U.S. Small Business Administration details mechanisms for extending Section 1112 payments

The U.S. Small Business Administration (SBA) released Procedural Notice 5000-20095 (Procedural Notice) on Feb. 16, 2021, which clarifies the eligibility and procedures for existing loans under its 7(a) and 504 loan (Covered Loan programs) to receive extended loan payments from funds earmarked for that purpose by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act). Effectively, via this Procedural Notice, the SBA admitted the funding it received from Congress was insufficient to accomplish the aim of continued Section 1112 payments in the Economic Aid Act.

Originally, under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the SBA would make six months of payments to lenders to cover the principal and interest owed on loans under the 7(a) and 504 programs. The Economic Aid Act sought to extend these payments for an additional period of time depending on whether the loan was approved prior to Sept. 27, 2020. Congressional motivation for continuing these payments as part of the subsequent relief aimed to both continue providing relief for businesses shuttered due to the pandemic while encouraging lending under its existing programs to keep lending from grinding to a halt as a result of the pandemic.

As newly set forth in the Procedural Notice, Covered Loan programs approved  prior to Sept. 27, 2020, and disbursed prior to Sept. 28, 2020, are now eligible for three months of payments under the Economic Aid Act so long as they did not receive Section 1112 payments under the CARES Act. Covered Loan programs approved between March 27, 2020, and Sept. 27, 2020, are only eligible for the six months of payments provided for by the CARES Act and cannot receive a second round of funding made available by the Economic Aid Act. 

The SBA seemingly made this distinction to enable more businesses and borrowers to obtain access to the limited funds available under Section 1112. Lenders experienced a flurry of activity and increased consumer demand for 7(a) and 504 loan products when Section 1112 payments were initially unveiled. Given that the CARES Act originally tied the annual budget allocation for 7(a) funding into the funds it earmarked for the popular and well-publicized Paycheck Protection Program, this allocation dried up quickly. While the subsequent Paycheck Protection Program Flexibility Act of 2020 realigned the Congressional budget allocation, the demand still surpassed expectations and led Congress to add funds to the Economic Aid Act and the SBA to carve out loans originated with the intent to receive Section 1112 payments for a second time. This increases the number of loans and borrowers with access to these payments as part of ramping up their business activities, while decreasing the amount of that aid.

Conversely, businesses that had previously undertaken additional debt prior to the onset of the pandemic in the form of a Covered Loan felt the brunt of the ensuing economic slowdown. As a result, Section 1112 payments were not an added bonus incentive to undertake new ventures during an economic slow period—for these borrowers they were a necessary reprieve to help save them from financial collapse. Therefore, Congress used the Economic Aid Act to provide additional relief enabling survival. 

The Procedural Notice serves as the SBA’s formal recognition that despite Congress’ intent, the funding is simply insufficient to meet the appetite for this program. By modifying the number of relief payments available to any single borrower, the SBA can provide some relief to many borrowers rather than running out of funds and leaving some out in the cold. 

If you have questions or need advice regarding the SBA’s Section 1112 payments, Chuhak & Tecson attorneys are ready and able to assist you.

Client alert authored by Christopher A. Pellegrini (312 855 4605), Associate.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.