The Small Business Administration (SBA) issued written guidance today that eligible businesses owned by outside bank directors and shareholders who own less than a 30% equity interest in their financial institution may obtain Paycheck Protection Program (PPP) loans from their banks. Officers, key employees, and shareholders who own a 30% or more equity interest would not be eligible to obtain PPP loans from their banks, but could obtain a PPP loan from another approved lender.
The SBA’s guidance also reminds banks that the “Authorized Lender Official” for each PPP loan is subject to the limitations described in the Lender Application Form, which provides in relevant part: “Neither the undersigned Authorized Lender Official, nor such individual’s spouse or children, has a financial interest in the Applicant [Borrower].”
The SBA further stated that favoritism in processing time or prioritization is prohibited; and that banks should follow their own policies, as well as applicable federal and state regulations, such as Regulation O, in making PPP loans to eligible bank insiders. We also recommend that if a bank is considering making a PPP loan to a bank insider, it should follow its own insider lending policies, and carefully document the application process to help avoid future potential regulatory scrutiny.
Although this is a positive development for banks, we nevertheless urge caution in reviewing, approving, and documenting any PPP loans to your bank’s eligible insiders. Please contact us with any questions regarding this development, including how this guidance could impact an outside director who serves as a bank's Chairman of the Board.
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We have been on the forefront of dealing with COVID-19 (coronavirus) for our clients. Please contact us if you would like to discuss any of these issues or if we can otherwise be of assistance.
We recommend reviewing the following pandemic-related business and legal considerations we have been discussing with our clients: