Irrespective of Regulation O’s lending limits for executive officers, a lender may not extend a PPP loan to an entity in which one of the lender’s officers or their spouse has an interest.

The SBA regulations generally provide that neither lenders nor their associates can own an equity interest in a business that has received or is applying for an SBA loan. A lender’s “associates” include “[a]n officer, director, key employee, or holder of 20 percent or more” of equity in the lender, or “any entity in which one or more [of any such] individuals . . . or a Close Relative of any such individual owns or controls at least 20 percent” of equity in the lender. “Close Relatives” include a spouse, parent, child, sibling or the spouse of a child or sibling.

Regarding PPP loans, the SBA recently issued an interim final rule providing that the SBA’s prohibitions against loans to lenders’ associates do not apply to “an outside director or holder of a less than 30 percent equity interest in a PPP Lender.” However, this exemption does not apply to a PPP lenders’ “officers or key employees” who “may obtain a PPP Loan from a different lender, but not from the PPP Lender with which they are associated.” Consequently, we do not believe you may extend a PPP loan to an entity in which a bank officer’s spouse has an interest.

With respect to Regulation O, we note that there are several exceptions to its prohibition on loans to executive officers exceeding $100,000 (or 2.5% of the bank’s unimpaired capital and unimpaired surplus, if that amount is lower). One of the exceptions is for loans in any amount that are secured by “guarantees of any department, agency, bureau, board, commission or establishment of the United States,” which includes PPP loans secured by the SBA. However, although a PPP loan would not be subject to Regulation O’s lending limits for executive officers, the SBA regulations do not permit making a PPP or other SBA loan to an entity in which an officer or their spouse has an interest.

 For resources related to our guidance, please see:

• SBA Regulations, 13 CFR 120.140 (“Lenders, Intermediaries, and CDCs (in this section, collectively referred to as ‘Participants’), must act ethically and exhibit good character. Ethical indiscretion of an Associate of a Participant or a member of a CDC will be attributed to the Participant. . . . The following are examples of such unethical behavior. A Participant may not: . . . (b) Have a real or apparent conflict of interest with a small business with which it is dealing (including any of its Associates or an Associate's Close Relatives) or SBA; (c) Own an equity interest in a business that has received or is applying to receive SBA financing (during the term of the loan or within 6 months prior to the loan application); . . . (i) Fail to disclose to SBA all relationships between the small business and its Associates (including Close Relatives of Associates), the Participant, and/or the lenders financing the Project of which it is aware or should be aware. . .”)

• SBA Regulations, 13 CFR 120.10 (“Lender or 7(a) Lender is an institution that has executed a participation agreement with SBA under the guaranteed loan program.”)

• SBA Regulations, 13 CFR 120.10 (“An Associate of a Lender or CDC is: (i) An officer, director, key employee, or holder of 20 percent or more of the value of the Lender's or CDC's stock or debt instruments, or an Agent (as defined in §103.1 of this chapter) involved in the loan process; or (ii) Any entity in which one or more individuals referred to in paragraphs (1)(i) of this definition or a Close Relative of any such individual owns or controls at least 20 percent.”)

• SBA Regulations, 13 CFR 120.10 (“Close Relative is a spouse; a parent; or a child or sibling, or the spouse of any such person.”)

• SBA Interim Final Rule, Paycheck Protection Program – Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (“[T]he Administrator, in consultation with the Secretary, has determined that SBA regulations (including 13 CFR 120.110 and 120.140) shall not apply to prohibit an otherwise eligible business owned (in whole or part) by an outside director or holder of a less than 30 percent equity interest in a PPP Lender from obtaining a PPP loan from the PPP Lender on whose board the director serves or in which the equity owner holds an interest, provided that the eligible business owned by the director or equity holder follows the same process as any similarly situated customer or account holder of the Lender. Favoritism by the Lender in processing time or prioritization of the director’s or equity holder’s PPP application is prohibited. The Administrator cautions, however, that Lenders should comply with all other applicable state and federal regulations concerning loans to associates of the Lender. . . . The foregoing paragraph does not apply to a director or owner who is also an officer or key employee of the PPP Lender.”)

• SBA Interim Final Rule, Paycheck Protection Program – Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (“Officers and key employees of a PPP Lender may obtain a PPP Loan from a different lender, but not from the PPP Lender with which they are associated. SBA also reminds Lenders that the ‘Authorized Lender Official’ for each PPP Loan is subject to the limitations described in the Lender Application Form, which states in relevant part: “Neither the undersigned Authorized Lender Official, nor such individual’s spouse or children, has a financial interest in the Applicant [Borrower].”)

• SBA 7(a) Borrower Information Form (“Section II of this form requests information about each of the Small Business Applicant’s principals. This section must be completed in its entirety, signed and dated by the following: . . . Any Person hired by the business to manage day-to-day operations (‘key employee’). . .”)

• SBA, Lender Application Form – Paycheck Protection Program Loan Guaranty (“Neither the undersigned Authorized Lender Official, nor such individual’s spouse or children, has a financial interest in the Applicant.”)

• OCC Rules, 12 CFR 31.2(a) (“National banks, Federal savings associations, and their insiders shall comply with the provisions contained in 12 CFR part 215 (Regulation O).”)

• Regulation O, 12 CFR 215.5(c) (“A member bank is authorized to extend credit to any executive officer of the bank: (1) In any amount to finance the education of the executive officer's children; (2) In any amount to finance or refinance the purchase, construction, maintenance, or improvement of a residence of the executive officer, provided: . . . (3) In any amount, if the extension of credit is secured in a manner described in § 215.4(d)(3)(i)(A) through (d)(3)(i)(C) of this part