April 17, 2020
Dear constituency list members of the Insolvency Law Committee, the following is a summary of recent legislation that may be of interest:
On March 27, 2020, President Trump signed into law H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). As an emergency act, the CARES Act takes immediate effect. A copy of the CARES Act, as enacted, may be found here.
While there are numerous provisions in the CARES Act that will impact everyone, there are several provisions specifically relevant to insolvency professionals, including several key revisions to the Bankruptcy Code (discussed below), the majority of which expire after one year.
Generally speaking, the CARES Act creates two new types of loan programs, guaranteed by the Small Business Administration (“SBA”) and administered by the Department of the Treasury. The first is the Paycheck Protection Program (defined in Section 1102), which creates a new type of 7(a) loans that are subject to forgiveness under certain conditions. The second program is the Economic Injury Disaster Loans (defined in Section 4003), which are designed to provide small businesses with working capital loans and loan advances to help overcome the temporary loss of revenue. Future articles will discuss these loan programs in detail. However, insolvency professionals must be aware that at this time, debtors in bankruptcy proceedings do not appear to be eligible for either the Economic Injury Disaster Loans or the Paycheck Protection Program available under the CARES Act.
For example, Section 4003(c)(3)(D) states that “[a]ny eligible borrower applying for a direct loan under [the Economic Injury Disaster Loans] program shall make a good faith certification that – (v) the recipient is not a debtor in a bankruptcy-proceeding.” (emphasis added). Similarly, the first question on the Paycheck Protection Program Borrower Application Form asks whether “the Applicant, or any owner of the Applicant . . . [is] “presently involved in any bankruptcy?” (emphasis added). The form states that if the answer is yes, “the loan will not be approved.” A link to the application form may be found here.
In addition, Section 1113 of the CARES Act makes certain modifications to the Bankruptcy Code to provide additional relief to small businesses and individual debtors affected by the Coronavirus Pandemic. The changes to the Bankruptcy Code are summarized as follows:
Additionally, Section 3513 of the CARES Act provides temporary relief for borrowers of federal student loans by deferring student loan payments, principal, and interest without penalty to the borrower, for a period of six months (through September 30, 2020).
Finally, Section 4022 of the CARES Act provides relief from foreclosure as to “Federally Backed Mortgage Loans.” These covered loans include Freddie and Fannie Mae owned loans, HUD Loans, Veteran Home Loans, and other federally backed loans. For any covered loan, upon the request of a borrower who attests in writing that the she or he is suffering financial hardship due to the COVID-19 Pandemic, and so long as the Federal National Emergency relating to the COVID-19 Pandemic is in place, the borrower is entitled to a 180 day forbearance period without providing further documentation. During this time, no late fees, costs, or additional interest can be charged to the loan. The CARES Act also appears to prohibit foreclosure on loans already in default so long as the borrower properly requests a forbearance. This 180 day forbearance period may be extended one time for an additional 180 day period at the request of the borrower so long as the Federal Emergency is still in place. Further, there is an absolute moratorium on foreclosure for any covered loans, whether or not a forbearance is requested, from March 18 to May 17.
Because most borrowers do not know who the owner of their mortgage loan is, research may be required to determine if an individual borrower is eligible for the relief under this act. If the servicer is unable to informally disclose whether the loan is a covered loan, a Request for Information under 1024.36 may be necessary to determine the borrower’s eligibility for forbearance.
The ILC will continue to review the CARES Act and other related Coronavirus legislation and provide updates as to legislation of interest to the insolvency community.
Insolvency Law Committee
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