Fed tweaks rules to allow some bank directors, shareholders to apply for PPP loans for their small businesses

A temporary change in rules to permit certain bank directors and shareholders to apply for Small Business Administration (SBA) Paycheck Protection Program (PPP) loans is slated to go into effect Wednesday as a result of action by the Federal Reserve Board.

The board on Friday announced the rule change, which reflects an SBA clarification 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 says this change applies only to PPP loans. The PPP program was created by the recently enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act.

To prevent favoritism, Fed rules limit the types and quantity of loans that bank directors, shareholders, officers, and businesses owned by these persons can receive from their related banks. It said the rule change, published as an interim final rule, will help make the PPP program more effective.

“The Board is providing the temporary change to allow banks to make PPP loans to a broad range of small businesses within their communities,” the Fed said in a release Friday. “The SBA explicitly has prohibited banks from favoring in processing time or prioritization a PPP loan application from a director or equity holder, and the Board will administer its rule change accordingly.”

The rule change takes effect upon publication in the Federal Register, which is scheduled for Wednesday. The Fed will take comments from the public for 45 days after that date.

Federal Reserve Board announces rule change to bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program

Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks (Federal Register notice)