SBA Issues Updates to Initial Interim Final Rule on Paycheck Protection Program
June 11, 2020
- William R. Johnson
On Thursday, June 11, 2020, the Small Business Administration (SBA) issued an update to its initial interim final rule on the Paycheck Protection Program (PPP), which was originally enacted as part of the CARES Act on March 27, 2020. The update incorporates key changes from the Paycheck Protection Program and Health Care Enhancement Act (enacted on April 24) and the Paycheck Protection Program Flexibility Act of 2020 (enacted on June 5). Following are the most important provisions:
Maturity Date
The update confirms that the maturity date of all loans made before June 5, 2020 is two years unless mutually extended by agreement of the lender and borrower. The maturity date is five years for loans made on or after June 5, 2020. The update provides that the date on which the SBA assigns a loan number to the PPP loan is the date the loan is “made” for this purpose.
Deferral Period
Further, the update elaborates on the deferral period for PPP loans. If a borrower submits its forgiveness application to its lender within ten months of the last day of its covered period, all payments of principal and interest are deferred until the SBA remits the loan forgiveness amount to the lender. If a borrower fails to submit its forgiveness application within that period, the lender may require the borrower to begin making payments on the 10-month anniversary date.
Loan Forgiveness – Minimum Payroll Costs
Prior SBA guidance provided that at least 60% of the PPP loan amount and forgiveness amount must be payroll expenses. The PPP Flexibility Act overrode that administrative pronouncement and instead provides that at least 60% of the PPP loan amount must be used for payroll costs. According to the update, the SBA is interpreting this requirement as a proportional limit and not a “cliff” or absolute bar to any forgiveness if the borrower uses less than 60% of the loan amount for payroll costs. The SBA essentially has interpreted the rule to focus on percentages of the forgiveness amount rather than the loan amount. In an example, the SBA considers a situation in which a borrower receives a $100,000 loan and spends $54,000 on payroll costs. The SBA concludes that the borrower in that example would be limited to $90,000 of loan forgiveness (with the $54,000 of payroll costs representing 60% of $90,000).
The SBA then confusingly revises the prior rule regarding how PPP loans can be used and explicitly states, “At least 60 percent of the PPP loan proceeds shall be used for payroll costs.” This language appears to be directly at odds with the SBA’s lengthy discussion summarized above. While this language seems inconsistent and therefore creates unnecessary confusion, it seems clear that the more specific discussion and the above-example will control a situation in which a borrower spends less than 60% of the PPP loan amount on payroll costs.
Loan Forgiveness – Amount
The update importantly states that the amount of loan forgiveness can be up to the full amount of principal plus accrued interest on the loan, despite contrary language in Section 1106(d)(1) of the CARES Act, which states, “The amount of loan forgiveness under this section shall not exceed the principal amount of the financing made available under the applicable covered loan.” The SBA interpretation provides borrowers with the opportunity to receive a slightly higher amount of loan forgiveness.
Further Guidance
The update states that the SBA will be issuing additional revisions to its prior interim final rules on loan forgiveness and loan review procedures as well as advance purchases of PPP loans.
Please contact Will Johnson or your HSB attorney for additional information on the Paycheck Protection Program.
Looking for additional resources on COVID-19? Visit our resource page here.
The update confirms that the maturity date of all loans made before June 5, 2020 is two years unless mutually extended by agreement of the lender and borrower. The maturity date is five years for loans made on or after June 5, 2020. The update provides that the date on which the SBA assigns a loan number to the PPP loan is the date the loan is “made” for this purpose.
Deferral Period
Further, the update elaborates on the deferral period for PPP loans. If a borrower submits its forgiveness application to its lender within ten months of the last day of its covered period, all payments of principal and interest are deferred until the SBA remits the loan forgiveness amount to the lender. If a borrower fails to submit its forgiveness application within that period, the lender may require the borrower to begin making payments on the 10-month anniversary date.
Loan Forgiveness – Minimum Payroll Costs
Prior SBA guidance provided that at least 60% of the PPP loan amount and forgiveness amount must be payroll expenses. The PPP Flexibility Act overrode that administrative pronouncement and instead provides that at least 60% of the PPP loan amount must be used for payroll costs. According to the update, the SBA is interpreting this requirement as a proportional limit and not a “cliff” or absolute bar to any forgiveness if the borrower uses less than 60% of the loan amount for payroll costs. The SBA essentially has interpreted the rule to focus on percentages of the forgiveness amount rather than the loan amount. In an example, the SBA considers a situation in which a borrower receives a $100,000 loan and spends $54,000 on payroll costs. The SBA concludes that the borrower in that example would be limited to $90,000 of loan forgiveness (with the $54,000 of payroll costs representing 60% of $90,000).
The SBA then confusingly revises the prior rule regarding how PPP loans can be used and explicitly states, “At least 60 percent of the PPP loan proceeds shall be used for payroll costs.” This language appears to be directly at odds with the SBA’s lengthy discussion summarized above. While this language seems inconsistent and therefore creates unnecessary confusion, it seems clear that the more specific discussion and the above-example will control a situation in which a borrower spends less than 60% of the PPP loan amount on payroll costs.
Loan Forgiveness – Amount
The update importantly states that the amount of loan forgiveness can be up to the full amount of principal plus accrued interest on the loan, despite contrary language in Section 1106(d)(1) of the CARES Act, which states, “The amount of loan forgiveness under this section shall not exceed the principal amount of the financing made available under the applicable covered loan.” The SBA interpretation provides borrowers with the opportunity to receive a slightly higher amount of loan forgiveness.
Further Guidance
The update states that the SBA will be issuing additional revisions to its prior interim final rules on loan forgiveness and loan review procedures as well as advance purchases of PPP loans.
Please contact Will Johnson or your HSB attorney for additional information on the Paycheck Protection Program.
Looking for additional resources on COVID-19? Visit our resource page here.
