Congressional Research Service Report: 'COVID-19 Relief Assistance to Small Businesses – Issues & Policy Options' (Part 1 of 2)

WASHINGTON, May 6 -- The Congressional Research Service issued the following report (No. R46284) on May 5, 2021, entitled "COVID-19 Relief Assistance to Small Businesses: Issues and Policy Options".

The report was authored by American national government senior specialist Robert Jay Dilger, American national government specialist Bruce R. Lindsay and public finance analyst Sean Lowry.

* * *

The U.S. Small Business Administration (SBA) administers several types of programs to support small businesses, including direct disaster loan programs for businesses, homeowners, and renters; loan guaranty and venture capital programs; management and technical assistance training programs; and contracting programs. Congressional interest in these programs has become especially acute in the wake of the Coronavirus Disease 2019 (COVID-19) pandemic's widespread adverse economic impact on the national economy.

This report provides a brief description of the SBA's programs and examines congressional action to assist small businesses during and immediately following the Great Recession (20072009) and during the COVID-19 pandemic, including the following:

* P.L. 116-123, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, provided the SBA an additional $20 million for SBA disaster assistance administrative expenses and made economic injury from the coronavirus an eligible expense for SBA's Economic Injury Disaster Loans (EIDL).

* P.L. 116-136, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), among other provisions, provided $349 billion to support SBA's Section 7(a) lending programs and create a new Paycheck Protection Program (PPP) to provide forgivable loans to small businesses, small 501(c)(3) nonprofit organizations, and small 501(c)(19) veterans organizations adversely affected by COVID-19. The loans were originally available through June 30, 2020, and had a two-year term at 1% interest.

* P.L. 116-139, the Paycheck Protection Program and Health Care Enhancement Act (Enhancement Act), among other provisions, provided $321.335 billion to support up to $659 billion in Section 7(a) lending.

* P.L. 116-142, the Paycheck Protection Program Flexibility Act, among other provisions, extended the PPP loan forgiveness covered period from 8 weeks after the loan's origination date to the earlier of 24 weeks or December 31, 2020. PPP borrowers could use the 8-week-covered period if they received their loan prior to enactment (June 5, 2020).

* P.L. 116-147, to extend the authority for commitments for the paycheck protection program, extended the PPP covered loan period from June 30, 2020, to August 8, 2020, and authorized $659 billion for PPP loan commitments and $30 billion for 7(a) loan commitments.

* P.L. 116-260, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Division N, Title III of the Consolidated Appropriations Act of 2021), among other provisions, extended the PPP through March 31, 2021, increased the program's authorization amount from $659 billion to $806.45 billion, and authorized second-draw PPP loans of up to $2 million.

* P.L. 117-2, the American Rescue Plan Act of 2021, among other provisions, increased the PPP authorization amount to $813.7 billion and provided $53.6 billion for SBA program enhancements, including $28.6 billion for a restaurant revitalization grant program.

* P.L. 117-6, the PPP Extension Act of 2021, extended the acceptance of PPP applications through May 31, 2021, and authorized the SBA to process any pending applications submitted on or before that date through June 30, 2021.

Some of the small business relief provisions enacted during the 116th and 117th Congresses are similar to provisions enacted during the 111th Congress to assist small businesses during and immediately following the Great Recession. However, the more recent legislation is much broader in scope and cost than the earlier legislation and includes loan deferrals, loan forgiveness, and greatly expanded eligibility, including, for the first time, specified types of nonprofit organizations.

One lesson learned from the actions taken during the 111th Congress is the potential benefits of providing additional funding for the SBA's Office of Inspector General (OIG) and the Government Accountability Office (GAO) to assist Congress in its oversight of these programs. Their audits and program reviews can provide an early warning if unforeseen administrative problems should arise and serve as a deterrent to fraud.

Introduction

The Small Business Administration (SBA) administers several types of programs to support small businesses, including

* direct disaster loan programs for businesses, homeowners, and renters to assist their recovery from natural disasters;

* loan guaranty and venture capital programs to enhance small business access to capital;

* small business management and technical assistance training programs to assist business formation and expansion; and

* contracting programs to increase small business opportunities in federal contracting.

Congressional interest in the SBA's programs has increased in recent years, primarily because small businesses are viewed as a means to stimulate economic activity and create jobs. Congressional interest, however, has become especially acute in the wake of the Coronavirus Disease 2019 (COVID-19) pandemic's widespread adverse economic impact on the national economy, including productivity losses, supply chain disruptions, major labor dislocation, and significant financial pressure on both businesses and households.

This report begins with an overview of legislation considered during the 116th and 117th Congresses to assist small businesses adversely affected by the COVID-19 pandemic. It then provides an overview of SBA disaster loans and discusses various issues related to providing disaster assistance to small businesses adversely affected by COVID-19. It then presents an overview of SBA access to capital programs (including the 7(a) loan guarantee, 504/CDC loan guarantee, and Microloan programs), SBA management and technical training programs (Small Business Development Centers [SBDCs], Women Business Centers [WBCs], SCORE, and Microloan technical assistance), and SBA contracting programs. This is followed by a discussion of legislation enacted during the 111th Congress to assist small businesses during and immediately following the Great Recession (2007-2009).

As discussed below, some of the provisions included in legislation enacted during the 116th and 117th Congresses to assist small businesses adversely affected by the COVID-19 pandemic were included in legislation enacted during the 111th Congress to assist small businesses during and immediately following the Great Recession, including SBA fee waivers and increased loan limits.

