Paycheck Protection Program (PPP) loans to businesses owned by their directors and certain shareholders who are also bank directors, officers and shareholders will be allowed – subject to certain limits, and without favoritism – under an extension of a rule change announced by the Federal Reserve Wednesday.
The Fed said it is extending the exception of business loans to the bank directors and others to bolster the effectiveness of the Small Business Administration’s (SBA) PPP. “Like the earlier rule, the extension will temporarily modify the Board’s rules so that certain bank directors and shareholders can apply to their banks for PPP loans for their small businesses,” the Fed said.
In a release, the Fed said to prevent favoritism it limits the types and quantity of loans that bank directors, shareholders, officers, and businesses owned by these persons can receive from their affiliated banks. However, the Fed said, the limits have prevented some small-business owners from accessing PPP loans – especially in rural areas.
“The SBA clarified in April that PPP lenders can make PPP loans to businesses owned by their directors and certain shareholders, subject to certain limits, and without favoritism,” the Fed said. “The Board’s rule change will allow those individuals to apply for PPP loans, consistent with SBA’s rules and restrictions. The change only applies to PPP loans.”
The central bank said the temporary change will allow banks to continue to make PPP loans to a broad range of small businesses within their communities. It noted that the SBA explicitly has prohibited banks from favoring in processing time or prioritization a PPP loan application from a director or equity holder. “The Board will administer its rule change accordingly,” the Fed said.
The rule change is effective immediately and will be in place while the PPP is active.