Interim Final Rule Implementing Paycheck Protection Program Issued

Noting that “small businesses need to be informed on how to apply for a loan and the terms of the loan under section 1102 of the Act as soon as possible,” the SBA provided that the interim final rule is effective immediately. Key provisions of the interim final rule are as follows:

FOR BORROWERS

• The methodology for determining the maximum loan amount is set forth as follows:
  • Step 1:  Aggregate payroll costs from the last 12 months for employees who are US residents.
  • Step 2:  Subtract compensation in excess of an annual salary of $100,000.
  • Step 3:  Divide the total by 12 to determine average monthly payroll.
  • Step 4:  Multiply the average monthly payroll by 2.5.
  • Step 5:  Add the outstanding amount of any Economic Injury Disaster Loan made between January 31, 2020 and April 30, 2020, less the amount of any advance under an EIDL COVID-19 loan.
• The interim final rule does not clarify the discrepancy between the CARES Act language stating that payroll costs are based on the 12-month period preceding the loan date and the SBA form application’s instruction providing that borrowers should use the average monthly payroll for 2019.
• Payroll costs include salary, wages, commissions, or similar compensation; cash tips or the equivalent; payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for group health care coverage; and payment of state and local taxes assessed on compensation; and for an independent contractor, wages, commissions, income, or net earnings from self-employment. The interim final rule does not clarify whether the $100,000 limit applies to the defined term “payroll costs” or to only the wage/salary component of payroll costs. However, the Treasury Department’s information sheet for borrowers implies that it has interpreted the $100,000 limit to apply to total “payroll costs,” including health care benefits.
• Payroll costs do not include compensation paid to non-US residents, compensation in excess of $100,000, federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, and qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.
• Independent contractors do not count as employees for purposes of Paycheck Protection Program (PPP) loan calculations and would have to apply for a PPP loan on their own.
• The interest rate on PPP loans will be 1%, and the maturity date will be two years.
• No eligible borrower may receive more than one PPP loan.
• E-signatures or e-consents may be used for the application forms.
• The program is first-come, first-served.
• Payments on PPP loans will be deferred for six months.
• No more than 25% of the loan forgiveness amount may be for non-payroll costs.
• The applicant must submit SBA Form 2483, while lenders must file SBA Form 2484.
• All loans guaranteed by the SBA will be made consistent with constitutional, statutory, and regulatory protections for religious liberty, including the First Amendment and the Religious Freedom Restoration Act. This provision provides assurance to some churches that have been concerned about the potential application of SBA anti-discrimination regulations. The interim final rule indicates that the SBA will promptly issue additional guidance on religious liberty protections.
• A prior version of the application indicated that PPP loans are not available to entities owned 20% or more by individuals who are not US citizens or green card holders. This restriction was not in the CARES Act and appears to have been removed in the final application, which replaced a prior question regarding citizenship or green card status with a new question to confirm that all employees included in the payroll calculation are US residents.
• The interim rule does not elaborate on how SBA affiliation rules will be applied to PPP borrowers. 

FOR LENDERS

• The SBA will allow lenders to rely on certifications of the borrower in order to determine eligibility of the borrower and the use of loan proceeds, and the SBA will hold lenders harmless for borrowers’ failure to comply with program criteria.
• All SBA 7(a) lenders are automatically approved to make PPP loans. Further, the SBA has extended authorization to make PPP loans to (I) any federally insured depository institution or any federally insured credit union, (II) certain farm credit system institutions, and (III) certain financing providers that have originated, maintained, and serviced more than $50 million in business loans or other commercial financing receivables during a consecutive 12-month period in the last 36 months or is a service provider to any insured depository institution in good standing that has a contract to support such institution’s lending activities in accordance with 12 USC 1867(c).  Such other institutions are automatically approved upon submission of a CARES Act Section 1102 Lender Agreement unless they are currently designated in troubled condition or are subject to a formal enforcement action by their primary federal regulator.
• Underwriting standards for lenders are as follows: (i) confirm receipt of borrower certifications, (ii) confirm receipt of information that the borrower had employees as of February 15, 2020, (iii) confirm average monthly payroll costs by reviewing payroll documentation from the borrower, and (iv) follow Bank Secrecy Act (BSA) requirements (with more detailed provisions requiring institutions that are not presently subject to BSA to establish an anti-money laundering compliance program or rely on the customer identification program of a federally insured depository institution or credit union). 
• With respect to BSA compliance, federally insured depository institutions and federally insured credit unions should continue to follow their existing protocols, although PPP loans for existing customers do not require re-verification unless required by the institution’s BSA policies.
• Each lender’s underwriting obligation is limited to these items and reviewing the application.  Lenders can rely on borrower documentation for loan forgiveness and are not required to conduct any additional verification.
• The interim final rule confirms that lenders may require the SBA to purchase the “estimated forgiveness amount” for all PPP loans within 15 days. It does not clarify the procedures that will apply to lenders and borrowers if the actual forgiveness amount is less than the estimated forgiveness amount.

Comments will be accepted at http://www.regulations.gov for 30 days after official publication of the interim final rule in the Federal Register.

Please contact your HSB attorney or Will Johnson with any questions.

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