However, the legislation enacted during the 116th and 117th Congresses is much larger in scope and cost than the legislation enacted during the 111th Congress and includes loan deferrals, loan forgiveness, and greatly expanded eligibility, including, for the first time, specified types of nonprofit organizations.

Legislative and Administrative Efforts to Assist Small Businesses During the 116th Congress

P.L. 116-123, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, was the first act to include provisions targeting SBA assistance to small businesses adversely affected by COVID-19. The act provided the SBA an additional $20 million for SBA disaster assistance administrative expenses and deemed the coronavirus to be a disaster under the SBA's Economic Injury Disaster Loan (EIDL) program. This change made economic injury from the coronavirus an eligible EIDL expense.

At that time, the SBA had $1.1 billion in disaster loan credit subsidies available, enough to support between $7 billion and $8 billion in disaster loans. Anticipating high demand, the SBA initially reduced the maximum COVID-19 EIDL loan amount from the statutory imposed $2 million lending cap to $500,000. Due to unprecedented demand, on May 3, 2020, the SBA lowered the maximum COVID-19 EIDL loan amount to six-months of economic injury up to $150,000./1

P.L. 116-136, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, made numerous changes to SBA programs, including the creation of the Paycheck Protection Program (PPP), which are loans 100% guaranteed by the SBA with a maximum term of 10 years and a maximum interest rate of no more than 4%. These loans are available to small businesses, small 501(c)(3) nonprofit organizations, and small 501(c)(19) veterans organizations--and are eligible for loan forgiveness. The SBA announced that the loans would have a two-year term at a 1% interest rate.

The CARES Act provided deferment relief for PPP loans and existing loans made under the 7(a), 504/CDC, and Microloan programs. The act also appropriated $349 billion for PPP loan guarantees and subsidies (to remain available through FY2021), $10 billion for Emergency EIDL Advance Payment grants, $675 million for the SBA's salaries and expenses account, $562 million for disaster loans, $25 million for the SBA's Office of Inspector General (OIG), $265 million for entrepreneurial development programs ($192 million for small business development centers (SBDCs), $48 million for women's business centers (WBCs), and $25 million for SBA resource partners to provide online information and training), and $17 billion for six months of debt relief for the SBA's 7(a), 504/CDC, and Microloan programs.

A summary of the CARES Act's major small business-related provisions is presented in the Appendix.

On March 30, 2020, the SBA updated its website to allow COVID-19-related EIDL applicants an option to request an Emergency EIDL Advance Payment grant./2

The SBA started accepting PPP loan applications on April 3, 2020./3

Because the SBA neared its $349 billion authorization limit for Section 7(a) lending, which at that time included the PPP, the SBA stopped accepting new PPP loan applications on April 15, 2020./4

A total of 1,661,367 PPP loans were approved by 4,975 lenders, totaling $342,277,999,103. Most of the loans (74%) were for less than $150,000. The average loan amount was $206,022./5

The SBA also stopped accepting COVID-19-related EIDL and Emergency EIDL Advance Payment grant applications on April 15, 2020, because the SBA was approaching its disaster loan assistance credit subsidy limit./6

COVID-19-related EIDL and Emergency EIDL Advance Payment grant applications already received continued to be processed on a first-in first-out basis.

The SBA resumed the acceptance of new PPP loan applications on April 27, 2020, following enactment of the Paycheck Protection Program and Healthcare Enhancement Act (Enhancement Act; P.L. 116-139) on April 24, 2020. The Enhancement Act increased the SBA's Section 7(a) loan authorization limit from $349 billion to $659 billion and appropriated $321.335 billion to support that level of lending. The act also appropriated $50 billion for EIDL (to support $367.1 billion in loan authority), $10 billion for Emergency EIDL advance payments (grants), and $2.1 billion for SBA salaries and expenses.

The SBA began accepting new EIDL and Emergency EIDL Advance Payment grant applications on a limited basis on May 4 to accommodate agricultural businesses that were provided COVID19-related EIDL eligibility by the Enhancement Act. The SBA also processed applications from agricultural businesses that had submitted an EIDL application prior to the legislative change.

Those agricultural businesses did not need to reapply. All other EIDL loan applications that were submitted before the SBA stopped accepting new applications on April 15 continued to be processed on a first-in, first-out basis./7

The SBA resumed the acceptance of new EIDL and Emergency EIDL Advance Payment applications from all borrowers on June 15, 2020./8

A summary of the Enhancement Act's major small business-related provisions is presented in the Appendix.

Numerous proposals to amend the PPP were introduced throughout the spring, summer, and fall of 2020, including

* H.R. 6800, the Health and Economic Recovery Omnibus Emergency Solutions Act (Heroes Act), which was passed by the House on May 15, 2020;

* S. 4321, the Continuing Small Business Recovery and Paycheck Protection Program Act, which was introduced in the Senate on July 27, 2020; and

* H.R. 925, the (updated) Heroes Act, which was passed by the House on October 1, 2020.

A summary of these bills' major small business-related provisions is presented in the Appendix.

