of Native Americans, and housing counseling services. This $25 billion is in addition to the $25 billion in rental assistance appropriated in the Consolidated Appropriations Act, 2021.
In addition, ARPA would provide $10 billion for Defense Production Act spending, $5 billion in financing for state and local governments to provide affordable housing and other services to the homeless, and $15 billion to support workers in the airline industry.
501(c)(4) institutions, i.e., social welfare organizations and local associations of employees, remain ineligible.
Read the PDF