Can a Texas local government buy SBA Paycheck Protection Program (PPP) loans as an authorized public-funds investment?

Plain-English summary

When Congress passed the CARES Act in March 2020, it created the Paycheck Protection Program, which ran forgivable loans to small businesses through the Small Business Administration's existing 7(a) loan program. Those loans could be sold on the secondary market, and that raised a question for Texas local governments that invest public money: could a city, county, or other public entity covered by the Texas Public Funds Investment Act buy PPP loans as an investment? State Senator Donna Campbell asked the Attorney General for an opinion.

The Public Funds Investment Act lists the kinds of investments covered public entities are allowed to make. One category, in section 2256.009(a)(4), covers obligations whose principal and interest are unconditionally guaranteed or insured by, or backed by the full faith and credit of, the United States or its agencies. The AG worked through whether PPP loans fit that category. Federal materials showed that the Small Business Administration guaranteed 100 percent of PPP loans, and the SBA is a federal agency. So the AG concluded that, as a general matter, PPP loans fully guaranteed by the SBA satisfy the requirements of section 2256.009(a)(4) and can be authorized investments under state law.

The AG was careful to flag two gates around that conclusion. The first is a federal-law gate the AG could not resolve. Federal regulations (13 C.F.R. section 120.432(a)) let a lender sell its interest in a 7(a) loan only to another participating lender operating under a Loan Guarantee Agreement, and a lender cannot sell to a nonparticipating lender. Whether a particular public entity even qualifies to purchase PPP loans on the secondary market is a threshold question of federal law that the entity has to determine for itself. The AG noted that SBA-approved lenders generally look more like financial or banking institutions than governmental units. The second gate is a state-law one that applies even after a PPP loan clears the authorized-investment category: the Act still requires every investment to comply with the entity's own board-approved investment policy and the standard of care in section 2256.006. That standard tells public investors to act with the judgment and care a prudent person would use with their own affairs, not for speculation, and to prioritize preservation and safety of principal first, then liquidity, then yield. Whether any specific PPP-loan purchase satisfies that standard is a determination for the investing entity in the first instance.

Currency note

This opinion was issued in 2020. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. The Paycheck Protection Program has since closed to new loans, and the federal CARES Act provisions, federal regulations, and the cited sections of the Public Funds Investment Act can be amended, so verify current law before relying on any specific rule mentioned here.

What the opinion meant for those who asked

The opinion was written for a state senator, and through her for the local governments and investment officers who manage public funds. For a public entity's investment officer or treasurer in 2020, the opinion meant a PPP loan was not categorically off-limits: because the SBA's 100 percent guarantee placed these loans within the full-faith-and-credit category of section 2256.009(a)(4), they could qualify as authorized investments. But the opinion gave that audience two checkpoints rather than a green light. They had to first confirm, under federal law, that their entity was even eligible to buy a PPP loan on the secondary market, since the federal rules limited purchasers to participating lenders. And they had to run any specific purchase through their own investment policy and the section 2256.006 standard of care, with safety of principal as the top priority. For the governing body that approves investment policy, the opinion reinforced that the eligibility and prudence calls were theirs to make, not the Attorney General's.

Common questions

Q: What is the Public Funds Investment Act in plain terms?
A: It is the Texas law (Government Code chapter 2256) that controls how local governments, state agencies, and certain related public entities may invest public money, listing the categories of authorized investments and setting a standard of care.

Q: Why do PPP loans qualify as an authorized investment?
A: Section 2256.009(a)(4) allows investments in obligations backed by the full faith and credit of the United States or its agencies. The SBA, a federal agency, guaranteed 100 percent of PPP loans, so the AG concluded they generally meet that subsection.

Q: Does that mean any Texas public entity could just buy PPP loans?
A: No. Federal regulations limit secondary-market purchasers of 7(a) loans to participating lenders under a Loan Guarantee Agreement. Whether a given public entity even qualifies is a federal-law question it must resolve for itself, and the AG noted SBA-approved lenders generally resemble financial institutions, not governmental units.

Q: Is qualifying as an authorized investment the end of the analysis?
A: No. The entity still has to comply with its own board-approved investment policy and the section 2256.006 standard of care, which prioritizes safety of principal, then liquidity, then yield. Whether a specific purchase meets that standard is the entity's call.

Background and statutory framework

The opinion harmonizes a federal relief program with a Texas investment statute. The Paycheck Protection Program was added to the SBA's 7(a) loan program by section 1102 of the CARES Act (Pub. L. No. 116-136) and later modified by the Paycheck Protection Program Flexibility Act of 2020 (Pub. L. No. 116-142). Federal rules at 13 C.F.R. section 120.432(a) govern who may buy 7(a) loans on the secondary market, and 15 U.S.C. section 633(a) establishes the SBA as a federal agency, which is what brings the loans within a "full faith and credit of the United States or their respective agencies" analysis. On the state side, the Public Funds Investment Act (Government Code chapter 2256) defines which public entities it covers in section 2256.003(a), lists authorized investments in sections 2256.009 through 2256.016 (with the relevant full-faith-and-credit category in section 2256.009(a)(4)), and sets the standard of care in section 2256.006(a). The AG tied the prudence point to its earlier Opinion KP-0220 (2018), which explained that the governing body making an investment decision is best positioned to weigh probable income and whether the risk and return objectives suit the investment.

