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Understanding the CARES Act: The $2.2 Trillion Stimulus Package

March 27, 2020Alerts

In response to the unprecedented economic disruption caused by the COVID-19 pandemic, Congress passed and the president has signed a massive $2.2 trillion fiscal stimulus bill — known as the Coronavirus Aid, Relief, and Economic Security Act or CARES Act — to offset the losses suffered by businesses and households and to stave off a looming, and potentially significant recession. The total cost represents about 9 percent of our nation’s annual GDP.

More than $377 billion of the total targets small businesses. An additional $130 billion will flow directly to hospitals, and $150 billion will go to state and local governments. But the heart of the bill is a more than $500 billion fund to be distributed through the Federal Reserve’s existing lending facilities and overseen by a new inspector general and a five-person congressional panel.

The oversight structure is similar to the one employed to run the Troubled Asset Relief Program (TARP) instituted after the financial crash of 2008.

Of the fund, around $57 billion is earmarked for the airline industry: $25 billion in loans to airlines, another $25 billion in grants, with a further $4 billion going to cargo carriers and $3 billion to contractors. An additional $17 billion is targeted at industries "critical to national security."

The remaining $425 billion-plus will be distributed by the U.S. Treasury and “will be available across categories, across sectors and industries,” according to Sen. Pat Toomey (R-Pa.).

The funds are in addition to previous congressional appropriations, including the $50 billion lawmakers approved for distribution by the Small Business Administration (SBA) in their previous stimulus bill, the Families First Coronavirus Response Act.

The separate lending authority was created in order to allow large businesses in “severely distressed industries” to tap the emergency funds. The special purpose program also is expected to speed the distribution of funds by reducing the paperwork and administrative requirements, like underwriting, typical of SBA loans. States, counties and municipalities also qualify for the loans.

Key Business Provisions

Special provisions of the bill allow for loan forgiveness if small businesses (under 500 employees) retain workers or rehire workers, essentially turning the loans into grants. The money must be used for payroll and basic overhead.

The bill allocates $350 billion for the forgivable SBA loans, with a loan limit of $10 million. In addition, the legislation allocates $17 billion to a program intended to help cover six months of payments on current outstanding SBA loans.

The bill also restricts use of the funds in some important ways. Companies receiving the special funds are barred from using them for stock buybacks, dividend payments or executive compensation for at least one year after the loans are no longer outstanding.

One specific provision directs loans to mid-sized businesses — defined as employing between 500 and 10,000 people — and nonprofits, where no payments on the loans will be due for six months. The loans will be subject to certain conditions, so applicants should read the fine print and be sure they are fully aware of all the requirements.

Businesses which accept the loans must also retain at least 90 percent of their employees as of March 24 until Sept. 30 “to the extent practicable.” The loans cannot last longer than five years.

Benefits for Individuals

Further provisions allow for direct payments to individuals and families who qualify. Initially, individuals making $75,000 or less per year will receive $1,200, married couples with a combined income below $150,000 will get $2,400 and families with children will see an extra $500 per child under 17 years of age.

The payments begin to phase out over those thresholds and cease entirely for individual incomes over $99,000 per year (the threshold is doubled for married couples). Persons filing as a head of household are eligible with an annual income up to $112,500.

The bill also includes provisions restricting foreclosures on mortgages and evictions of renters. Those who are suffering hardship due to COVID-19 can obtain forbearance on their federally backed mortgage for up to 60 days, with a possible extension of four more periods of 30 days. Servicers of federally backed mortgages are barred from beginning any foreclosures for 60 days beginning March 18. Fees, penalties and additional interest cannot be charged for delayed payments.

Holders of multifamily federally backed mortgage loans can receive 30 days of forbearance with up to two additional 30-day periods available. They may not evict tenants for failure to pay rent for 120 days and may not charge penalties or fees for missed rent payments.

The maximum weekly unemployment benefit will also go up by $600. Under normal circumstances, private employers often have unemployment benefits charged to their account, but under the bill the federal government is fully funding the increase.

Businesses controlled by federally elected officials, cabinet members, their spouses and their immediate families do not qualify for the loans and investments managed by the U.S. Department of the Treasury.

For businesses, the measure represents a massive infusion of capital in the form of low-interest loans and, in some cases, direct grants. The intent of the bill is to streamline the process for obtaining monies by using existing Federal Reserve lending facilities and overhauling the Small Business Administration’s application processes.

Next Steps

Details on the specific application processes are expected to be announced by the Federal Reserve and the Treasury Department in the near future.

Speaker of the House Nancy Pelosi is expected to introduce additional economic relief legislation. The Senate is adjourned until April 20.

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