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COVID-19 Update: The Paycheck Protection Program – Loan Participation Transactions

On Friday, April 24, 2020, the Small Business Administration (“SBA”) addressed some of the confusion regarding secondary market transactions involving Paycheck Protection Program (“PPP”) loans, at least with respect to participation transactions.  In a Procedural Notice to SBA and PPP lenders, the SBA announced that it was lifting certain restrictions on participation transactions involving such PPP loans.1

As explained in our prior Clients & Friends memos, “COVID-19 Update: The SBA’s Paycheck Protection Program Explained” and “COVID-19 Update: The Paycheck Protection Program and the Secondary Market,” PPP loans are a form of SBA Section 7(a) loan, a traditional form of SBA guaranteed loan.  Confusion has existed since the inception of the Program due to the CARES Act’s statutory language and the nature of the PPP loans and how they are regulated.  Section 1102(a) of the CARES Act provides that PPP loans “shall be eligible to be sold in the secondary market consistent with this subsection.”  This statement regarding sales in the secondary market was echoed in Treasury Department releases describing the PPP.  “This subsection” refers to Section 7(a) of the Small Business Act.2  On April 17, the SBA and the Treasury Department issued an FAQ reaffirming that “A PPP loan may be sold into the secondary market at any time after the loan is fully disbursed” and that “A secondary market sale of a PPP loan does not require SBA approval.”3

Although not addressed in the CARES Act, the SBA’s existing regulations nonetheless impose some limitations on the ability of Section 7(a) loans to be transferred in the secondary market.  With respect to participations, existing SBA Section 7(a) regulations require a prior notice for participation transactions up to 90%, and prior consent for participations above 90%.  Participations can be made only to other SBA lenders.  The SBA historically has required a formal Multiparty Agreement for participations above 90%.4

Regarding the “notice” concept, it is important to note that the notice concept refers to the transaction, not to the participants.  SBA regulations provide that SBA originating lenders may participate away their loans only if pre-approved to do so; the SBA has to first determine that the originating SBA lender is sufficiently sound before it may participate away its loans.5  Thus, although an SBA lender may enter into 90% (or less) participating transactions subject only to a notice requirement with respect to the transaction, the originating SBA 7(a) lender has to be a lender that has been approved by the SBA to enter into participations. 

In the SBA’s Procedural Notice, the SBA announced that it is pre-approving all PPP originating lenders to participate away the PPP loans originated by that lender, effectively granting participation authority to all Section 7(a), Form 3506,6 and Form 35077 PPP originating lenders.  The SBA announced that it is maintaining the prior notice requirement, but that all PPP participations may go up to 100% – in effect, eliminating the prior consent requirement for participations above 90%.  The SBA further made clear that servicing responsibilities must remain with the PPP originating lender, even in a 100% participation.  This suggests that the entity responsible for submitting the PPP forgiveness and guarantee claims to the SBA will be the originating PPP lender. 

Most notably, in the Procedural Notice, the SBA indicated that it is maintaining its requirement that the entity acquiring the participation interest must itself be an SBA-regulated entity – i.e., either a Section 7(a) lender, or an entity that is authorized to originate PPP loans after having filed Form 3506 or Form 3507 with the SBA.  This announcement by the SBA suggests that for other types of transactions – in particular, whole loan sales – the SBA will expect that the purchaser of the PPP loan also be an SBA-regulated entity (and possibly subject to existing SBA “secondary market” whole loan transfer protocols as well), frustrating some efforts by PPP lenders to sell whole PPP loans to non-SBA regulated entities.

The SBA’s Procedural Notice clears the way for PPP originating lenders to finance their originations by participating away the PPP loans to other SBA-regulated lenders, including most banks.  This is critical, given the additional $310 billion in PPP funding approved last week and the resumption of the origination of PPP loans as soon as April 27th.


 

1   https://content.sba.gov/sites/default/files/2020-04/Procedural%20Notice%20-%20PPP%20Loan%20Participations.pdf

 

2   15 U.S.C. § 636.

3   Paycheck Protection Program Loans Asked Questions, FAQ #30 (Apr. 17, 2020), https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf

4   13 C.F.R. § 120.432(b).

5   13 C.F.R. § 120.433(b). 

6   Form 3506 is the form submitted to the SBA by FDIC-insured depository institutions that do not currently have Section 7(a) loan authority.  After submission of the notice, the depository institution is automatically permitted to begin originating PPP loans.

7   Form 3507 is the form submitted to the SBA by entities other than FDIC-insured depository institutions that do not currently have Section 7(a) loan authority.  Such entities may begin originating PPP loans only after the SBA approves.

© Copyright 2020 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume X, Number 117

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About this Author

Scott Cammarn Financial Law Attorney Cadwalader Law Firm
Partner

Scott Cammarn has 28 years of experience in the banking industry and his legal career has spanned all areas of banking compliance and finance law. His practice focuses on regulatory matters, mergers & acquisitions, legislation, transactions, and training. He represents a number of national and international financial institutions and has practiced before the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, and numerous state banking departments.

...
704-348-5363
Jopseph Beach, Cadwalader Law Firm, Investment Banking and Assett Management Attorney
Partner

Joseph Beach represents investment banks, asset managers, large commercial banks and commercial paper conduits in a broad range of securitization and structured finance transactions, focusing primarily on CLOs and structured loans.

Joseph's clients include a broad range of investment banks and asset managers in CLO transactions. He has extensive experience with both broadly syndicated and middle market CLOs utilizing cash flow and static pool structures. He also represents multiple commercial banks and asset-backed commercial paper conduits in structured loan financings of middle market loans, capital call rights, trade receivables, equipment lease receivables and venture debt. He is well-versed in navigating the changing regulatory landscaping governing both U.S. and European securitization transactions.

704-348-5171
Gregg Jubin, Cadwalader Law Firm, Washington DC, Corporate and Finance Law Attorney
Partner

Gregg Jubin is a partner in the Capital Markets Group and Managing Partner of the Washington, D.C., office. He practices in both Washington and New York. Gregg has more than 20 years of experience in corporate and finance transactions, with particular emphasis in transactions involving hedge funds and private equity fund of funds, structured funds, collateralized debt obligations, derivatives, synthetic structured products, and other types of structured products. Gregg represents the managers of hedge funds and private equity fund of funds, collateral managers,...

202-862-2485
Peter Morreale Attorney Asset Finance Lending
Partner

Peter Morreale represents issuers, underwriters, servicers and other entities in connection with the structuring, negotiation, and execution of asset finance transactions. He focuses on bank lending, public and private MBS and ABS offerings, CLOs, private equity transactions, structured finance transactions and purchases, sales and financings of various types of financial assets and related servicing.

Peter also advises clients with respect to ’34 Act reporting requirements, including on Forms 10-Q, 10-K and 10-D, and counsels parties in connection with pre-litigation and litigation...

202-862-2258
Lorien Golaski Capital Market Attorney Cadwalader Charlotte, NC
Counsel

Lorien Golaski is counsel in the firm's Capital Markets Group.  She represents investment banks and other institutional lenders and underwriters in secured commercial lending transactions (both syndicated and bilateral) and CLOs. Lorien also represents financial institutions as lenders and lead agents in subscription credit facilities.

She received her J.D. from Tulane University Law School, magna cum laude, and her B.S. in Journalism from Northwestern University. Lorien is admitted to the North Carolina Bar and to the Florida Bar.

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