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SBA Rules for Second Draw PPP Loans

By Peter Janovsky

On January 6, 2021, the Small Business Administration (“SBA”) released two Interim Final Rules (the “Rules”) concerning “Second Draw” Paycheck Protection Program (“PPP”) loans under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Economic Aid Act”) passed on December 27, 20201. See this article.

The Rules provide details for implementation of the Second Draw PPP loans. The Rules are available at these links:

The Summary below is based primarily on the First Rule, as are the cited page numbers.

1. Eligibility

  1. Various types of businesses are eligible under the Economic Aid Act, including certain small businesses, independent contractors, tax-exempt non-profits, housing cooperatives, news organizations or other PPP eligible entities. The upper size limitations are usually between 300 and 500 employees but vary according to statute and regulations. Please consult page 13 of the Rules for detailed descriptions and references to federal regulations.
  2. The business must have been in operation on February 15, 2020, and either had (a) salaried employees or paid independent contractors, as reported on a Form 1099-MISC, or (b) you were an eligible self-employed individual, independent contractor, or sole proprietorship with no employees. However, under certain circumstances, dormant or newly not fully operating businesses as of February 15, 2020, may nonetheless be eligible. See page 18 of the Rules.
  3. Ineligible Businesses include those that are household employers, are delinquent on SBA loans, have criminal associations, if the President, Vice President, head of an Executive Department, or a Member of Congress, or the spouse of such person directly or indirectly holds a controlling interest in the business, if the business is an “issuer” of securities on an exchange, as defined under Securities Law or if the business is in bankruptcy. See pages 24-26 of the Rules.
  4. Affiliates: The above eligibility determinations must be made after combining relevant factors with all affiliates. See pages 27-29 of the Rules.
  5. The business must have experienced a reduction in gross receipts of at least 25%, comparing the same quarter in a previous year. Applicants may use 2020 or 2019 as the previous year. See p. 1 of linked Application.

2. Amount of Loans

The maximum loan is the lower of $10 million or an amount calculated under a payroll-based formula. With certain exceptions, borrowers may base the formula on payroll costs in 2019 or 2020. Pages 31-44 of the Rules detail the formula and provide examples for various types of businesses. Payroll costs include:

compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care or group life, disability, vision, or dental insurance, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation. See page 44 of the Rules.

Exclusions include employees whose residence is outside the United States, amounts over $100,000 for persons making over that amount, annualized, certain FICA taxes and certain sick pay and family leave wages.

3. Other Provisions

  1. The interest rate is one percent (1%)
  2. The term of the loan is five years.
  3. Any borrower who received a PPP loan in 2020 is deemed to have received a First Draw PPP Loan and is not eligible to receive another First Draw PPP Loan, but may be eligible for a Second Draw PPP loan.
  4. Forgiveness: If you submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you will not have to make any payments of principal or interest on your loan before the date on which the SBA remits the loan forgiveness amount on your loan to your lender (or notifies your lender that no loan forgiveness is allowed).

    Your “loan forgiveness covered period” is the period beginning on the date the lender disburses the PPP loan, and ending on any date selected by the borrower that occurs during the period (i) beginning on the date that is 8 weeks after the date of disbursement and (ii) ending on the date that is 24 weeks after the date of disbursement.

    See Rules, pp.47-48
  5. Forms: Borrowers: Paycheck Protection Program Borrower Application Form (SBA Form 2483), or lender’s equivalent form, and payroll documentation.

    Lenders: SBA Form 2484, Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty.

4. Uses of Loan Proceeds

Pages 49-52 of the Rules enumerate the permissible uses for the loans, which include payroll, costs relating to health and similar care, mortgage, utility and rent payments and other costs.

At least 60 percent of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any SBA Economic Injury Disaster Loans (“EIDL”) refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs to determine the amount of forgiveness.

Other Rules are set forth for individuals with income from self-employment who file a Form 1040, Schedule C, on pages 52-54.

5. Certifications

An authorized representative of the applicant must certify (a) as to the applicant’s status on February 15, 2020, (b) that current economic uncertainty makes the loan request necessary, (c) that the funds will be used for the allowable purposes, and (d) other representations regarding the business and use of the funds. See Rules, pages 55-57.

6. Forgiveness

The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. An eligible borrower will not be responsible for any loan payment if the borrower uses all loan proceeds for forgivable purposes and employee and compensation levels are maintained or, if not, an applicable safe harbor or exemption applies. See Rules, page 59. Further details on forgiveness are on pages 58-60.

7. Information for Lenders

  1. Eligibility:
    1. Banks and Credit Unions: All SBA lenders and other lenders determined by the SBA, including FDIC insured banks or credit unions and other lenders specified on pages 62-63 of the Rules.
    2. Non-Bank lenders: A non-bank lender may be approved to make PPP loans if it has originated, maintained, or serviced more than $10 million in business loans or other commercial financial receivables during a 12-month period in the past 36 months, and is (1) a community development financial institution (other than a federally insured bank or federally insured credit union) or (2) a minority, women, or veteran/military-owned lender.
  2. Underwriting:
    Lenders must:
    1. Confirm receipt of borrower certifications contained in Paycheck Protection Program Borrower Application Form or lender’s equivalent form;
    2. Confirm receipt of information demonstrating that a borrower was either an eligible self-employed individual, independent contractor, or sole proprietorship with no employees or had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020;
    3. Comply with Bank Secrecy Act requirements. See pages 64-68 of the Rules;
    4. This section includes the “safe harbor” provision, in which lenders will not be subject to enforcement actions or penalties if they rely in good faith on submissions by borrowers. Lenders may also rely on the borrower’s documentation for loan forgiveness. See pages 67-68 of the Rules.
  3. Lender’s Fees
    1. For loans of not more than $50,000, an amount equal to the lesser of fifty (50) percent or $2,500;
    2. Five (5) percent for loans of more than $50,000 and not more than $350,000;
    3. Three (3) percent for loans of more than $350,000 and less than $2,000,000; and
    4. One (1) percent for loans of at least $2,000,000.

      SBA will pay the lender’s fee not later than 5 days after the reported disbursement of the PPP loan and, as required by the Economic Aid Act, may not require the fee to be repaid by the lender unless the lender is found guilty of an act of fraud in connection with the PPP loan. See page 68 of the Rules

8. Summary of Terms and Conditions

Loans will be guaranteed under the PPP under the same terms, conditions, and processes as other loans under Section 7(a) Small Business Administration loans, with certain changes including but not limited to:

  1. The guarantee percentage is 100 percent.
  2. No collateral will be required.
  3. No personal guarantees will be required.
  4. The interest rate will be 100 basis points or one percent, calculated on a non-compounding, non-adjustable basis.
  5. All loans will be processed by lenders under delegated authority and lenders will be permitted to rely on certifications of the borrower to determine eligibility of the borrower and the use of loan proceeds.

    See pages 71-72 of the Rules.

We are available to answer any questions you may have concerning this article or Second Draw PPP Loans.

1Referred to in prior versions as the "Relief Act"

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Peter Janovsky is a partner at ZEK and a member of both its Litigation and Bankruptcy groups. His 32 years of experience includes successfully litigating trials, motions and appeals in complex real estate, secured lending, title, partnership agreements, license agreements and many other issues in Courts on all levels.