Citations and references

Texas statutory provisions:

• Tex. Gov't Code §§ 2256.003, .006, .009 (Public Funds Investment Act: covered entities, standard of care, authorized investments)

Federal authorities:

• CARES Act, Pub. L. No. 116-136, § 1102, 134 Stat. 281 (2020)
• Paycheck Protection Program Flexibility Act of 2020, Pub. L. No. 116-142, 134 Stat. 641
• 15 U.S.C. § 636(a), § 633(a), § 631; 13 C.F.R. § 120.432(a); 85 Fed. Reg. 20811 (Apr. 15, 2020)

Related opinion:

• Tex. Att'y Gen. Op. No. KP-0220 (2018) (the governing body is best positioned to weigh an investment's probable income and risk/return fit)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0337
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2020/kp-0337.pdf

Original opinion text

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

October 20, 2020

The Honorable Donna Campbell, M.D.
Chair, Committee on Veteran Affairs and Border Security
Texas State Senate
Post Office Box 12068
Austin, Texas 78711-2068

Opinion No. KP-0337

Re: Whether Paycheck Protection Program loans are authorized investments under subsection 2256.009(a)(4) the Public Funds Investment Act (RQ-0349-KP)

Dear Senator Campbell:

You ask whether Paycheck Protection Program loans issued pursuant to the Coronavirus Aid, Relief, and Economic Security Act are authorized investments for local governments covered by the Texas Public Funds Investment Act.¹

In response to the millions of workers and businesses that have been economically harmed by the COVID-19 pandemic, on March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Pub. L. No. 116-136, 134 Stat. 281 (2020) (to be codified in various titles of the U.S.C.). Included in that Act, Congress added the Paycheck Protection Program to the U.S. Small Business Administration's 7(a) Loan Program. See CARES Act § 1102 (to be codified at 15 U.S.C. § 636(a)).² The Paycheck Protection Program authorizes billions of dollars in forgivable loans to small businesses to pay their employees during the COVID-19 disaster. Id. § 1102(b)(1).³ You explain that the "CARES Act permits the loans to be sold into the secondary market," and you ask whether those loans are authorized investments under the Public Funds Investment Act such that public entities subject to that Act may purchase the loans in the secondary market. Request Letter at 1-2; see also CARES Act § 1102(a)(2)(36)(N) ("A covered loan shall be eligible to be sold in the secondary market . . . .").⁴

At the outset, we observe that federal regulations limit the entities that may purchase Paycheck Protection Program loans in the secondary market to "participating lenders":

A Lender may sell all of its interest in a 7(a) loan to another Lender operating under a current Loan Guarantee Agreement (SBA Form 750) ("participating Lender"), with SBA's prior written consent, which SBA may withhold in its sole discretion. A Lender may not sell any of its interest in a 7(a) loan to a nonparticipating Lender.

13 C.F.R. § 120.432(a) (emphasis added).⁵ Whether a particular entity qualifies to purchase loans on the secondary market is a threshold question that must be determined under federal law by the public entity in the first instance.⁶ However, to the extent that an entity qualifies under federal law as an authorized investor on the secondary market, we address whether, under State law, the loans in question are authorized investments under the Public Funds Investment Act.

The Public Funds Investment Act governs the ability of local governments, state agencies, and certain other government-affiliated organizations to purchase, sell, and invest funds in authorized investments. TEX. GOV'T CODE § 2256.003(a). The Act lists multiple categories of authorized investments in which entities subject to the Act may invest. See id. §§ 2256.009-.016. Relevant to your request, the Act authorizes investments in

obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, this state or the United States or their respective agencies and instrumentalities, including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation or by the explicit full faith and credit of the United States.

Id. § 2256.009(a)(4). Answering your question requires analyzing whether the Paycheck Protection Program loans qualify as authorized investments under this subsection.

To qualify as an authorized investment under subsection 2256.009(a)(4), obligations must be "unconditionally guaranteed or insured by, or backed by the full faith and credit of, this state or the United States or their respective agencies . . . ." Id. "Loans guaranteed under the Paycheck Protection Program [are] 100 percent guaranteed" by the Small Business Administration. 85 Fed. Reg. 20811, 20812 (Apr. 15, 2020) (to be codified at 13 C.F.R. pt. 120); see also 15 U.S.C. 636(a)(2)(F); CARES Act § 1102(a)(1)(B) (providing that the Small Business Administration's participation in guaranteeing loans under the Payment Protection Program "is 100 percent"). The Small Business Administration is an agency of the United States. See 15 U.S.C. § 633(a) (creating the Small Business Administration as a federal agency "under the general direction and supervision of the President"). Thus, as a general matter, Payment Protection Program loans fully guaranteed by the Small Business Administration satisfy the statutory requirements of subsection 2256.009(a)(4).

