SBA Payment Protection Program applications open April 3, 2020

The Small Business Administration (“SBA”) has begun to release regulatory guidance and issued a form application for businesses that may be applying to the Payroll Protection Program (“PPP”). Significantly, SBA advises that lenders may begin processing loan applications as soon as April 3, 2020.  Unfortunately, some of this new guidance from the SBA only creates further confusion and raises new issues as it may materially differ or significantly qualify and refine the provisions of the CARES Act. In colloquial parlance, “this is how sausage is made.”

Some of the new PPP guidance may be beneficial for some applicants. For example, while the CARES Act states that PPP loans would bear interest not to exceed 4% and have a maximum term of ten years, the guidance states that PPP loans will have a maturity of two years and an interest rate of 0.5%. This concerns many lenders who feel that the interest rate is too low and the term too short to efficiently manage the rushed administration of the PPP program.

The guidance also confirms that “any federally insured depository institution, federally insured credit union, and Farm Credit System institution” can make a PPP loan, in addition to the previously approved SBA 7(a) lenders. The CARES Act granted the Administrator and the Secretary of the Treasury this ability to extend PPP loan authority to additional lenders having the necessary qualifications to process, close, disburse and service loans. This expansion may be beneficial to applicants by increasing the universe of potential lenders. This is important since all PPP loans need to be originated and closed by June 30, 2020, and a large number of applications are anticipated. However lenders have also expressed concerns that certain large lenders may receive an inequitable allocation of PPP funds for distribution. A larger lender pool could further dilute the distribution of funds for smaller lenders.

Not all of the guidance may be beneficial for applicants. For example, the CARES Act provides that the maximum PPP loan amount is based on “payroll costs incurred during the one-year period before the date on which the loan is made.” The proposed application’s instructions instead direct applicants to “use the average monthly payroll for 2019.” For some applicants, this nuanced distinction could materially influence the maximum amount of the available loan. In each case, the maximum loan amount is the lesser of 2.5 times this average monthly payroll or $10million.

Another discrepancy that could become very significant affects the potential amount of loan forgiveness under the PPP. The CARES Act simply provides that the forgiveness amount cannot exceed the sum of the following costs incurred by the business in the eight-week period immediately following the closing of the loan: payroll costs; any payment of interest on any covered mortgage obligation; any payment on any covered rent obligation; or any covered utility payment.

In contrast, while the SBA’s application does state that “loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities,” the application also requires the business to certify that, “due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.” This newly refined emphasis on wages may affect the anticipated forgiveness amount of potential applicants that have high non-payroll costs.

The sample form also states that applicants and any individual owning 20% or more of an applicant must be able to certify that (a) each of them are U.S. citizens or lawful permanent residents (so any businesses where 20% of more is owned by an undocumented immigrant or a foreign citizen may not apply for or receive a PPP loan); and (b) none of them are “presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction, or presently incarcerated, or probation, or parole.”

While the first provision is troubling for many businesses that may have foreign investment, such investment has not previously been preclusive of SBA loan eligibility. Rather, it has been a factor for SBA loan guarantees which are to be waived together with any collateral requirement for PPP loans because they are 100% guaranteed by SBA.

The breadth of that last provision is striking, in that anyone merely standing accused of a crime may not apply for or receive a PPP loan.

Additional guidance and revisions may be forthcoming from the SBA.