On May 22, 2020, the U.S. Small Business Administration (SBA) published two new interim final rules with respect to the Paycheck Protection Program (PPP)—the small business loan program implemented under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The issuance of these new regulations follows the release of the PPP loan forgiveness application the week earlier.
In the meantime, on June 3, 2020, Congress passed the Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility Act). The text of the bill introduces a host of key changes to the PPP, but it still needs to be signed into law by the President to take effect. These changes address several problems encountered by borrowers, as follows:
- PPP loan forgiveness is limited to those expenses incurred and paid over the course of just eight weeks. The PPP Flexibility Act will extend this covered period to 24 weeks (up to December 31, 2020), though borrowers who received loans before the date of enactment can still elect for an eight-week covered period.
- PPP loan forgiveness is subject to reduction if the borrower fails to maintain its payroll, but the CARES Act includes a safe harbor for borrowers who rehire their employees. The PPP Flexibility Act will extend the safe harbor deadline for re-hires from June 30, 2020 to December 31, 2020.
- The PPP Flexibility Act will further expand the safe harbor to cover circumstances where a borrower cannot rehire employees or replacements, or where a borrower cannot return to its former level of business activity due to compliance with certain federal requirements and guidance related to COVID-19.
- The PPP Flexibility Act will reduce the percentage of the PPP loan amount that a borrower must use for payroll costs to receive PPP loan forgiveness from the SBA’s current requirement of 75 percent to 60 percent.
- The PPP Flexibility Act will extend the deferral period for payments of principal, interest, and fees from the SBA’s current deferral period of six months to 10 months after the last day of the covered period for PPP loan forgiveness.
- The PPP Flexibility Act will increase the maturity of PPP loans from the SBA’s current maximum of two years to a minimum of five years.
- The PPP Flexibility Act will remove the exception of PPP loan recipients from the deferment of employer payroll taxes.
The first interim final rule details the general process and requirements to obtain loan forgiveness under the PPP. The loans administered under the PPP are subject to loan forgiveness, to the extent that borrowers use the loan proceeds for payroll costs, interest on mortgage obligations, rent obligations, and utilities. Under the existing PPP, loan forgiveness is limited to those expenses that were incurred and paid in the eight weeks after either the disbursement of the loan or the first day of the first payroll cycle thereafter. Moreover, to receive loan forgiveness, a borrower is required to allocate at least 75 percent of the loan proceeds to payroll costs. The PPP Flexibility Act would extend the eight-week period to 24 weeks and reduce the 75 percent requirement to 60 percent.
The amount of loan forgiveness is further subject to reduction based on reductions in the number of the borrower’s employees or their compensation, unless such reductions are eliminated by June 30, 2020 (or December 31, 2020, if the PPP Flexibility Act is enacted). However, if a borrower makes a good faith, written offer to rehire an employee at the same compensation, and the employee rejects the offer, then the borrower may exclude that employee from its calculations, provided that it has documented the offer and rejection and informed the applicable state unemployment insurance office of the rejection.
The PPP Flexibility Act would further allow a borrower to receive loan forgiveness in the full amount if the borrower, in good faith, is able to document its inability to rehire individuals who were employees or similarly qualified employees for unfilled positions; or an inability to return to the same level of business activity due to compliance with requirements established or guidance issued by the U.S. Department of Health and Human Services, the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
The second interim final rule discusses whether and to what extent the SBA will review individual PPP loans. The SBA is authorized to review whether a borrower was eligible to receive a PPP loan, whether a borrower calculated the loan amount correctly and used the loan proceeds for allowable uses, and whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s loan forgiveness application. The SBA has discretion as to whether or when it will undertake to review a given loan, though the SBA has advised that it would review all loans in excess of $2 million and other loans as appropriate. Per the loan forgiveness application, a borrower must retain PPP documentation in its files for six years after the date the loan is forgiven or repaid in full and must permit access to such files upon request.
If the SBA determines that a borrower is ineligible for a PPP loan, then the loan is not subject to forgiveness. Furthermore, if the SBA determines that a borrower is ineligible for the loan amount or the loan forgiveness amount claimed by the borrower, then the borrower’s loan forgiveness application will be denied in whole or in part, as appropriate. The SBA may also seek repayment of the outstanding PPP loan balance or pursue other remedies. That said, borrowers will receive an opportunity to respond to the SBA’s questions in a review and will be able to appeal the SBA’s determination, if necessary.