As negotiations among House and Senate leaders continued over these and other legislative proposals, several changes to the PPP were agreed to. For example, P.L. 116-142, the Paycheck Protection Program Flexibility Act, enacted on June 5, 2020, among other provisions,

* extended the PPP loan forgiveness covered period from 8 weeks after the loan's origination date to the earlier of 24 weeks after the loan's origination date or December 31, 2020;

* provided borrowers that received a PPP loan prior to the date of enactment (June 5, 2020) the option to use the CARES Act's loan forgiveness covered period of eight weeks after the loan's origination date;

* replaced the 75%/25% rule on the use of PPP loan proceeds for loan forgiveness purposes with the requirement that at least 60% of the loan proceeds be used for payroll costs and up to 40% be used for covered mortgage interest, rent, and utility payments;/9

* provided borrowers a "safe harbor" from the loan forgiveness rehiring requirement if the borrower is unable to rehire an individual who was an employee of the recipient on or before February 15, 2020, or if the borrower can demonstrate an inability to hire similarly qualified employees on or before December 31, 2020;

* provided borrowers another "safe harbor" from the loan forgiveness rehiring requirement if the business can document that it was unable to operate between February 15, 2020, and the end of the covered period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020, and December 31, 2020, by the U.S. Department of Health and Human Services, the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 (the SBA indicates that this safe harbor includes state and local government directives based on these requirements or guidance);/10

* established a minimum PPP loan maturity of five years for loans made on or after the date of enactment; and

* extended the PPP loan deferral period from six months (under SBA regulations) to the date that the SBA remits the borrower's loan forgiveness amount to the lender or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower's loan forgiveness covered period.

Under the act, June 30, 2020, remained the last date on which a PPP loan application could be approved. A summary of the Paycheck Protection Program Flexibility Act is presented in the Appendix.

As required by the CARES Act, the SBA stopped accepting new PPP loan applications at midnight on June 30, 2020.

P.L. 116-147, to extend the authority for commitments for the paycheck protection program and separate amounts authorized for other loans under Section 7(a) of the Small Business Act, and for other purposes, enacted on July 4, 2020, extended the PPP covered loan period from June 30, 2020, to August 8, 2020, and authorized $659 billion for PPP loan commitments and $30 billion for 7(a) loan commitments. The Senate passed the bill by voice vote on June 30, 2020, and the House passed it by unanimous consent on July 1, 2020.

On July 11, 2020, the SBA announced that it had stopped accepting Emergency EIDL Advance Payment grant applications because the program had reached its authorization limit of $20 billion in grants./11

The SBA approved 5,781,390 Emergency EIDL Advance Payment grant applications./12

As of February 15, 2021, the SBA had approved 3,734,701 COVID-19-related EIDL loans, totaling over $203 billion./13

As required by P.L. 116-147, the SBA stopped accepting PPP loan applications on August 8, 2020.

As of August 8, 2020, the SBA had approved, after cancellations, 5,212,128 PPP loans, totaling over $525 billion (see Table 1). For comparative purposes, that loan approval amount is more than the amount the SBA has approved in all of its loan programs, including disaster loans, during the last 29 years (from October 1, 1991, through December 31, 2019; $509.9 billion)./14

[See link at end of text for Table 1: Paycheck Protection Program Loan Approvals, After Cancellations, Through August 8, 2020]

As of August 8, 2020, four industry sectors had received at least 10% of PPP net loan amounts:

* Health Care and Social Assistance (12.9%);

* Professional, Scientific, and Technical Services (12.7%);

* Construction (12.4%); and

* Manufacturing (10.3%)./15

House and Senate leaders continued negotiations on legislation to reopen and amend the PPP throughout the summer and fall. P.L. 116-260, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Division N, Title III of the Consolidated Appropriations Act of 2021), enacted on December 27, 2020, among other provisions,

* extends the PPP loan covered period from August 8, 2020, to March 31, 2021;

* expands the list of allowable uses of proceeds and loan forgiveness to include personal protective equipment, supplier costs, payments for software, cloud computing, and other human resources and accounting needs, and costs related to property damage from public disturbances that occurred in 2020 that are not covered by insurance;

* allows borrowers to select a PPP loan forgiveness covered period of either 8 weeks after the loan's origination date or 24 weeks after the loan's origination date regardless of when the loan was disbursed;

* creates a simplified loan forgiveness application process for loans of $150,000 or less, which includes an application form that is not more than one page in length and only requires borrowers to provide a description of the number of employees the borrower was able to retain because of the loan, the estimated amount of the loan amount spent on payroll costs, and the total loan amount. The borrower must also attest that they complied with all PPP loan requirements. Borrowers must retain relevant employment records for four years following submission of the form and other relevant records for three years. The SBA retains the right to review and audit these loans for fraud. Reporting of demographic information is optional;

* allows PPP borrowers that have fewer than 300 employees, have or will use the full amount of their PPP loan, and can document quarterly revenue losses of at least 25% in the first, second, or third quarter of 2020 relative to the same quarter of 2019 to receive a second-draw PPP loan of up to $2 million;

* increases the PPP loan authorization level from $659 billion to $806.45 billion, appropriates an additional $284.45 billion for the PPP, and rescinds $146.5 billion from the SBA's business loans program account (appropriated funds that were not spent prior to enactment);

* sets aside funds for new and smaller small businesses, for borrowers in low- and moderate-income communities, and for community and smaller lenders. These set asides include $15 billion across first and second draw PPP loans for lending by community financial institutions; $15 billion across first and second draw PPP loans for lending by insured depository institutions, credit unions, and farm credit system institutions with consolidated assets of less than $10 billion; $35 billion for new first draw PPP borrowers; and $15 billion and $25 billion for first draw and second draw PPP loans, respectively, for borrowers with a maximum of 10 employees or for loans less than $250,000 to borrowers in low- or moderate-income neighborhoods;

* extends the covered period for Emergency EIDL advance payments (grants) from December 31, 2020, to December 31, 2021, extends the time for the SBA to approve and disburse the funds from three to 21 days, and repeals the requirement that borrowers deduct the amount of their EIDL advance payment from their PPP loan forgiveness amount if the advance payment was refinanced into their PPP loan;

