April 3, 2020

Implementing the Paycheck Protection Program

SBA issues interim final rule

Confronted with loud dissension from the lending community on the eve of the program’s launch, including an email notice from the largest U.S. bank, JP Morgan Chase to its customers on April 2, 2020, indicating that it would “most likely” not start accepting applications on April 3, 2020, as it had hoped, the Treasury Department issued an interim final rule[1] on Thursday, April 2, to facilitate implementation of the Paycheck Protection Program (the “PPP”). The PPP is one of the hallmarks of the CARES Act federal economic stimulus legislation adopted on March 27, 2020, in response to the COVID-19 pandemic. Yet to be seen is whether the chaotic launch of the PPP has been calmed by the issuance of this guidance.

Applicable to PPP applications submitted through June 30, 2020, or until the available funds are exhausted, the interim rule is effective immediately as, “small businesses need to be informed on how to apply for a loan and the terms of the loan under section 1102 of the Act as soon as possible.” A comment period remains open for thirty days, and the SBA will consider the need for making additional revisions to the PPP as a result of the submitted comments. Further SBA guidance is also anticipated, in particular as to affiliation rules and the parameters of loan forgiveness.

For applicants, key provisions of the PPP under this interim final rule include:

Calculating the Maximum Loan Amount

The methodology for determining the maximum loan amount[2] is set forth as follows:

Step 1: Aggregate payroll costs[3] from the last 12 months for employees who are US residents.

Step 2: Subtract compensation in excess of an annual salary of $100,000.

Step 3: Divide the total by 12 to determine average monthly payroll.

Step 4: Multiply the average monthly payroll by 2.5.

Step 5: Add the outstanding amount of any Economic Injury Disaster Loan made between January 31, 2020 and April 30, 2020, less the amount of any advance under an EIDL COVID-19 loan (EIDL advances may be up to $10,000 and do not have to be repaid.)

The interim final rule does not clarify whether the PPP’s $100,000 limit on compensation for determining payroll costs applies to the defined term “payroll costs” or to only the wage/salary component of payroll costs. However, the Treasury Department’s information sheet for borrowers implies that it has interpreted the $100,000 compensation limit to apply to total “payroll costs,” including health care benefits.

The interim rules include helpful examples of several different calculations under the PPP. The guidance states that payroll costs do not include compensation paid to non-US residents, compensation in excess of $100,000, federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, and qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

Independent contractors do not count as employees for purposes of Paycheck Protection Program (PPP) loan calculations. However, independent contractors may be eligible to apply for a PPP loan independently. No eligible borrower may receive more than one PPP loan. 

Loan Forgiveness

The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. That is, the borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes described below and employee and compensation levels are maintained. The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan.

However, not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. The Administrator has determined that the non-payroll portion of the forgivable loan amount should be limited to effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll. The Administrator has determined in consultation with the Secretary that 75% is an appropriate percentage in light of the Act’s overarching focus on keeping workers paid and employed. We note, however, that the 25% threshold for loan forgiveness is not a threshold for the loan amount in the first place. Accordingly, the consequence of payroll decisions that leave a borrower with more than 25% of costs attributable to non-payroll costs is “simply” a reduction in the forgiveness amount, or said differently, a non-forgivable, non-recourse two year loan at 1% interest.

The interim rule states that SBA will issue additional guidance on loan forgiveness.

PPP Administration and Terms

The program is first-come, first-served. Estimates have suggested that there may be more than 4 million applications submitted under the PPP. To appreciate the ambitious scope of the PPP, the SBA’s traditional 7(a) program generated $141 billion in volume — or roughly 40% the size of PPP — over a six-year period that ended on Sept. 30, 2019.

The interest rate on PPP loans will be 1%[4] and the maturity date will be two years. E-signatures or e-consents may be used for the application forms. Loan payments are deferred for six months following the date of disbursement of the loan. However, interest will continue to accrue on PPP loans during this six-month deferment.

20%+ Owners Who Are Foreign Citizens Are No Longer Disqualified From the PPP

The interim final rule does not clarify or discuss the Treasury Department’s earlier position that PPP loans are not available to entities owned 20% or more by individuals who are not US citizens or green card holders. This disqualification was not included in the CARES Act and had not previously been an SBA requirement. However, the newly revised PPP application has quietly dropped this requirement.[5]

Affiliation Rules

The interim rule does not elaborate on how SBA affiliation rules will be applied to PPP borrowers. Instead, it states that “SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules at 13 CFR §§ 121.103 and 121.301 to PPP loans.”

[1] The final interim rule may be found here.

[2] The interim final rule does not clarify the discrepancy between the CARES Act language stating that payroll costs are based on the 12-month period preceding the loan date and the instructions on the Treasury Department form providing that borrowers should use the average monthly payroll for 2019.

[3] Payroll costs include salary, wages, commissions, or similar compensation; cash tips or the equivalent; payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for group health care coverage; and payment of state and local taxes assessed on compensation; and for an independent contractor, wages, commissions, income, or net earnings from self-employment.

[4] This interest rate is 50 basis points higher than the interest rate set forth in the SBA guidance issued earlier this week and appears to be a compromise. “The Administrator, in consultation with the Secretary, determined that a one percent interest rate is appropriate. First, it provides low cost funds to borrowers to meet eligible payroll costs and other eligible expenses during this temporary period of economic dislocation caused by the coronavirus. Second, for lenders, the 100 basis points offers an attractive interest rate relative to the cost of funding for comparable maturities. … Third, the interest rate is higher than the yield on Treasury securities of comparable maturity. For example, the yield on the Treasury two-year note is approximately 23 basis points. This higher yield combined with the fact that the loans are 100 percent guaranteed by the SBA and the fact that lenders will receive a substantial processing fee from the SBA provide ample inducement for lenders to participate in the PPP.”

[5] See the PPP Application Form in effect at the time of this writing.


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