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April 24, 2020

Stroock Special Bulletin

By: Quyen T. Truong

Today, the $484 billion Paycheck Protection Program and Health Care Enhancement Act (Interim Relief Act) became law. The Act replenishes key small-business lending programs established under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) in addition to increasing funding for health care providers and testing. This bulletin discusses the new package’s components and major issues confronting the industry and Congress on the way to adoption of Phase 4 of the federal COVID-19 relief and stimulus program.

The Interim Relief Act

The Interim Relief Act injects an additional $310 billion into the existing $350 billion Paycheck Protection Program (PPP), with another $10 billion set aside for administrative costs. The PPP ran out of money last week after approximately 1.6 million small businesses obtained bank loans under the program. Amidst complaints that hundreds of thousands more small businesses are still waiting, many of them lacking existing lending relationships with the large banks that are issuing the highest volume of PPP loans, Congress replenished funding for the program and earmarked $60 billion for community banks and other small lenders. Of this $60 billion, $30 billion will go to community banks and credit unions with assets of less than $10 billion, and $30 billion will go to banks and credit unions with assets of between $10 billion and $50 billion. Notwithstanding this fresh infusion, the PPP is likely to run out of money again in the coming week.

The Act also adds $10 billion to the Economic Injury Disaster Loans Program (EIDL) and $50 billion to the Small Business Administration’s (SBA) Section 7(b) disaster loan program, which includes the EIDL.

Besides replenishing funding for small-business loans and grants, the Interim Relief Act adds $75 billion for hospitals and other healthcare providers, and $25 billion for coronavirus testing and tracing.

Phase 4 COVID-19 Relief and Stimulus

Next up is Phase 4 of the federal relief and stimulus program, which will be on a scale comparable to the $2 trillion CARES Act. Democrats are aiming to have a new bill drafted by May 4, the current end date of the congressional recess. But Republicans are pushing back hard on both substance and timing, citing concerns regarding the long-term impact of more stimulus spending as total COVID-19 relief spending already equals roughly 25% of the entire national debt. Emphasizing the need to tread carefully, Senate Majority Leader Mitch McConnell states that there will not be another unanimous vote for passage of legislation until the Senate reconvenes with “full participation.”

Funding for state and local governments remains a central issue that will substantially delay new legislation. Although kept out of the Interim Relief Act, except for $11 billion provided for state and local coronavirus testing, states and cities are almost certain to receive substantial funding under CARES Act 2. The fight will focus on the amount and allocation of those dollars.  Democrats want a large infusion for state and local governments, with few restrictions. The Republican leadership has concerns about losing control, especially as many of the state and local governments hardest hit by COVID-19 are at odds with the Trump administration. It is open, however, to providing more money for states to take primary responsibility for coronavirus testing (notwithstanding Democrats’ preference for federal coordination) and to build out transportation and other infrastructure (providing welcome stimulus for industries and the economy).

Of particular concern for the financial, real estate and other key economic sectors is the battle to supplement COVID-19 relief for both households and small businesses. For consumers, CARES Act 2 will include additional payments and payroll protection, forbearance on loans, and housing and nutrition assistance. Because some of the consumer relief will be in the form of payroll protection, these provisions will affect the terms of small-business lending programs. Legislators will be battling over not only the amount and period of relief, but also the implementation details of small-business lending programs and of forbearance provisions for consumers in regard to rent, mortgages and loans. Democrats have just established a special panel in the House for oversight of the federal government’s COVID-19 response, and they will seek to include in CARES ACT 2 provisions for oversight of the implementation of federal business lending programs and potentially other aspects of business operations.

There is a significant possibility that the new legislation will seek to add specificity to eligibility provisions for both small-business lending and consumer forbearance programs. Beyond the question of whether forbearance provisions will extend to privately owned mortgages and loans, the eligibility debate will include how to ensure fair and equal access for applicants and avoid abuse, based on recent concerns about program implementation to date.

In response, federal regulators have started and will be issuing more guidance in the coming weeks aimed at allaying concerns about implementation of CARES Act programs. For example, in contrast to earlier rules and guidance (which focused primarily on fleshing out program details and providing flexibility for businesses making and seeking loans under the PPP and other programs), the Treasury’s latest guidance and the SBA’s new interim final rule on the PPP established clearer guard rails regarding businesses that are not eligible to receive loans thereunder. The Federal Reserve also announced that it will publicly release on a monthly basis, for recipients of CARES Act funding, (1) the names and details of participants in each facility, (2) the amounts borrowed and interest rate charged, and (3) the overall costs, revenues and fees for each facility. Similar guidance and disclosures will be coming in the coming weeks and months.

Meanwhile, legislators will keep a close eye on reports regarding how CARES Act programs have been implemented to date, as well as how consumer-facing businesses are treating their customers generally. CARES Act 2 may include not only more detailed directions regarding implementation of its relief measures, but also what will happen at the end of the statutorily mandated forbearance period. While providing more clarity, Congress’ hastily drafted directions will limit businesses’ discretion and almost certainly will raise unintended conflicts with the existing regulatory and market framework. The legislation also will serve as a potential vehicle for changes to that framework. For instance, there is a significant possibility that the legislation will include measures for credit reporting changes, including attempts toward longer term reform of the system.

We will continue to monitor legislative and regulatory developments. In addition, we are focusing on the litigation and enforcement risks facing the industry in this evolving environment.  Please click here to register for our April 29, 2020, webinar on Emerging Litigation Risks for the Financial Services Industry.


For More Information

Quyen T. Truong

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.