The Public Funds Investment Act also requires entities subject to it to invest "in compliance with investment policies approved by the governing body and according to the standard of care prescribed by section 2256.006." TEX. GOV'T CODE § 2256.003(a). The standard of care in section 2256.006 provides:

Investments shall be made with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived. Investment of funds shall be governed by the following investment objectives, in order of priority:
(1) preservation and safety of principal;
(2) liquidity; and
(3) yield.

Id. § 2256.006(a). Whether any specific investment satisfies this standard of care must be determined by the investing entity in the first instance, after reviewing the entity's policies and the specific investment under consideration. See Tex. Att'y Gen. Op. No. KP-0220 (2018) at 4 (explaining that the governing body making the investment decision is in the best position to know and consider the probable income from the investment and whether the risk and return objectives are reasonably suited to the investment).

¹ See Letter from Honorable Donna Campbell, Chair, Senate Comm. on Veteran Affairs & Border Security, to Honorable Ken Paxton, Tex. Att'y Gen. at 1-2 (Apr. 22, 2020), https://www2.texasattorneygeneral.gov/opinions/opinions/51paxton/rq/2020/pdf/RQ0349KP.pdf.

² See https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf.

³ Congress amended the Paycheck Protection Program on June 5, 2020, through the Paycheck Protection Program Flexibility Act of 2020. See https://www.congress.gov/bill/116th-congress/house-bill/7010/text. Among other changes, the amendments establish a minimum maturity period for a loan and revise the deferral period for the loans, allowing recipients to defer payments until they receive compensation for forgiven amounts. See Paycheck Protection Program Flexibility Act of 2020, Pub. L. No. 116-142, 134 Stat. 641. We note these changes to point out that the new Paycheck Protection Program is still in a state of development and potentially subject to further modifications.

⁴ See Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20811, 20816 (Apr. 15, 2020) (to be codified at 13 C.F.R. pt. 120) ("A PPP loan may be sold on the secondary market after the loan is fully disbursed. A PPP loan may be sold on the secondary market at a premium or a discount to par value.").

⁵ In addition to selling whole loans on the secondary market, federal law authorizes the pooling of certain Small Business Administration loans. See 15 U.S.C. 631. These pools can only be formed by Small Business Administration-approved Pool Assemblers, and the "SBA guarantees to a Registered Holder in an SBA pool security (referred to as a Pool Certificate) the timely payment of principal and accrued interest. SBA's guarantee of the Pool Certificate is backed by the full faith and credit of the United States." U.S. SMALL BUS. ADMIN., SBA SECONDARY MKT. PROGRAM & SECURITIZATIONS GUIDE 16 (June 2020), https://www.sba.gov/sites/default/files/2020-06/Secondary%20Market%20Program%20Guide%20June%202020%20%28508%20Compliant%29.pdf.

⁶ The Public Funds Investment Act governs public entities comprising local governments, state agencies, non-profit corporations acting on behalf of a local government or state agency, and investment pools acting on behalf of two or more local governments, state agencies, or a combination of those entities. TEX. GOV'T CODE § 2256.003(a)(1)-(4). In contrast, a lender approved by the Small Business Administration to make and therefore purchase Paycheck Protection Program loans must have the necessary qualifications to process, close, disburse and service loans made with the guarantee, thus possessing the nature of a financial or banking institution rather than a governmental unit. See 15 U.S.C. § 636(a)(36)(F)(ii)(I).

S U M M A R Y

To qualify as an authorized investment under subsection 2256.009(a)(4) of the Texas Public Funds Investment Act, an investment must be "unconditionally guaranteed or insured by, or backed by the full faith and credit of, this state or the United States or their respective agencies."

The federal Paycheck Protection Program authorizes loans to small businesses to pay their employees during the COVID-19 disaster. The Small Business Administration currently guarantees 100 percent of those loans, and they are available for purchase on the secondary market. Thus, Paycheck Protection Program loans fully guaranteed by the Small Business Administration generally satisfy the statutory requirements of an authorized investment under subsection 2256.009(a)(4).

Section 2256.006 requires that public investments "be made with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived." Whether any specific investment satisfies this standard of care required in the Public Funds Investment Act must be determined by the investing entity in the first instance, after reviewing the entity's policies and the specific investment under consideration.

Very truly yours,

KEN PAXTON
Attorney General of Texas

BRENT E. WEBSTER
First Assistant Attorney General

RYAN L. BANGERT
Deputy First Assistant Attorney General

RYAN M. VASSAR
Deputy Attorney General for Legal Counsel

VIRGINIA K. HOELSCHER
Chair, Opinion Committee