SBA Issues Revisions to PPP 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 (Rule). The Rule implements changes to the Paycheck Protection Program to conform it to the Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act), which was signed into law on June 5, 2020.
1. Covered Period. The Rule amends the definition of “covered period” in Section 1102 of the CARES Act—which governs loan use, loan eligibility and related requirements—for a PPP loan from “the period beginning on February 15, 2020 and ending on June 30, 2020” to “the period beginning on February 15, 2020 and ending on December 31, 2020.” This amendment does not alter the meaning of “covered period” in Section 1106 of the CARES Act governing loan forgiveness, which is addressed by a different provision of the Flexibility Act and discussed in paragraph 4 below.
2. Maturity Date. The maturity date of a PPP loan depends on when the loan was made.
- 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, 2020, the maturity is five years.
3. Deferral Period. The deferral period for a PPP loan depends on when the loan forgiveness application is submitted.
- If the loan forgiveness application is submitted to the lender within 10 months after the end of the borrower’s loan forgiveness covered period, the borrower 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 on the borrower’s loan to its lender (or notifies the lender that no loan forgiveness is allowed).
- If the loan forgiveness application is not submitted to the lender within 10 months after the end of the loan forgiveness covered period, the borrower must begin paying principal and interest after that period.
- “Loan forgiveness covered period” is the 24-week period beginning on the date the borrower’s PPP loan is disbursed; however, if the PPP loan was made before June 5, 2020, the borrower may elect to have its loan forgiveness period be the eight-week period beginning on the date the PPP loan was disbursed. The lender must notify the borrower of the loan forgiveness amount (or notify the borrower that SBA determined that no loan forgiveness is allowed) and the date the borrower’s first payment is due.
4. Loan Forgiveness. The Flexibility Act amended the requirements concerning forgiveness of PPP loans to reduce the amount of PPP loan proceeds that must be used for payroll costs to 60 percent. It also created a new exemption for borrowers to avoid a reduction in their loan forgiveness amount when they have a reduction in full-time equivalent employees.
- 60% Limit is a Proportional Limit, Not a Threshold. While the Flexibility Act requires that a borrower use at least 60% of its PPP loan for payroll costs in order to be eligible for loan forgiveness, the Rule states that the SBA administrator, in consultation with the Secretary of Treasury, interprets this requirement as a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount, not as a threshold for receiving any loan forgiveness.
- Example: If a borrower receives a $100,000 PPP loan and during the covered period the borrower spends $54,000 (54% of the loan amount and 90% of 60% of the loan amount) of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (90%).
- New Exemption. The Flexibility Act provides that if a borrower is unable to rehire previously employed individuals or similarly qualified employees, the borrower will not have its loan forgiveness amount reduced based on the reduction in full-time equivalent employees.
5. Use of Proceeds. For consistency with the amendments made in the Flexibility Act, the Rule revised the use of proceeds requirement for PPP loans as follows:
- payroll costs;
- costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- 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
- refinancing an SBA Economic Injury Disaster Loan (“EIDL”) made between January 31, 2020 and April 3, 2020.
6. New Certifications. The Rule adds three new borrower certifications:
- 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.”
7. Further Guidance. The Rule notes that SBA will be issuing 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. SBA will also be issuing additional guidance on advance purchases of PPP loans, which will include any effect of the amendments made to the loan forgiveness requirements. The Rule also notes that SBA may provide further guidance, if needed, through SBA notices which will be posted on SBA’s website at www.sba.gov.
The full text of the Rule is available here.
We are available to consult with you concerning any questions you may have on this alert.