* appropriates $20 billion for an EIDL Targeted advance payment (grant) program that provides a $10,000 advance payment to borrowers located in low-income communities that have suffered a revenue loss greater than 30% over specified time periods and have no more than 300 employees; applicants that meet these requirements and received an Emergency EIDL advance payment previously are eligible to receive an amount equal to the difference of what the borrower received and $10,000. The SBA is required to provide first priority in awarding the grants to eligible borrowers located in low-income communities that received an Emergency EIDL advance payment of less than $10,000 previously, and second priority to eligible first-time applicants located in low-income communities;

* increases the 7(a) loan guarantee program's authorization limit from $30 billion to $75 billion in FY2021, and appropriates $1.918 billion for 7(a) loan guarantee program subsidy costs, and costs related to (1) increasing the 7(a) program's loan guarantee percentage from 75% and 85%, depending on the loan amount, to 90% for all 7(a) loans; (2) increasing the SBA Express loan amount from $350,000 to $1 million on January 1, 2021 (reverts permanently to $500,000 on October 1, 2021); (3) increasing the SBA Express loan guarantee percentage from 50% to 75% for loans of $350,000 or less (reverts permanently to 50% for all SBA Express loans on October 1, 2021); (4) waiving 7(a) and 504/CDC lender and borrower fees in FY2021; and (5) providing lower interest rates for the 504/CDC refinancing program;

* appropriates $3.5 billion to resume the first six months of payments of principal, interest, and fees for SBA 7(a) loans, 504/CDC loans, and Microloans, capped at $9,000 per month per borrower. Payments are dependent on when the loan was disbursed, the type of loan received, and the business's industry. For example, the SBA will pay at least three additional monthly payments on loans that were in repayment before March 27, 2020, starting with the next payment due on or after February 1, 2021. After the first three monthly payments are provided, businesses with an SBA Community Advantage loan, Microloan, or operating in specified economically hard-hit industries will receive an additional five monthly payments./16 Also, loans approved from February 1, 2021, through September 30, 2021, will receive six monthly payments beginning with the first payment due;

* appropriates $15 billion for a new Shuttered Venue Operators Grant program to provide grants to eligible live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theatre operators, or talent representatives who demonstrate a 25% reduction in revenue over specified time periods./17 The SBA can award an initial grant to eligible individuals or entities of up to $10 million based on a specified formula and a supplemental grant equal to half of the initial grant, also based on a specified formula. Funding must be used for specified purposes, such as payroll, rent, utilities, and personal protective equipment; and

* appropriates $57 million for Microloan program enhancements, including $50 million for Microloan technical assistance grants and $7 million in loan credit subsidies to support up to $64 million in additional Microloan lending.

Legislative and Administrative Efforts to Assist Small Businesses During the 117th Congress

On January 6, 2021, the SBA released two interim final rules to enable implementation of P.L. 116-260's PPP-related provisions./18

On January 8, 2021, the SBA announced that it would reopen the PPP loan portal on January 11, 2021, on a restricted basis. Initially, only community financial institutions were allowed to submit PPP loan applications (first-draw loans were accepted starting on January 11 and second-draw loans were accepted starting on January 13) as a means to promote PPP loan access for minority, underserved, veteran and women-owned small businesses./19

Community financial institutions are generally recognized as more likely to serve these populations than are other lending institutions.

The SBA reopened the PPP loan portal to PPP-eligible lenders with $1 billion or less in assets on January 15, 2021, and to all PPP-eligible lenders on January 19, 2021./20

In addition, in an effort to enhance PPP access for smaller entities, the SBA announced on February 22, 2021, that it would restrict PPP loan applications to businesses and nonprofit organizations with fewer than 20 employees for 14 days, starting on February 24, 2021./21

The SBA also announced several regulatory changes, effective the first week in March 2021, to "advance equity goals," including revising the formula that determines the loan amount for sole proprietors, independent contractors, and self-employed individuals to enable them to receive more financial support;/22 establishing a $1 billion set aside for sole proprietors, independent contractors, and self-employed individuals that do not have employees and are located in low- and moderate-income areas; and making it clear that legal U.S. residents who are not citizens are eligible and if they use an Individual Taxpayer Identification Number (ITIN) to pay their taxes they may use their ITIN as an identifier when applying for a PPP loan./23

In a related development, on January 20, 2021, the Biden Administration requested an additional $50 billion for SBA program enhancements in its "American Rescue Plan," including $25 billion for a Restaurant Revitalization grant program.24 During congressional consideration of the proposal, Congress increased the Restaurant Revitalization grant program's funding to $28.6 billion and accepted the Administration's other small business proposals.

Specifically, P.L. 117-2, the American Rescue Plan Act of 2021, provided an additional $53.6 billion for SBA program enhancements, including

* $28.6 billion for the Restaurant Revitalization grant program to provide grants of up to $10 million per entity (up to $5 million per physical location, limited to 20 locations) to restaurants and other food and beverage-related establishments that have experienced COVID-19-related revenue loss;

* $15 billion for the Targeted Economic Injury Disaster Loan Advance payment program;

* $7.25 billion for the PPP;

* $1.25 billion for the Shuttered Venue Operators Grant Program;

* $840 million for administrative costs to prevent, prepare and respond to the COVID-19 pandemic, including expenses related to PPP, SVOG, and grants to restaurants;

* $460 million for the disaster loan program ($70 million for credit subsidies and $390 million for administrative costs);

* $100 million for a community navigator pilot grant program to improve small business access to COVID-19-related assistance programs;

* $75 million for outreach, education, and improving the SBA website; and

* $25 million for SBA's Office of Inspector General for oversight, to remain available until expended./25

On March 24, 2021, the SBA announced that, as of April 6, 2021, the maximum COVID19 EIDL would be increased to 24 months of economic injury up to $500,000 from 6 months of economic injury up to $150,000. The SBA indicated that it would contact existing EIDL borrowers via email to provide details about how they can request an increase./26

In addition, P.L. 117-6, the PPP Extension Act of 2021, signed into law on March 30, 2021, extended the acceptance of PPP applications through May 31, 2021, and authorized the SBA to process any pending applications submitted on or before that date through June 30, 2021.

