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    FED Announces Rule Change in Relation to Paycheck Protection Program

    April 17, 2020

    FED announced a change to an interim final rule to bolster the effectiveness of the Paycheck Protection Program (PPP) of the Small Business Administration. The change will temporarily modify the FED rules to allow certain bank directors and shareholders to apply for PPP loans for their small businesses. The rule change becomes effective immediately and will be in place while the PPP is active. Comments on the interim final rule will be accepted for 45 days after publication in the Federal Register.

    To prevent favoritism, FED rules limit the types and quantity of loans that bank directors, shareholders, officers, and businesses owned by these persons can receive from their related banks. These requirements have prevented some small business owners from accessing PPP loans—especially in rural areas. The Small Business Administration recently clarified that PPP lenders can make PPP loans to businesses owned by their directors and certain shareholders, subject to certain limits and without favoritism. This change will allow banks to make PPP loans to a broad range of small businesses within their communities, in line with the rules and restrictions of the Small Business Administration. The change only applies to PPP loans.

    PPP was created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to facilitate lending to small businesses affected by COVID-19. Under PPP, qualified lenders, including many depository institutions subject to section 22(h) of the Federal Reserve Act and the Board’s Regulation O, may make loans to small businesses for payroll-related and other purposes specified in the CARES Act. Loans that meet the requirements for the PPP set forth by the Small Business Administration are guaranteed as to the unpaid principal and accrued interest of the loan. The guarantee for PPP loans provided by the Small Business Administration is backed by the full faith and credit of the United States. Only loans made between February 15, 2020 and June 30, 2020 are eligible for the PPP. 

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    Keywords: Americas, US, Banking, Small Banking Administration, Paycheck Protection Program, COVID-19, Credit Risk, CARES Act, Regulatory Capital, FED

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