The CARES Act: Implications for Banks

On March 27^th, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed by Congress with the intention of providing assistance for those most impacted by the pandemic, including individuals, small businesses, and state and local governments. 

A large portion of the CARES Act funding was allocated for the Payment Protection Program (PPP), a loan program designed to incentivize small businesses to keep workers on their payroll. The Small Business Administration (SBA) will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities. The first round of PPP funding consisted of $349 billion in loans, but the money quickly ran out. A second round of funding was announced on April 27^th, with $310 billion added. The intention: to not only provide needed funds for those applicants from the first round who didn’t receive funding, but to also better serve minority-owned businesses, with $60 billion set aside for community-based lenders and mid-sized banks.

While the PPP lending program continues to evolve, other lending programs have been initiated. The Federal Reserve is offering an alternative: The Main Street Lending Program, for businesses with fewer than 10,000 employees and revenues of less than $2.5 billion. Instead of loan forgiveness, the Fed will purchase 95% of a loan disbursed to a company that meets its requirements, thereby reducing most of the risk for the lender. 

Banks are on the front line, quickly ramping up their intake processes and building solutions to deliver government relief to small business owners, while anticipating their needs going forward. The stakes are high; banks must address a variety of factors to successfully mitigate the risks associated with the loans’ implementation.