On May 4, 2021, the SBA informed lenders that due to budgetary limitations it was limiting new PPP loan applications to community financial institutions and would continue to process applications that had already been submitted./27

As of May 2, 2021, the SBA had approved more than 10.7 million PPP loans totaling over $780.4 billion, including more than 5.6 million PPP loans totaling over $258.2 billion during 2021 (see Table 2).

[See link at end of text for Table 2: Paycheck Protection Program Loan Approvals, After Cancellations, Through May 2, 2021]

Disaster Loans

Overview

SBA disaster assistance is provided in the form of loans, not grants, which must be repaid to the federal government. The SBA's disaster loans are unique in two respects: (1) they go directly to the ultimate borrower, and (2) they are not limited to small businesses./28

SBA disaster loans for physical damage are available to individuals, businesses of all sizes, and nonprofit organizations in declared disaster areas./29

SBA disaster loans for economic injury (EIDL) are available to eligible small businesses, small agricultural cooperatives, small businesses engaged in aquaculture, and most private, nonprofit organizations in declared disaster areas. The SBA issues about 80% of its direct disaster loans to individuals and households (renters and property owners) to repair and replace homes and personal property. The SBA disbursed $401 million in disaster loans in FY2016, $889 million in FY2017, $3.59 billion in FY2018, $1.5 billion in FY2019, and $178.5 billion in FY2020 (primarily for COVID-19-related assistance)./30

Types of Disaster Loans

The SBA Disaster Loan Program includes home disaster loans, business physical disaster loans, and EIDLs./31

This report focuses on the EIDL program because it is currently being used to address the adverse economic impact of COVID-19 on small businesses and other EIDL-eligible organizations.

P.L. 116-123, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, deemed the coronavirus to be a disaster under the EIDL program. This change made economic injury from the coronavirus an eligible EIDL expense. The act also provided the SBA an additional $20 million for disaster loan administrative expenses.

For a discussion of all SBA disaster loans, see CRS Report R41309, The SBA Disaster Loan Program: Overview and Possible Issues for Congress, by Bruce R. Lindsay.

Economic Injury Disaster Loans

EIDLs provide up to $2 million for working capital (including fixed debts, payroll, accounts payable and other bills that cannot be paid because of the disaster's impact) to help small businesses, small agricultural cooperatives, small businesses engaged in aquaculture, and most private, nonprofit organizations meet their financial obligations and operating expenses that cannot be met as a direct result of the disaster./32

As mentioned, due to unprecedented demand, in March 2020, the SBA lowered the maximum COVID-19 EIDL amount from $2 million to $500,000, and, on May 3, 2020, reduced it to six months of economic injury up to $150,000. On March 24, 2021, the SBA announced that, as of April 6, 2021, the maximum COVID-19 EIDL would be increased to 24 months of economic injury up to $500,000./33

Public nonprofit organizations and several specific business types are not eligible for EIDL assistance. Ineligible businesses include, but are not limited to, the following:

* businesses that do not meet the SBA's small business eligibility criteria, including the SBA's size standards;

* businesses that derive more than one-third of their annual gross revenue from legal gambling activities;

* casinos and racetracks;

* religious organizations;

* political and lobbying concerns;

* government-owned concerns (expect for businesses owned or controlled by a Native American tribe); and

* businesses determined by the SBA to have credit available elsewhere./34

EIDL loan amounts are based on actual economic injury and financial needs, regardless of whether the business or eligible nonprofit suffered any property damage. If an applicant is a major source of employment, the SBA may waive the $2 million statutory limit.35 In addition, EIDL loan proceeds cannot be used to refinance long-term debt, expand facilities, pay dividends or bonuses, or for relocation./36

Applicants must have a credit history acceptable to the SBA, the ability to repay the loan, and present collateral for all EIDL loans over $25,000 if available. The SBA collateralizes real estate or other assets when available, but it will not deny a loan for lack of collateral./37

EIDL interest rates are determined by formulas established in law (discussed later) and are fixed for the life of the loan. EIDL interest rate ceilings are statutorily set at no more than 4% per annum. EIDL applicants are not eligible if the SBA determines that the applicant has credit available elsewhere.

EIDL loans can have maturities up to 30 years. The SBA determines an appropriate installment payment based on each borrower's financial condition, which, in turn, determines the loan term./38

There are no prepayment penalties.

SBA EIDL assistance is not automatically available. It must be requested in one of two ways: (1) a state or territory governor can submit a request to the President for a major disaster declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act/39 or (2) a state or governor can submit a request for SBA EIDL from the SBA Administrator under the Small Business Act.

There was some initial concern that COVID-19 would not be a declarable disaster under the Small Business Act because it did not meet the legal definition for a disaster. As mentioned, to prevent any potential ambiguity, Title II of P.L. 116-123 deemed the coronavirus a disaster under Section 7(b)(2)(D) of the Small Business Act, making economic injury from the coronavirus an eligible expense under the SBA's Economic Injury Disaster Loan program.

