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Economic Aid Act Section 1112 FAQ

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First Round Section 1112 Payment FAQ      Second Round Section 1112 Payment FAQ

 

 

What is the availability of funds for all Section 1112 payments?

Congress appropriated $3.5 trillion to carry out Section 325 of the Economic Aid Act and these funds remain available until expended. The SBA will monitor whether this amount is sufficient to make the payments for the periods authorized by Section 1112(c), as amended. If deemed insufficient, the SBA will develop and submit to Congress a plan to proportionally reduce the number of months provided for each authorized period. Therefore, the number of months of Section 1112 payments may be adjusted based on the availability of funds.

 

What date determines eligibility for Section 1112 payments?

Your loan becomes eligible on the date it is approved by the SBA and assigned an SBA loan number. This is not the same date as when the lender approves the loan. A lender’s approval is subject to the SBA’s final determination. For example, a lender approves a loan on June 12, 2020; the SBA approves the loan and assigns a loan number on September 10, 2020. The eligibility date is September 10, 2020.

 

 

First Round Section 1112 Payments

 

Am I qualified for expanded eligibility on covered loans for First Round Section 1112 payments?

Based on the latest SBA guidance, covered loans that were approved on or before September 27, 2020 are now eligible for First Round Section 1112 payments, even if the loan was not fully disbursed on or before September 27, 2020.

 

The Economic Aid Act amends Section 1112(c) of the CARES Act by requiring that the loan’s eligibility for Section 1112 payments be based on the date on which the loan was approved by SBA, not the date on which the loan was fully disbursed. The amendment is effective “as if included in the CARES Act.”

 

When will I receive my first payment under the First Round Section 1112?

Pursuant to the SBA’s guidance, Cadence Bank will identify 7(a) loans in its portfolio that were approved on or before September 27, 2020 but not fully disbursed by that date. If and when the loan is fully dispersed, and if the loan is in a regular servicing status, the loan is eligible to receive Section 1112 payments for a three-month period beginning with the next payment due date or, if the loan is on deferment, beginning with the first month after the deferment period. A loan must meet both criteria to be considered a “Newly Eligible First Round Loan”.

 

Importantly, a 7(a) term loan will not begin to receive Section 1112 payments until it has been fully disbursed and moved into a regular servicing status.

 

EXAMPLES: If a loan on a monthly payment schedule was approved on August 31, 2020, and fully disbursed on October 20, 2020, the loan is now eligible for the First Round Section 1112 payments and the following procedures would apply:

 

Example A: If the borrower made the loan payments for November and December 2020 and January 2021, the SBA would make the Section 1112 payments for a three-month period beginning with the next monthly loan payment due in February 2021. Cadence Bank would submit the information needed for the SBA to make the loan payment for one month (February), and then submit the information necessary for making the payments in each of the two subsequent months.

 

Example B: If the loan payments for November and December 2020 and January 2021 are past due, the SBA would make the Section 1112 payments for a three-month period beginning with the amounts past due for November, December and January. Cadence Bank would submit the information needed for the SBA to make the loan payments for those three months.

 

When am I eligible for Second Round Section 1112 payments?

The First Round Section 1112 payments on a 7(a) loan must be completed before a Newly Eligible First Round Loan may receive any Second Round Section 1112 payments.

 

What is the scheduling of First Round Section 1112 payments for 7(a) loans?

SBA Procedural Notice 5000-20095: Effective February 16, 2021

For a 7(a) loan that was approved on or before September 27, 2020 and fully disbursed on or after September 28, 2020, the SBA will make the Section 1112 payments for a three-month period. (Note: For 7(a) loans that were approved and fully disbursed on or before September 27, 2020, SBA will continue to make Section 1112 payments for a six-month period, as authorized under the original CARES Act.

 

Section 1112 Payment Guidance Payment Plan (Effective Feb. 16, 2021)
# Months
Approved on or before 9/27/2020;
Fully disbursed on or after 9/28/2020
3
Approved on or before 9/27/2020;
Fully disbursed on or before 9/27/2020
6

 

 

Second Round Section 1112 Payments

 

What are the eligibility requirements for implementing Second Round Section 1112 payments?

To be eligible for Second Round Section 1112 payments, a loan must be a “covered loan” and be in “regular servicing status”.

