LOANS RECEIVABLE

Loans receivable consist of the following:



	March 31, 2020			December 31, 2019
	(in thousands)
SBA 7(a) loans receivable, subject to loan-backed notes	$	25,581		$	27,598
SBA 7(a) loans receivable, subject to credit risk	28,395			27,290
SBA 7(a) loans receivable, subject to secured borrowings	10,586			12,644
Loans receivable	64,562			67,532
Deferred capitalized costs	1,139			1,145
Loan loss reserves	(531		)	(598		)
Loans receivable, net	$	65,170		$	68,079

SBA 7(a) Loans Receivable, Subject to Loan-Backed Notes—Represents the unguaranteed portions of loans originated under the SBA 7(a) Program which were transferred to a trust and are held as collateral in connection with a securitization transaction. The proceeds received from the transfer are reflected as loan-backed notes payable (Note 7).

SBA 7(a) Loans Receivable, Subject to Credit Risk—Represents the unguaranteed portions of loans originated under the SBA 7(a) Program which were retained by the Company and the government guaranteed portions of such loans that have not yet been fully funded or sold.

SBA 7(a) Loans Receivable, Subject to Secured Borrowings—Represents the government guaranteed portions of loans originated under the SBA 7(a) Program which were sold with the proceeds received from the sale reflected as secured borrowings—government guaranteed loans. There is no credit risk associated with these loans since the SBA has guaranteed payment of the principal.

At March 31, 2020 and December 31, 2019, 97.2% and 99.6%, respectively, of our loans subject to credit risk were current. We classify loans with negative characteristics in substandard categories ranging from special mention to doubtful. At March 31, 2020 and December 31, 2019, $1,339,000 and $1,362,000, respectively, of loans subject to credit risk were classified in substandard categories.

At March 31, 2020 and December 31, 2019, our loans subject to credit risk were 98.8% and 98.7%, respectively, concentrated in the hospitality industry.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted to help provide financial stability and relief for individuals and businesses affected by COVID-19. Section 1112 of the CARES Act (“Section 1112”) provides for six months of subsidy loan payments to be made on all existing SBA 7(a) loans in ‘regular’ servicing. Borrowers’ scheduled payments of principal and interest will be made by the SBA and these payments do not have to be repaid by the borrower. The overwhelming majority of borrowers under our SBA 7(a) lending platform qualify for relief under Section 1112. The relief also applies to any new borrowers for covered loans made through September 27, 2020. Thus, while the long-term economic impact of COVID-19 to borrowers under our SBA 7(a) lending platform remains unclear, we do not expect new delinquencies to be material in the aggregate for loans currently serviced under our SBA 7(a) lending platform through August 2020 because of the relief provided by Section 1112.

The CARES Act also implemented the Paycheck Protection Program, a new SBA 7(a) loan program. The Paycheck Protection Program provides small businesses with funds to pay up to 2.5 months of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. These funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities (according to the United States Treasury, due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll cost). Loan payments will also be deferred for six months. For borrowers who do not meet the criteria required for their loans to be forgiven, their loans will convert to a loan with a twenty-four month term and an interest rate of 1.00%. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees. These loans are 100% guaranteed by the SBA provided that originating lenders follow the requirements set forth in the Paycheck Protection Program.

As a SBA 7(a) lender, we are an authorized lender under the Paycheck Protection Program and have originated $13,500,000 of loans under the program as of May 8, 2020. We expect a significant portion of these loans to be forgiven either in part or in full and we will receive payment from the SBA for any such forgiven amounts, including both principal and accrued interest.