Initial EIDL Response to COVID-19

On March 16, 2020, the SBA Administrator began issuing declarations for SBA EIDLs in response to states seeking SBA disaster assistance for small businesses./40

The SBA changed its requirement that a state or territory "provide documentation certifying that at least five small businesses have suffered substantial economic injury as a result of the disaster, with at least one business located in each declared county/parish."/41

Under new criteria, states and territories now "are only required to certify that at least five small businesses within the state/territory have suffered substantial economic injury, regardless of where the businesses are located."/42

The SBA announced that under the new criteria EIDL assistance may be available statewide instead of just within specific identified counties in declarations related to COVID-19.

EIDL Funding

Prior to the CARES Act's enactment, the SBA had about $1.1 billion in disaster loan credit subsidy available to support about $7 billion to $8 billion in disaster loans. Loan credit subsidy is the amount provided to cover the government's cost of extending or guaranteeing credit./43

The loan credit subsidy amount is about one-seventh of the cost of each disaster loan./44

The credit subsidy amount is used to protect the government against the risk of estimated shortfalls in loan repayments. There was some concern that the SBA's funding for disaster loan credit subsidies would have proven to be insufficient to meet the demand for disaster loans now that EIDL eligibility has been extended to economic injuries related to COVID-19.

The CARES Act addressed this issue by providing an additional $562 million to support disaster loans and $10 billion to support the Emergency EIDL grant program. As mentioned, the Paycheck Protection Program and Health Care Enhancement Act (P.L. 116-139) appropriated an additional $50 billion for EIDL and $10 billion for Emergency EIDL grants. P.L. 116-260, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Division N, Title III of the Consolidated Appropriations Act of 2021), appropriated an additional $20 billion for the EIDL Targeted advance payment (grant) program. P.L. 117-2, the American Rescue Plan Act of 2021, appropriated an additional $15 billion for the Targeted Economic Injury Disaster Loan Advance payment program and $460 million for the disaster loan program ($70 million for credit subsidies and $390 million for administrative costs).

Surge Issues and Loan Processing Times

Historically, the majority (80%) of SBA disaster loans have been for individuals and households. The significant number of businesses that will likely apply for EIDL assistance because of the economic damage the coronavirus caused may require the SBA to enhance its disaster business loan portfolio and increase staff to meet demand. As mentioned, in anticipation of increased EIDL demand, Title II of P.L. 116-123 provided the SBA with an additional $20 million, to remain available until expended, for SBA Disaster Loan Program administrative expenses.

A Government Accountability Office (GAO) report found that the SBA provided disaster loans in roughly 18 days or less in response to Hurricanes Harvey, Irma, and Maria in 2017./45

Although the 2017 hurricanes created a high demand at that time for SBA disaster loans, it is unclear if GAO's findings can be extrapolated to the current COVID-19 pandemic. The sheer volume of EIDL applications in response to COVID-19 could be significantly higher because COVID-19 affects a much larger number of small businesses and organizations. In addition, the time needed for the SBA to expand the disaster loan portfolio and hire and train new and existing staff could compromise loan processing times.

Loan processing times may be of significant concern to Congress and business owners alike. If loans are not processed quickly enough, businesses nationwide may suffer economic damage and, potentially, collapse. Consequently, Congress may examine options that could expedite loan processing, such as increased staffing and surge capabilities, waiving application requirements, and the use of expedited loans or bridge loans.

Expedited Disaster Loans and Bridge Loans

In response to criticism of SBA's disaster loan processing following the Gulf Coast hurricanes of 2005 and 2008, Congress passed P.L. 110-234, the Small Business Disaster Response and Loan Improvements Act of 2008./46

The act created several programs to improve the disaster loan processing./47

Among them were the following:

* Expedited Disaster Assistance Loan Program (EDALP) to provide eligible EIDL applicants with expedited access to short-term guaranteed loans of up to $150,000./48

* Immediate Disaster Assistance Program (IDAP) to provide eligible EIDL applicants with guaranteed bridge loans of up to $25,000 from private-sector lenders, with an SBA decision within 36 hours of a lender's application on behalf of a borrower./49

* Private Disaster Assistance Program (PDAP) to make guaranteed loans available to homeowners and eligible EIDL applicants in an amount up to $2 million./50

The SBA, however, had difficulty implementing these programs. In his statement before the House Committee on Small Business, then-acting (and now the current) SBA Inspector General, Hannibal "Mike" Ware, stated the following:

"In the wake of disasters like Hurricane Sandy, congressional representatives expressed concern that SBA did not effectively develop and utilize programmatic innovations intended to assist in disbursing funds quickly and effectively. For instance, SBA did not implement statutory provisions of the Immediate Disaster Assistance Program (IDAP), Economic Injury Disaster Assistance Program (EDAP), and the Private Disaster Assistance Programs (PDAP), collectively known as the "Guaranteed Disaster Assistance Programs" mandated by Congress in 2008. These provisions were enacted with the expectation that they would allow SBA to provide expedited disaster loans in partnership with private sector lenders. These provisions remain unimplemented."/51

He added that the SBA had difficulty implementing the programs because private lenders were reluctant to participate in the program. He mentioned the following impediments:

"[the] cost of program participation under the current pricing structure and the lender's lack of infrastructure to deliver loans that meet SBA standards (such as evaluating eligibility and duplication of benefits); loan terms that include longer maturities than conventional lending practices; the high cost of providing these loans; inadequate collateral security; and their lack of expertise in the home loan sector. Lenders were also concerned that loan guarantees would be denied due to improper eligibility determinations."

