The US Small Business Administration (“SBA”) has now formalized certain borrower-friendly changes to the Paycheck Protection Program (“PPP”) provided for by the PPP Flexibility Act. A new Interim Final Rule (“IFR”) follows an informal joint press release on June 8, 2020 by the Department of the Treasury and SBA that previewed program changes. The SBA also issued a revised PPP Borrower Application Form and a revised PPP Lender Application Form conforming certain certifications to the program revisions and making other changes. Revised forgiveness application forms and instructions have not yet been released, but are anticipated in the near future.
The IFR addresses changes in certain PPP standards relating to PPP loan maturity, eligibility for and calculation of loan forgiveness, deferral of loan payments, and eligible uses of loan proceeds.
- Loan Maturity—The IFR provides that PPP loans made on or after June 5, 2020 will have maturities of 5 years (increased from 2 years in the prior PPP rules). The SBA will use the date on which a PPP loan is assigned its SBA loan number as the date the loan is “made” and the applicable date for establishing which maturity applies in order to provide “an efficient, transparent, and auditable” standard.Borrowers with PPP loans made prior to June 5, 2020 are not entitled to an automatic maturity extension from 2 years to 5 years, but the PPP Flexibility Act permits lenders and borrowers to mutually agree to an extension.
- Loan Forgiveness Covered Period—The IFR implements the PPP Flexibility Act’s extension of a borrower’s “loan forgiveness covered period” (the period over which a borrower may obtain loan forgiveness based on certain eligible expense) from the 8 weeks following loan disbursement in the prior PPP rules to the 24 weeks following loan disbursement, but not extending past December 31, 2020.Consistent with the PPP Flexibility Act, the IFR provides that PPP borrowers whose loans were made before June 5, 2020 may elect to use the original 8-week loan forgiveness covered period. Borrowers with that option should consider which forgiveness period is more favorable. On one hand, a borrower electing a 24-week forgiveness period may able to count covered expense toward forgiveness. On the other hand, that borrower will face the possibility of reductions in forgiveness if it does not maintain full-time equivalent workforce and/or employee salaries over the 24-week period, whereas a borrower electing an 8-week forgiveness period will only have to maintain workforce and salaries during the 8-week period. The right answer for any particular borrower may depend on the specific circumstances of the borrower’s business.The IFR does not address expressly the concept of an “Alternative Payroll Covered Period” under which a borrower’s loan forgiveness covered period may be shifted slightly with respect to payroll expenses for administrative convenience in certain cases. Its silence on that issue appears not to carry much weight at this time, as the SBA will need to issue a revised forgiveness application and instructions and there has been no indication to date that the SBA intends to pull back from the “Alternative Payroll Covered Period” concept or other forgiveness-related interpretations that provided flexibility for convenience prior to the PPP Flexibility Act.
- Loan Forgiveness Amount/Eligibility—The IFR implements a provision of the PPP Flexibility Act providing that, “[t]o receive loan forgiveness . . . an eligible recipient shall use at least 60[%] of the covered loan amount for payroll costs, and may use up to 40[%] of such amount for [eligible non-payroll costs].”Whereas the statement could otherwise have been read literally to mean that a borrower that did not use at least 60% of loan proceeds for payroll costs could not obtain any forgiveness, the IFR interprets the provision in light of the background of existing PPP rules under which Congress drafted the PPP Flexibility Act that previously provided for proportional reductions in loan forgiveness if a borrower used less than 75% of proceeds for eligible payroll costs. Accordingly, under the amended PPP rules, a borrower using less than 60% of loan proceeds may still qualify for partial forgiveness, provided that at least 60% of the forgiveness request must be based on eligible payroll costs.For those borrower that followed along with prior PPP forgiveness rules, this implementation means that the SBA is merely swapping 60% into the standard where 75% previously was used, without changing the way in which the number is used.
- Use of Proceeds—The IFR amends standards relating to the use of PPP proceeds to conform with the principles applicable to loan forgiveness. In the original PPP rules, not only was 75% of a borrower’s forgiveness request required to be based on eligible payroll costs, but a borrower was also required to use at least 75% of loan proceeds for eligible payroll costs over the term of the loan. Consistent with the PPP Flexibility Act’s reduction in the percentage of a forgiveness request that is required to be based on eligible payroll costs, the SBA has also reduced the percentage of loan proceeds that must be used on eligible payroll costs from 75% to 60%.
- Application Certifications—Finally, the IFR makes conforming amendments to certain borrower application certifications based on the changes to program rules (specifically, that not more than 40% of loan proceeds may be used for non-payroll costs and not more than 40% of a forgiveness request may be based on non-payroll costs). While not addressed expressly in the IFR, we note that the SBA has also made conforming changes to certain certifications in the revised PPP Lender Application Form and made additional minor changes in the revised PPP Borrower Application Form (e.g., removing express references to pretrial diversion from an application question regarding an applicant’s prior bad acts).
Existing and potential borrowers and lenders should review SBA rules and forms carefully to understand the program requirements that will apply to them. Further rules, guidance, forms, and instructions are expected on the forgiveness process itself, and may also be issued to clarify aspects of the IFR as the SBA continues to implement the PPP Flexibility Act and the overall program.
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