Although a large portion of the funds from the CARES Act is going to certain air carriers and businesses critical to national security, some $454 billion is allocated to the Federal Reserve Board to help provide financial relief to other eligible businesses. Specifically, that money will fund the Federal Reserve’s programs and facilities that promote financial stability and lending to eligible businesses or, as stated in the Act, the funds will be allocated to “programs or facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, States and municipalities.”

​The funds will be used to: (1) purchase obligations or other interests directly from the issuers, (2) purchase obligations in secondary markets, and (3) make loans, including loans or advances secured by collateral. One such Federal Reserve program is the “Federal Reserve Direct Loan” program and, as part of that program, banks and other lenders receive funds in order to make direct loans to eligible businesses, with between 500 and 10,000 employees, who do not qualify for a Paycheck Protection Program loan.

What is a “Direct Loan”?

In this context, a “direct loan” is “a loan under a bilateral loan agreement that is (1) entered into directly with an eligible business as borrower; and (2) not part of a syndicated loan, a loan originated by a financial institution in the ordinary course of business, or a securities or capital markets transaction.” It cannot be forgiven.

Which Business Are Eligible for Direct Loans?

The Secretary may make a loan, loan guarantee or other investment as part of a program or facility that provides direct loans only if the eligible business receiving the direct loan agrees to certain requirements:

  • First, the business must be organized and domiciled in the United States, and have significant operation in and a majority of its employees based in the United States.
  • Second, the business must agree that for the length of the direct loan, plus one (1) year, it will not, on any national securities exchange, repurchase an equity interest in itself (or any parent company). As one exception, however, an eligible business may repurchase an equity security if such repurchase is required by a contract in effect on the date the CARES Act was enacted.
  • Third, the eligible business cannot, for the length of the loan plus one (1) year, pay dividends or make other capital distributions with respect to its common stock.
  • Finally, the eligible business must comply with the limitations on compensation set forth in section 4004 of the CARES Act.

Of course, the Secretary has the discretion to waive the aforementioned requirements “to protect the interests of the Federal Government.”

What is Section 4004 of the CARES Act?

​As we discussed in a prior blog post, Section 4004 of the CARES Act addresses limitations on certain employees’ compensation. The Section’s requirements apply to businesses receiving loans from the $46 billion allocation, and also to certain eligible businesses discussed in this post.

​Under section 4004, the eligible business must agree that officers and employees who, in 2019, made more than $425,000 (including salary, bonuses, awards of stock, and other financial benefits) will not receive (1) total compensation exceeding, during any consecutive 12-month period, the total compensation received in 2019, or (2) severance pay or other benefits upon termination of employment in excess of two (2) times the maximum total compensation received in 2019.

​Section 4004 also requires the eligible business to agree that no officer or employee who earned more than $3 million in 2019 will receive, in any consecutive 12-month period, total compensation in excess of $3 million plus 50% of the compensation received in excess of $3 million in 2019.

Direct Loans for Mid-Size Businesses

​Additionally, the Secretary is instructed to endeavor to implement a Federal Reserve program that will, to the extent practicable, make direct loans to mid-sized profit and nonprofit businesses that have between 500 and 10,000 employees. Such loans will be subject to an annual interest rate no higher than 2%, and no principal or interest payments are due for the first six (6) months.

To be eligible for this type of loan, the business, in addition to requirements set forth above, must certify that: (1) the uncertainty of the economic conditions makes the loan application necessary to support ongoing operations of the business, (2) the borrower is not a debtor in a bankruptcy proceeding, (3) the borrower will remain neutral in any union organizing effort for the term of the loan, and (4) that the borrower will not abrogate existing collective bargaining agreements for the length of the loan plus two (2) years. Additionally, the eligible business cannot pay dividends with respect to its common stock, cannot repurchase an equity security listed on a national securities exchange (with the exception as set forth above), and cannot offshore or outsource jobs for the length of the loan, plus two (2) years.

More importantly, the business must certify that the direct loan it receives will be used to retain at least 90% of the business’s workforce at full compensation and benefits until September 30, 2020 and that the business intends to restore at least 90% of the workforce of the borrower that existed on February 1, 2020, which includes restoring all compensation and benefits to the workers no later than four (4) months after the termination date of the public health emergency declared by the Secretary of Health and Human Services.


​While this is only an introduction and summary of certain provisions of Title IV of the CARES Act, it is clear that the CARES Act is providing support to businesses to encourage the retention of employees and encourage payment of employees during these difficult times. As always, if you need assistance or have any questions about the CARES Act, contact any member of our Coronavirus Response Team.