COVID-19 UPDATES
Updates to Economic Injury Disaster Loan Liens
Impact of SBA’s lien requirements on EIDL loans over $25,000 on a borrower’s ability to obtain other financing for business operations
Loans issued under the Economic Injury Disaster Loan (EIDL) program over $25,000 require a blanket lien on the assets of the business. The lien is a Universal Commercial Code (UCC-1) lien allowing the Small Business Administration to take an interest in the assets of the business. SBA’s lien does not apply to real estate or titled vehicles.
SBA has concluded that there is no prohibition on a lender with a superior lien position to the UCC-1 lien filed under the EIDL loan arrangement to continue to advance additional funds under an existing borrowing arrangement.
SBA originally required borrowers to obtain written consent from SBA before taking future advances. This requirement was rescinded and removed from the Requirement Relative to Collateral conditions in the EIDL lending arrangement effective June 18, 2020.
SBA will be modifying existing EIDL loans issued before this date through a loan modification letter. Therefore, EIDL borrowers are permitted to continue to draw from and receive additional loan funds from a lender with a superior lien position without jeopardy.
The EIDL loan agreements contain language requiring consent before selling or transferring collateral. SBA will not arbitrarily withhold consent, which is generally granted upon request when the sale or transfer benefits the business and allows it to continue to operate. The turnover of inventory is allowed in the ordinary course and does not require consent.
How does the borrower/lender request a subordination of SBA’s lien when needed for new financing?
Requests for subordination, which are currently taking about 5-7 business days to process due to volume, should be sent to pdc.pdcaccountscollateralreview@sba.gov and include the following information:
• Borrower’s Name or Company Name
• SBA EIDL Loan Number or Application Number
• For the subordination document: Lender’s Name
• Lender’s Mailing Address
• Name of Lender’s Authorized Signer & Title
• Lender’s Contact Name and Email Address for That Contact
• The Proposed Loan Amount of the Loan Extended to the Borrower by Lender
The SBA PDC can follow up with verification of borrower's consent and any additional information needed, such as copies of the filed UCC(s).
SBA PDC will review and, once approved, the SBA PDC will prepare and execute a Subordination Agreement that subordinates the collateral security in the EIDL loan to the lien of the new lender and forward the signed document to the requestor and borrower.
This completed form is then emailed exclusively through Box.com to the borrower and lender, per SBA security policy for all electronic documents presented outside of the application portals. Some lenders are unable to access the Box.com links for electronic documents; in such cases, lenders should note that the documents are also provided to the borrowers in the same fashion and borrowers are able to freely share their personal documents to suit their businesses. Physical documents are mailed USPS.
FFIEC Addresses Treatment of Borrowers Nearing End of COVID-19 Accommodations
With many COVID-19-related accommodations for loans nearing their initial expiration dates, the Federal Financial Institutions Examination Council has issued a joint statement outlining prudent risk management and consumer protection principles for financial institutions to consider while working with affected borrowers.
“The FFIEC members encourage financial institutions to consider prudent accommodation options that are based on an understanding of the credit risk of the borrower; are consistent with applicable laws and regulations; and, that can ease cash flow pressures on affected borrowers, improve their capacity to service debt, and facilitate a financial institution’s ability to collect on its loans,” according to the statement. “Such arrangements may mitigate the long-term impact of a financial challenge on borrowers by avoiding delinquencies or other adverse consequences.”
When executing an additional accommodation, the agencies noted that institutions should provide “clear, accurate and timely information” to borrowers and guarantors and ensure that the accommodation offered is “well-structured and sustainable.” The statement also addresses the accounting and regulatory reporting requirements for COVID-19-related loan modifications, as well as expectations for internal control systems.
Fed Survey: Loan Demand Plummets in Second Quarter
As the U.S. economy dove deeper into recession amid the coronavirus pandemic in the second quarter, more than half of banks reported weaker demand for commercial and industrial loans, according to the Federal Reserve’s survey of senior loan officers released yesterday. Businesses with stronger demand for C&I loans sought to bulk up on cash or replace lost revenue. Client demand for commercial real estate and consumer debt demand also plummeted, while low rates drove higher demand for mortgage loans.
• C&I. As the overall economy and specific industries’ conditions worsened, more than two-thirds of banks reported tightening standards for C&I loans for firms of all sizes – substantially larger shares seen than in previous reports. No banks reported easing standards for C&I loans. Banks tightening were most likely to tighten by increasing spreads, raising premiums on riskier loans, adding covenants and collateralization requirements, and using interest rate floors. C&I loan demand was mixed, with about a quarter of banks seeing stronger demand from firms of all sizes, driven almost entirely by falling customer revenues or protective demand for liquidity. However, 40.7% of banks saw weaker demand from large and midsize firms, while 54.3% of banks saw weaker demand from smaller firms; the most important reasons cited were declining need for client investments, M&A financing and inventory financing. (The report does not indicate loan officers’ views on Paycheck Protection Program loans.)