Because these programs had limited use, Congress included a provision in P.L. 115-141, the Consolidated Appropriations Act, 2018, which permanently cancelled $2.6 million in unobligated balances available for the IDAP and the EDALP.

The CARES Act addressed loan processing issues by authorizing the SBA Administrator, in response to economic injuries caused by COVID-19, to

* waive the "credit not available elsewhere" requirement,

* approve an applicant based solely on their credit score,

* not require applicants to submit a tax return or tax return transcript for approval,

* waive any rules related to the personal guarantee on advances and loans of not more than $200,000, and

* waive the requirement that the applicant needs to be in business for the one-year period before the disaster declaration (except that no waiver may be made for a business that was not in operation on January 31, 2020).

SBA EIDL Repayment and Forgiveness

Under present law and regulations, the first SBA EIDL payment is normally due five months after disbursement. However, on March 23, 2020, the SBA announced that it would defer payments on existing disaster loans through December 31, 2020, "to help borrowers during this unprecedented time."/52

The SBA also announced that payments on new EIDL loans would be deferred for one year (interest does accrue).

Additionally, on March 12, 2021, the SBA extended the deferment period for all COVID-19related EIDL and other disaster loans until 2022. Specifically, all disaster loans made in calendar year 2020 will have a first payment due extended from 12 months to 24 months from the date of the note, and all disaster loans made in calendar year 2021 will have a first payment due extended from 12 months to 18 months from the date of the note./53

The CARES Act authorized the SBA to provide complete payment deferment relief, for not less than six months and not more than one year, for Paycheck Protection Program (PPP) borrowers if the borrower was in operation on February 15, 2020, and had an application for a covered loan approved or pending approval on or after the date of enactment. The SBA subsequently deferred PPP loan payments for six months. However, interest continued to accrue on these loans during the six-month deferment./54

PPP loans can also be forgiven, in whole or in part, under specified conditions related to the borrower's retention of employees and wages. Federal loan forgiveness is rare, but has been used in the past to help businesses that were having difficulty repaying their loans. For example, loan forgiveness was granted after Hurricane Betsy, when President Lyndon B. Johnson signed the Southeast Hurricane Disaster Relief Act of 1965./55

Section 3 of the act authorized the SBA Administrator to grant disaster loan forgiveness or issue waivers for property lost or damaged in Florida, Louisiana, and Mississippi as a result of the hurricane. The act stated that to the extent such loss or damage is not compensated for by insurance or otherwise, (1) shall at the borrower's option on that part of any loan in excess of $500, (A) cancel up to $1,800 of the loan, or (B) waive interest due on the loan in a total amount of not more than $1,800 over a period not to exceed three years; and (2) may lend to a privately owned school, college, or university without regard to whether the required financial assistance is otherwise available from private sources, and may waive interest payments and defer principal payments on such a loan for the first three years of the term of the loan./56

Disaster Grants

Historically, businesses that suffer uninsured loss as a result of a major disaster declaration are not eligible for Federal Emergency Management Agency (FEMA) grant assistance, and grant assistance from other federal sources is limited. On some occasions, Congress has provided disaster assistance to businesses through the Department of Housing and Urban Development's (HUD's) Community Development Block Grant (CDBG) program. The CDBG program provides loans and grants to eligible businesses to help them recover from disasters as well as grants intended to attract new businesses to the disaster-stricken area. In a few cases, CDBG has also been used to compensate businesses and workers for lost wages or revenues.

Although the President issued the first major disaster declaration to New York for COVID-19,/57 CDBG disaster assistance is not available for all major disasters. States can use CDBG funding to respond to emergencies or other "urgent needs" through the conventional CDBG entitlement and states program,/58 but existing (or future) CDBG monies generally must be reprogrammed in consultation with HUD to respond to the emergency./59

For these reasons, CDBG is generally used for long-term recovery needs rather than providing immediate, direct disaster assistance.

Thus, advocates of providing disaster grants to small businesses generally focus on FEMA or the SBA. Advocates of enlisting FEMA to administer the program argue that FEMA already has grant processing operations in place, making it relatively easier to expand the operations to include small businesses disaster grants rather than establishing new grant-making operations within SBA. They also argue that having FEMA administer the small business disaster grant program may limit duplication of administrative functions between FEMA and SBA. It would also provide access to FEMA's Disaster Relief Fund (DRF) which, as of July 31, 2020, had roughly $74 billion for disaster assistance activities./60

In contrast, advocates of using the SBA to administer the program argue that it already has a framework in place to evaluate business disaster needs and disaster loan eligibility.

Another concern about providing grants to businesses is whether businesses provided SBA EIDL will be eligible for grant assistance. For example, in some cases homeowners and businesses that accepted disaster loans were deemed ineligible for disaster grants. This may make some businesses reluctant to apply for SBA EIDL and instead hold out for the possibility of a grant.

Congress may therefore allow businesses to use grant money to pay down their SBA EIDL. Another potential concern is waste, fraud, and abuse. For example, Section 1210 of the Disaster Recovery Reform Act of 2018 (DRRA, Division D of P.L. 115-254) prohibits the President from determining loans as duplicative assistance provided all federal assistance is used toward loss resulting from an emergency or major disaster under the Stafford Act. Consequently, businesses that obtain SBA EIDL and a grant for the same purposes would conceivably not be required to pay back the duplicative award.

The CARES Act authorized the SBA Administrator to provide up to $10,000 as an advance payment in the amount requested within three days after receiving an EIDL application from an eligible entity. Applicants were not required to repay the advance payment, referred to in the CARES Act as an Emergency EIDL grant, even if subsequently denied an EIDL loan. Due to anticipated demand, the SBA limited Emergency EIDL grants to $1,000 per employee, up to a maximum of $10,000.

