Paycheck Protection Program

The PPP provides loans to help small businesses struggling in the wake of the COVID-19 pandemic and provides a direct incentive for small businesses to keep their workers on payroll.

The PPP loans are an extension of the SBA’s 7(a) loan program with the following differences:

  • PPP loans are 100 percent guaranteed, meaning there is no credit risk to a credit union if it complies with the applicable lender obligations set forth in the interim final rule
  • The full principal amount of a PPP loan may qualify for loan forgiveness
  • PPP loans are limited to $10 million

The NCUA interim final rule excludes PPP loans from the commercial loan definition. In addition, PPP loans are not included in the member business loan cap as specified in NCUA regulation § 723.8, Aggregate member business loan limit; exclusions and exceptions, because they are 100 percent guaranteed by the federal government.

This section addresses the following topics:

Eligibility Criteria

Lenders

All current SBA 7(a) lenders are automatically approved to make PPP loans.

A FICU that is not an approved 7(a) lender can receive SBA approval by submitting a CARES Act § 1102, 7(a) Loan Program Lender Agreement to the SBA. The SBA will automatically approve lenders that are not designated in troubled condition or subject to a formal enforcement action by the NCUA due to unsafe or unsound lending practices.

CUSOs can also qualify as a PPP lender, subject to the requirements listed in the SBA’s interim final rule.

Borrowers

Small businesses, non-profit organizations, veterans’ organizations, tribal businesses, independent contractors, and the self-employed may be eligible to apply for a PPP loan. The SBA’s interim rule on the PPP provides specific information regarding eligible small businesses and tax-exempt nonprofit organizations.

To qualify, a borrowing business must have been in operation on February 15, 2020.

The FCUA § 1757(5), Authority to Make Loans, permits an FCU to originate loans for its members. If a potential borrower is not a current member, the credit union must ensure the borrower becomes a member before the loan closes.

Loan Terms

Loans under the PPP are guaranteed under the same terms, conditions, and processes as other SBA 7(a) loans, with certain changes, including but not limited to:

  • Loan Amount—The maximum loan amount is the lesser of $10 million or an amount calculated using the criteria in the interim final rule
  • Maturity—Five years
  • Repayment—Commences six months from the date of disbursement
  • Lender Guarantee—100 percent
  • Collateral—None required
  • Personal Guarantees—None required
  • Interest Rate—One percent
  • Loan Fees—None charged to the borrower by either the government or lender

Lender Obligations

The credit union may rely on certification of the borrower in order to determine borrower eligibility and use of loan proceeds. The credit union may also rely on documents provided by the borrower for underwriting to determine qualifying loan amount and eligibility for loan forgiveness.

This topic addresses the following:

Loan Underwriting

The CARES Act 1102, 7(a) Loan Program, provides specific loan underwriting criteria for PPP loans. Borrowers must submit documentation to establish eligibility such as payroll processor records, payroll tax filings, Form 1099-MISC, or income and expenses from a sole proprietorship. Borrowers that do not have these documents must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.

The credit union should review the borrower’s calculations and supporting documents, but does not need to replicate the borrower’s calculations. If the credit union identifies errors in the borrower’s calculation or determines the borrower’s supporting documents are insufficient, the credit union should work with the borrower to resolve the issues.

A credit union’s underwriting obligations are limited to:

  • Reviewing of the Paycheck Protection Application Form to confirm the borrower’s certification
  • Verifying the borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020
  • Confirming the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower's application
  • Following the credit union’s BSA policy and BSA regulatory requirements
FinCEN has issued advisories and notices concerning COVID-19-related scams and BSA compliance during this pandemic.

Loan Documentation

A credit union’s documentation requirements are limited to:

  • Promissory Note—The credit union may use its own promissory note or one from the SBA
  • SBA Authorization—The credit union does not need a separate SBA authorization for the SBA to guarantee a PPP loan

Note: The credit union must have executed SBA Form 2484 (the Lender Application Form for the PPP) to issue PPP loans and receive a loan number for each originated PPP loan. This requirement is satisfied when the credit union submits a loan through the E-Tran system; no transmission or retention of a physical copy of Form 2484 is required.

Loan Forgiveness

The SBA will fully forgive PPP loans if the funds are used for payroll costs, interest on mortgages, rent, and utilities. At least 60 percent of the forgiven amount must have been used for payroll.

Credit unions can rely on borrower documentation for loan forgiveness. The credit union does not need to verify the documentation supporting the borrower’s request if the borrower attests to accurately verifying the payments for eligible costs. Refer to the SBA interim rule on the PPP, SBA PPP guidance, and the SBA’s responses to frequently asked questions for additional information relating to PPP loan forgiveness.