  • A covered loan is one that is guaranteed by the SBA under Section 7(a) of the Small Business Act and excludes loans made under the CARES Act Paycheck Protection Program.
  • A loan in “regular servicing status” includes any loan that has been moved from “approval” status to “regular servicing” status. This occurs when the loan has been closed and the final loan disbursement has been made. Revolving lines of credit are considered fully dispersed when the loan has been closed and the initial loan disbursement has been made.
  • “Regular servicing status” does not include any loan that has been moved from “regular servicing” into “liquidation” status. It also does not include any loan that should have been moved pursuant to SBA Loan Program Requirements from “regular servicing” into “liquidation” status prior to the first or next payment due date covered by Section 1112.
  • Refer to “What is the scheduling of Second Round Section 1112 payments for 7(a) loans?” for additional eligibility requirements.

 

What is the scheduling of Second Round Section 1112 payments for 7(a) loans?

SBA Procedural Notice 5000-20095: Effective February 16, 2021

  • For a loan that was approved before March 27, 2020 and is not on deferment, the SBA will make the Second Round Section 1112 payments as follows:
    1. For a two-month period beginning with the first payment due on the loan on or after February 1, 2021. Note, for any loan that is continuing to receive First Round Section 1112 payments on or after February 1, 2021, this two-month period for the Second Round Section 1112 payments does not begin until the first month after the SBA has completed the First Round Section 1112 payments.
    2. For an additional five-month period immediately following the end of the three-month period for a borrower that, according to the records of the SBA, is assigned a NAICS code beginning with 61, 71, 72, 213, 315, 448, 451, 481, 485, 487, 511, 512, 515, 532 or 812.

    Depending on the NAICS code, a borrower will receive two or five months of payments.

  • A loan approved during the period beginning on March 27, 2020 and ending on September 27, 2020 is not eligible to receive Second Round Section 1112 payments.
  • A loan approved during the period beginning on September 28, 2020 and ending on January 31, 2021 is not eligible to receive Second Round Section 1112 payments.
  • For a loan approved during the period beginning on February 1, 2021 and ending on September 30, 2021, for the three-month period beginning with the first payment due on the loan after the loan has been moved into a regular servicing status (meaning it has been fully funded).

 

Section 1112 Payment Guidance Payment Plan (Effective Feb. 16, 2021)
# Months
Approved before 3/27/2020 (not on deferment) 2 or 5 (based on NAICS Code)
Approved between 3/27/2020 – 9/27/2020 Not eligible
Approved between 9/28/2020 – 1/31/2021 Not eligible
Approved between 2/1/2021 – 9/30/2021 3

 

 

What is the scheduling of Second Round Section 1112 payments for 7(a) loans on deferment?

  • For a loan that was approved before March 27, 2020 and is on deferment, the SBA will make the Second Round Section 1112 payments as follows:
    • For a two-month period (beginning on or after February 1, 2021) beginning with the later of:
      • The next payment due on the covered loan after the deferment period; or
      • The first month after the SBA has completed the First Round Section 1112 Payments.
    • For an additional three-month period immediately following the end of the two-month period for a borrower that, according to the records of the SBA, is assigned a NAICS code beginning with 61, 71, 72, 213, 315, 448, 451, 481, 485, 487, 511, 512, 515, 532 or 812.

 

Depending on the NAICS code, a borrower will receive two or five months of payments after the deferment period ends.

 

Section 1112 Payment Guidance Payment Plan (Effective Feb. 16, 2021)
# Months
Approved before 3/27/2020 (not on deferment) 2 or 5 (based on NAICS Code)

 

 

What is the monthly payment limit for the Second Round Section 1112 payments?

Per the SBA’s guidance, no single monthly payment of principal, interest and associated fees made by SBA in a Second Round Section 1112 payment may total more than $9,000.

 

The borrower will be responsible for any amount that exceeds $9,000 (“excess due”) and must either pay the lender the amount over $9,000 at the time the payment is due or enter into an agreement with the lender in accordance with SBA’s loan program requirements and lending standards to pay that amount under mutually agreeable terms. Contact your Cadence Bank Relationship Manager for assistance.

 

What is the one-loan limitation for certain borrowers?