The CARES Act addressed waste, fraud, and abuse by providing the SBA's OIG $25 million for oversight of the SBA's administration of its lending programs and for investigations to serve as a general deterrent to fraud, waste, and abuse.

As mentioned, the Paycheck Protection Program and Health Care Enhancement Act (P.L. 116139) appropriated an additional $10 billion for Emergency EIDL grants. P.L. 116-260, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Division N, Title III of the Consolidated Appropriations Act of 2021), appropriated an additional $20 billion for the EIDL Targeted advance payment (grant) program. SBA's OIG is to receive $20 million of that amount "to prevent waste, fraud, and abuse" in the awarding of the grants. Also, P.L. 117-2, the American Rescue Plan Act of 2021, appropriated an additional $15 billion for the Targeted Economic Injury Disaster Loan Advance payment program.

SBA EIDL Interest Rates

SBA EIDL interest rates for COVD-19 are 3.75% for businesses and 2.75% for nonprofit organizations./61

SBA disaster loan interest rates have been a long-standing congressional concern. First, there is concern about the ability of disaster victims to pay off their loans. Second, there is concern about how interest rates are determined given the complexity of the statutory language about disaster loan interest rates. 15 U.S.C. Sec.636(d)(5)(C)) states that interest rates are "in the case of a business, private nonprofit organization, or other concern, including agricultural cooperatives, unable to obtain credit elsewhere, not to exceed 4 per centum per annum."/62

To determine EIDL interest rates, SBA uses a formula under 15 U.S.C. Sec.636(d)(4)(A):

"Notwithstanding the provisions of the constitution of any State or the laws of any State limiting the rate or amount of interest which may be charged, taken, received, or reserved, the maximum legal rate of interest on any financing made on a deferred basis pursuant to this subsection shall not exceed a rate prescribed by the Administration, and the rate of interest for the Administration's share of any direct or immediate participation loan shall not exceed the current average market yield on outstanding marketable obligations of the United States with remaining periods to maturity comparable to the average maturities of such loans and adjusted to the nearest one-eighth of 1 per centum, and an additional amount as determined by the Administration, but not to exceed 1 per centum per annum: Provided, That for those loans to assist any public or private organization for the handicapped or to assist any handicapped individual as provided in paragraph (10) of this subsection, the interest rate shall be 3 per centum per annum."

Congress could request SBA to reevaluate its interpretation of 15 U.S.C. Sec.636(d)(4)(A) and provide detailed information explaining how the formula provides nonprofit organizations with lower interest rates than small businesses. Alternatively, Congress could change the formula under the Small Business Act if it considered the language ambiguous, or it could designate an interest rate (including a zero interest rate) for all SBA EIDL for the duration of COVID-19.

SBA Capital Access Programs

Overview

The SBA has authority to make direct loans but, with the exception of disaster loans and loans to Microloan program intermediaries, has not exercised that authority since 1998./63

The SBA indicated that it stopped issuing direct business loans primarily because the subsidy rate was "10 to 15 times higher" than the subsidy rate for its loan guaranty programs./64

Instead of making direct loans, the SBA guarantees loans issued by approved lenders to encourage those lenders to provide loans to small businesses "that might not otherwise obtain financing on reasonable terms and conditions."/65

With few exceptions, to qualify for SBA assistance, an organization must be both a for-profit business and small./66

What Is a "Small Business"?

To participate in any of the SBA loan guaranty programs, a business must meet the Small Business Act's definition of small business. This is a business that

* is organized for profit;

* has a place of business in the United States;

* operates primarily within the United States or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor;

* is independently owned and operated;

* is not dominant in its field on a national basis;/67 and

* does not exceed size standards established, and updated periodically, by the SBA./68

The business may be a sole proprietorship, partnership, corporation, or any other legal form.

What Is "Small"?/69

The SBA uses two measures to determine if a business is small: SBA-derived industry specific size standards or a combination of the business's net worth and net income. For example, businesses participating in the SBA's 7(a) loan guaranty program are deemed small if they either meet the SBA's industry-specific size standards for firms in 1,047 industrial classifications in 18 subindustry activities described in the North American Industry Classification System (NAICS) or do not have more than $15 million in tangible net worth and not more than $5 million in average net income after federal taxes (excluding any carryover losses) for the two full fiscal years before the date of the application. All of the company's subsidiaries, parent companies, and affiliates are considered in determining if it meets the size standard./70

The SBA's industry size standards vary by industry, and they are based on one of the following four measures: the firm's (1) average annual receipts in the previous three (or five) years, (2) number of employees, (3) asset size, or (4) for refineries, a combination of number of employees and barrel per day refining capacity. Historically, the SBA has used the number of employees to determine if manufacturing and mining companies are small and average annual receipts for most other industries.

The SBA's size standards are designed to encourage competition within each industry. They are derived through an assessment of the following four economic factors: "average firm size, average assets size as a proxy of start-up costs and entry barriers, the 4-firm concentration ratio as a measure of industry competition, and size distribution of firms."/71

The SBA also considers the ability of small businesses to compete for federal contracting opportunities and, when necessary, several secondary factors "as they are relevant to the industries and the interests of small businesses, including technological change, competition among industries, industry growth trends, and impacts of size standard revisions on small businesses."/72

Continues with Part 2 of 2

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View tables, footnotes and full text of the report at https://crsreports.congress.gov/product/pdf/R/R46284