Lenders that comply with the lender obligations in the SBA interim rule on the PPP will be held harmless for borrowers' failure to comply with program criteria.

Loan Participations and Loan Sales

Credit unions participating in the PPP may sell loan participations of up to 100 percent of the principal balance or whole loans as outlined in the PPP guidance and the SBA’s frequently asked questions. Contrary to the participation limits established in §  701.22, Loan participations, the existence of the 100 percent government guarantee provides separate authority for an FCU to sell 100 percent participation in a PPP loan. (OGC opinion OL2003-0839, Investment in Portions of Loans Guaranteed by U.S. Department of Agriculture )

PPP Loans to Officials

Board of Directors. A credit union can extend a PPP loan to a small business owned, in part or in whole, by a member of a credit union’s board of directors if the small business meets PPP eligibility requirements and the director is not a key employee or officer of the credit union.

Credit unions should contact their local SBA office to determine if a board member meets the SBA’s definition of a key employee or officer. For more information, see NCUA Letter to Credit Unions 20-CU-11, Regulatory Treatment for Paycheck Protection Program Loans. Credit unions should maintain documentation that supports the SBA’s determination.

Credit unions must comply with NCUA regulations § 701.21, Loans to members and lines of credit to members, (applicable to federally-insured, state-charted credit unions under NCUA regulations § 741.203, Minimum loan policy requirements), concerning non-preferential treatment for loans and lines of credit to officials.

Other Credit Union Officials. Credit unions cannot make SBA loans, including PPP loans, to small businesses owned in part, or in whole by, officers or key employees of the credit union.

Regulatory Changes

In April 2020, the NCUA Board approved an interim final rule amending regulatory requirements related to the PPP loans and the Board of Governors of the Federal Reserve System’s PPPLF advances. These regulatory changes include the following, which are discussed in detail below:

PPP Risk Weight

The NCUA Board amended NCUA regulation § 702.104, Risk portfolios defined, to include PPP loans as low-risk assets for purposes of calculating a credit union’s risk-based net worth ratio. PPP loans will receive a zero-percent risk weight. This treatment will also apply to the NCUA’s risk-based capital rule, which currently has an effective date of January 1, 2022.

Commercial Loan Exclusions

The NCUA interim final rule excludes PPP loans from the commercial loan definition in NCUA regulation § 723.2, Definitions. Therefore, PPP loans are not subject to the same enhanced underwriting and monitoring requirements for commercial loans. In addition, PPP loans are excluded from the member business loan definition in NCUA regulation § 723.8, Aggregate member business loan limit; exclusions and exceptions, because they are fully guaranteed by a federal agency.

Paycheck Protection Program Liquidity Facility

To bolster the effectiveness of the PPP, the Federal Reserve established the PPPLF under the Federal Reserve Act § 13(3), Discounts for individuals, partnerships, and corporations. Under the PPPLF, the Federal Reserve will supply liquidity to participating financial institutions through term financing backed by PPP loans.

Eligibility

To facilitate the extension of PPP loans to small businesses and other eligible borrowers, the Federal Reserve will provide non-recourse loans to all PPP lenders. PPP lenders that obtain PPPLF extensions of credit will pledge the PPP loans as collateral. The PPPLF will take the PPP loans as collateral at face value.

Credit Terms

  • Interest Rate—PPPLF extensions of credit will be extended at a fixed rate of 35 basis points
  • Fees—None
  • Maturity Date—The maturity date of an extension of credit under the PPPLF will equal the maturity date of the PPP loans pledged to secure the extension of credit, generally two years from origination of the PPP loan
  • Credit Limit—None
  • Prepayment Penalty—None

Net Worth Calculation

The NCUA Board approved changes to NCUA regulation § 702.2(k)(3), Definitions , regarding the calculation of a credit union’s net worth ratio. This change allows a credit union to exclude PPPLF pledged loans from the calculation of total assets for the purpose of calculating its net worth ratio. In effect, this amendment neutralizes the regulatory capital effects of PPP loans pledged to the PPPLF. The non-recourse nature of the Federal Reserve’s extension of credit to credit unions eliminates the credit and market risk exposure for the pledged PPP loans.

Only PPP loans pledged to the PPPLF can be excluded from the net worth ratio calculation. Unpledged PPP loans will still be included in total assets for purposes of calculating the net worth ratio, but all PPP loans will receive a zero-percent risk weight for purposes of risk-based net worth.

Last updated on June 30, 2020