SBA Releases Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to First Interim Final Rule
On June 10, 2020, the Small Business Administration (“SBA”) released Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to First Interim Final Rule. These revisions implement regulatory changes to the Paycheck Protection Program (“PPP”), including amendments to the use of PPP loan proceeds, to conform to the recently adopted Paycheck Protection Program Flexibility Act (“Flexibility Act”).
These revisions clarify how businesses that use less than 60% of the PPP loan amount for payroll costs during the forgiveness-covered period will continue to be eligible for partial loan forgiveness. The SBA includes the following example:
If a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54%) of its loan on payroll costs, then because the borrower used less than 60 percent of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60 percent of the forgiveness amount and $36,000 in nonpayroll costs constituting 40 percent of the forgiveness amount).
The revisions also implement an extension of the covered period for loan forgiveness from eight weeks to 24 weeks, providing substantially greater flexibility for borrowers to qualify for loan forgiveness. Although businesses who elect the new longer 24-week covered period may be required to maintain employment levels and salary and wage levels through this longer covered period, this extension of the covered period may be particularly helpful for businesses that remain shuttered or with restricted operations due to COVID-19 orders. Now, businesses may also treat unfilled positions as if they were filled by the December 31, 2020, deadline if the business can establish, in good faith, and document:
- An inability to rehire the same or similar employees that were in place as of February 15, 2020; or
- An inability to return to the same level of business activity before February 15, 2020, due to COVID-related social distancing, sanitation, and other safety requirements or guidance from the Centers for Disease Control, Health and Human Services, or Occupational Safety and Health Administration issued between March 1, 2020, and December 31, 2020.
The revisions also implement the Flexibility Act’s modification of PPP loan maturity dates. For loans made before June 5, 2020, the maturity is two years; however, borrowers and lenders may mutually agree to extend the maturity of such loans to five years. For loans made on or after June 5, the maturity is five years. The revisions establish that the date SBA assigns a loan number to the PPP loan provides an efficient, transparent, and auditable means of determining when a PPP loan is “made” that provides certainty to lenders.
The revisions further implement the extended deferral period for loan repayment adopted in the Flexibility Act. If a loan forgiveness application is submitted within 10 months after the end of the covered period, a business will not have to make any payments of principal or interest on its loan before the date on which SBA remits the loan forgiveness amount to the lender (or notifies the lender that no loan forgiveness is allowed). The revisions also clarify that the lender must notify each borrower of remittance by SBA of its loan forgiveness amount (or notification that SBA determined that no loan forgiveness is allowed) and the due date of the first required loan payment. Interest still continues to accrue during the deferment period.
For businesses that do not submit a forgiveness application within 10 months after the end of their loan forgiveness covered period, payments of principal and interest begin promptly after that period. For example, if a borrower’s PPP loan is disbursed on June 25, 2020, the 24-week period ends on December 10, 2020. If the borrower does not submit a loan forgiveness application to its lender by October 10, 2021 (the date being 10 months after the end of the covered period), the borrower must begin making payments on or after October 10, 2021.
The revisions do not alter how PPP loans may be used. The proceeds of a PPP loan are still to be used for:
- payroll costs (as defined in the Act and in 2.f.);
- costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
iii. mortgage interest payments (but not mortgage prepayments or principal payments);
- rent payments;
- utility payments;
- interest payments on any other debt obligations that were incurred before February 15, 2020; and/or
vii. refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.
Finally, the new revisions modify three of the required borrower certifications for consistency with the PPP changes under the Flexibility Act. These include:
“iii. The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; I understand that if the funds are knowingly used for unauthorized purposes, the Federal Government may hold me legally liable such as for charges of fraud. As explained above, not more than 40 percent of loan proceeds may be used for nonpayroll costs.
- Documentation verifying the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the loan forgiveness covered period for the loan will be provided to the lender.
- Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utility payments. As explained above, not more than 40 percent of the forgiven amount may be used for nonpayroll costs.”
As evidenced by these first revisions, the PPP and its regulatory implementation continue to change. In these revisions the SBA expressly commits to issuing (i) revisions to its interim final rules on loan forgiveness and loan review procedures to address amendments the Flexibility Act made to the loan forgiveness requirements and (ii) additional guidance on advance purchases of PPP loans, which will include any effect of the amendments made to the loan forgiveness requirements. These recent revisions also expressly acknowledge that further guidance, if needed, may be provided through SBA notices which will be posted on SBA’s website at www.sba.gov. DRM attorneys will continue to monitor these developments.
 The complete text of these revisions can be found here: https://home.treasury.gov/system/files/136/PPP-IFR-Revisions-to-First-Interim-Final-Rule.pdf