A borrower that has received, is receiving or will receive Section 1112 payments on a loan that was approved beginning on March 27, 2020 and ending on September 27, 2020 may not receive assistance under Section 1112 for any other loan approved beginning on or after February 1, 2021. This one-loan limitation does not apply to affiliates of the borrower.

 

What happens if I make a loan payment on a 7(a) loan on which the SBA is making Second Round Section 1112 payments?

If you have made a regular payment, in whole or in part, on a 7(a) loan for which the SBA is making Section 1112 payment, the lender must inform the borrower that it has the option of the lender either returning the loan payment to the borrower or applying the loan payment to further reduce the loan balance after application of the SBA’s payment, provided that the lender complies with SBA loan program requirements applicable to prepayments.

 

Can a borrower use the Section 1112 payments to cover payments under a “catch-up plan” or “settlement”?

Per the SBA’s guidance, the borrower is required to make payments under a catch-up plan or other settlement in accordance with that plan or settlement during the authorized period of SBA payments. No payments made by the SBA under Section 1112 may be used to cover payments owed by the borrower under the catch-up plan or settlement. The SBA will cover the regular payment owed on the loan that is not related to the catch-up plan or settlement.

 

Can lenders charge late fees on payments?

In accordance with the SBA’s guidance, lenders may not charge the borrower a late fee on a covered loan during any period in which the SBA is making Section 1112 payments with respect to the loan. This includes on any amount that exceeds the monthly limit of $9,000 on a Section 1112 payment.

 

Are revolving lines of credit eligible for Second Round Section 1112 payments? What is that process?

Yes, revolving lines of credit are eligible for Second Round Section 1112 payments per the SBA’s guidance. For revolving lines of credit, the SBA will make the loan payments in accordance with the payment terms stated in the loan authorization. Section 1112 payments will begin only after the borrower has made its first draw on the line of credit. A borrower does not need to maintain a continuous outstanding balance in the revolving line of credit during the authorized period of Section 1112 payments to be eligible for these payments. The SBA will pay no more than the authorized period of Second Round Section 1112 payments on the revolving line of credit, and these payments do not need to be made in consecutive months. The payments made by the SBA may not be used to cover any balloon payments.

 

Are Export Working Capital Program loans eligible for Second Round Section 1112 payments? What is that process?

Yes, Export Working Capital Program loans are eligible for Second Round Section 1112 payments per the SBA’s guidance. If a loan made under the Export Working Capital Program matures during the authorized period of SBA payments and another loan is taken out for the same purpose, the number of payments the SBA will make on these loans combined will not exceed the total number of months authorized for the initial loan.

 

 

Section 1112 Payments Excluded from Gross Income for IRS Revenue Code Purposes

 

Cadence Bank provided 1099-MISC forms to all SBA 7(a) borrowers that received First Round Section 1112 payments. Since then, the SBA has issued guidance stating that lenders should not file or furnish Form 1099-MISC with respect to Section 1112 payments made during calendar year 2020. Please refer to the SBA’s guidance below and consult with your tax advisor as necessary.

 

SBA Notice 5000-20087:

In April 2020, the SBA began making payments under Section 1112 of the CARES Act to cover, for a six-month period, the principal, interest and any associated fees that small businesses owe on certain 7(a) loans, 504 loans, and Microloans. The SBA’s December Notice stated that, in accordance with section 6041 of the Internal Revenue Code and the regulations thereunder, 7(a) Lenders and Microloan Intermediaries would be responsible for filing Form 1099-MISC, Miscellaneous Income, with the IRS and furnishing this form to the small businesses on whose behalf the SBA made Section 1112 payments.


However, Section 278(c) of the COVID-related Tax Relief Act of 2020, enacted on December 27, 2020, provides that, for purposes of the Internal Revenue Code of 1986, “any payment described in section 1112(c) of the CARES Act shall not be included in the gross income of the person on whose behalf such payment is made.” Accordingly, because the Section 1112 payments are excluded, for purposes of the Internal Revenue Code of 1986, from the gross income of the person on whose behalf the payment was made, Intermediaries and 7(a) Lenders should not file or furnish Form 1099-MISC with respect to Section 1112 payments that were made during calendar year 2020.

 

 

 

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