• CRE. Accelerating from the second quarter’s C&I loan pattern, roughly four in five banks tightened standards to some degree on construction and land development loans and loans secured by nonfarm nonresidential properties, while two-thirds tightened on multifamily residential property loans. No banks reported easing standards for CRE loans, and most banks reported weaker demand for CRE loans.
• Mortgages. After a small net percentage of banks tightened standards for conforming mortgages in the first quarter, more than half of banks reported they tightened standards for GSE-eligible and government mortgage loans in the second quarter. Two-thirds indicated they tightened standards on jumbo loans; no banks eased standards in any mortgage category. Demand remained strong, however, as interest rates remained near historic lows. As many as half of banks reported stronger demand for mortgages in every category, with nearly a quarter reporting “substantially stronger” demand for conforming loans. About two-thirds of banks also noted tightening on home equity lines of credit, for which demand was mixed.
• Personal loans. More than seven in 10 banks reported tightening standards on credit cards – mostly by cutting credit limits, increasing minimum credit scores and limiting exceptions – and the long-running tightening trend on auto loans accelerated sharply, with 55% of banks tightening. Nearly two-thirds of banks reported falling demand for credit card loans, while nearly half on net reported demand fell for car loans.
Read more about survey results
Coalition of Business Interests Urge Passage of Streamlined PPP Forgiveness House Bill
A coalition of business interests sent a letter on Friday to House leaders in support of H.R. 7777, the Paycheck Protection Small Business Forgiveness Act, a bill sponsored by Reps. Chrissy Houlahan (D-Penn.) and Fred Upton (R-Mich.) that would allow PPP loans to be forgiven once the borrower completes a one-page attestation form.
The bill is expected to significantly reduce the paperwork burden for the vast majority of PPP borrowers. “In addition to relieving these small businesses of the significant time and expenses required by the guidance released, this automatic forgiveness for all loans of $150,000 and under will also relieve SBA from an enormous administrative burden created by millions of requests for forgiveness,” the groups noted. “As the country continues to struggle with the economic consequences of the COVID-19 pandemic, H.R. 7777 will allow SBA to better utilize its limited resources to positively impact our nation’s small businesses.”
Action Alert: Urge House Members to Pass H.R. 7777 to Forgive PPP Loans of $150,000 and Under
The U.S. House of Representatives recently introduced legislation to simplify the forgiveness process for Paycheck Protection Program loans of $150,000 and under by having borrowers sign a simple form attesting that the funds were used according to the PPP loan requirements. Several IBA members have already contacted Indiana’s two U.S. senators encouraging them to pass similar legislation. Now we need your support by asking your U.S. representative to pass H.R. 7777 quickly to make the PPP forgiveness process simple and less complicated for small business owners. Contact your representative today and ask for help to ease the burden on small businesses by passing legislation to forgive PPP loans of $150,000 or less.
Action Alert: Ask the Senate to Simplify Forgiveness for PPP Loans $150,000 and Under
The IBA is asking members to contact their senators in an effort to increase support for S. 4117, the Paycheck Protection Program Small Business Forgiveness Act. As referenced in the story above, this bill has broad support from national trade associations and state banking associations across the country. Please contact your senators today and ask for their support to pass this legislation that will expedite the forgiveness process for the majority of borrowers that received loans through the PPP.
Financial Industry Group Urge House to Protect EIPs From Garnishment
A coalition of bank trade groups and consumer advocacy organizations sent a letter on Friday urging the House to pass S. 3841, which would protect 2020 economic impact payments made under the CARES Act or other legislation from court-ordered garnishment. The Senate passed the legislation unanimously on July 23.
While the CARES Act exempted these payments from being offset for debts owed to state and federal agencies, except for child support, it did not address court-ordered garnishments with which depository institutions are obliged to comply.
“We urge the House of Representatives to follow the Senate’s lead and quickly approve S. 3841 and provide this certainty to ensure that American families will receive these benefits as intended to fulfill our common goal of protecting these payments from garnishment within the practical realities of existing financial institution systems,” the group wrote.
FHFA Extends Policy on Forbearance Loan Purchases
The Federal Housing Finance Agency extended a temporary policy that allows for the purchase of certain single-family mortgages in forbearance that meet specific eligibility criteria set by Fannie Mae and Freddie Mac. The policy is extended for loans originated through Aug. 31.
The FHFA also reported it will share with the Consumer Financial Protection Bureau aggregate data on loans that enter forbearance before delivery to the government-sponsored enterprises. The agency indicated data-sharing will allow it to fulfill its obligation under the “QM Patch” to ensure that loans sold to the enterprises comply with ability-to-repay rules.
IBA COVID-19 Updates
The IBA has several COVID-19 resources and updates available at our website.