Authored by Mike Avent, Joe Bailey, and Andy Smetana
On Thursday, April 2, 2020, the Small Business Administration (SBA) issued an interim final rule that became effective immediately, implementing provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) regarding Paycheck Protection Program (PPP) Loans . In addition, the SBA released an updated application form for PPP Loans (Form 2483), a copy of which can be found here. These materials clarify, and in some instances change, the requirements and terms of the PPP Loans. Because the SBA has announced that loan applications will start being accepted today (April 3, 2020), anyone in the process of applying for a PPP Loan should pay close attention to the changes.
Below is a summary of key points in the interim final rule and the updated application form that may be of interest to companies that are considering a PPP Loan. These updates supplement prior summaries posted on our blog providing guidance for businesses regarding coronavirus (COVID-19).
As has been discussed in our earlier blog posts, only certain types of borrowers are eligible to receive PPP Loans. The interim final rule provided the following clarifications and updates regarding eligibility:
- Further guidance on applicability of SBA affiliation rules still to come. The new rule states that the SBA intends to “promptly” issue additional guidance with regard to the applicability of its affiliation rules to PPP Loans. These rules are a matter of intense interest to companies with institutional investors, and we are aware of a letter from Speaker Pelosi and Congressman Khanna encouraging the SBA and the Treasury Department to “exercise appropriate discretion under the law to secure coverage for as many small businesses under 500 employees as possible.” The updated application form also removed language from the initial application that called for information regarding Affiliates of the business or its 20% owners. The application form now requires this information only for the 20% owners. Absent additional guidance from the SBA, we are advising clients that intend to apply for a PPP Loan to do so on the basis of the SBA’s existing affiliation rules, which are discussed further in our prior publication, Expanded FAQ on Government-Supported Loan Programs for Businesses Impacted by COVID-19.
- No PPP Loans for “illegal” businesses. The interim final rule confirms that businesses engaged in any activity that is illegal under federal, state, or local law are ineligible for PPP Loans. For example, this may prevent cannabis companies from obtaining PPP Loans.
- No PPP Loans for businesses or business owners with prior delinquencies or defaults. The interim final rule states that any business, or any other business it owns or that is controlled by it or any of its owners, is disqualified from a PPP Loan if it is currently delinquent on or has defaulted within the last seven years on a direct or guaranteed loan from the SBA or any other federal agency. For businesses with institutional investors, this may require diligence regarding whether any portfolio companies of those institutional investors are or have been delinquent or in default under any loans obtained from or guaranteed by the SBA or any other federal agency.
- New clarity on interplay with Economic Injury Disaster Loans (EIDLs). Borrowers that received an EIDL from the SBA from January 31, 2020 through April 3, 2020 can apply for a PPP Loan. If the EIDL was not used for payroll costs, it does not affect the borrower’s eligibility for a PPP Loan. If the EIDL was used for payroll costs, the PPP Loan must be used to refinance the EIDL. Proceeds from any advance up to $10,000 on the EIDL will be deducted from the loan forgiveness amount on the PPP Loan.
- Interim final rule supersedes any conflicting Loan Program Requirements.The interim final rule includes language stating that the program requirements set forth in the rule temporarily supersede any conflicting Loan Program Requirements (as defined in 13 CFR 120.10). There has been speculation that certain prior SBA requirements for Section 7(a) loans that were not expressly addressed by the CARES Act would provide additional limits on PPP Loans, and this statement may be intended to address that concern. For example, some had questioned whether an earlier rule requiring any 20% or more owner of the applicant to inject available liquid assets above a certain threshold into the applicant might still apply to PPP Loans. Such requirement is not described in the interim final rule and does not appear to apply.
APPLYING FOR A PPP LOAN
The SBA has publicly announced that it plans to be ready to accept PPP Loan applications on April 3, 2020. The interim final rule and Form 2483 released on April 2, 2020 differ from a prior “sample” application the SBA had released on March 30, 2020 and address some of the concerns that were raised about the “sample” application. Applicants should work directly with their lender to determine the specific bank requirements, but note the following updates:
- First-come, first-served. The new rule confirms that PPP Loans will be made on a first-come, first-served basis. We understand that several lenders have already been accepting indications of interest from existing bank customers.
- One application per borrower. The new rule confirms that no eligible borrower may receive more than one PPP Loan. Accordingly, the SBA encourages borrowers to consider applying for the maximum amount.
- Clarification regarding who may make PPP Loans. In light of the high level of public interest in PPP Loans, the SBA included in the interim final rule clarification that existing SBA 7(a) lenders are not the only lenders that can originate PPP Loans. Rather, any federally insured depository institution, any federally insured credit union, and other federally regulated financial institutions may originate PPP Loans, as long as they are not designated in “Troubled Condition” by their primary federal regulator or subject to a formal enforcement action by their primary federal regulator that addresses unsafe or unsound lending practices.
- Updated application form is better suited for borrowers with institutional investors than prior published version. Under the updated application form, 20% or greater owners of borrowers will not be required to sign or make certifications. The updated application no longer includes a question as to whether an individual applicant and each 20% owner of an applicant are U.S. citizens or lawful permanent residents.
- Required Certifications. In preparing and signing Form 2483, an authorized representative of the applicant must certify in good faith that the following are each true and correct in all material respects under penalty of federal criminal prosecution:
- The applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC;
- Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant;
- The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, and that if the funds are knowingly used for unauthorized purposes, the federal government may hold such business or representative legally liable; and
- The applicant has not and will not receive another loan under this program.
In addition, an authorized representative of the applicant must certify in good faith that documentation supporting the following is true and correct in all material respects under penalty of federal criminal prosecution:
- 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;
- Covered utilities (each of the foregoing with respect to the eight-week period following the loan); and
- Tax documents confirming the eligible loan amount.
20% or greater owners of borrowers will no longer be required to sign the PPP Loan application or make certifications.
- Borrowers and their owners may have liability for knowingly using PPP Loans for unauthorized purposes or for acting in bad faith in applying for a PPP Loan. The “sample” loan application released by the SBA had included a certification by the borrower suggesting that any borrower that ultimately used loan proceeds for unauthorized purposes could be subject to fraud claims. Form 2483 modifies this language in ways that soften the certifications to be made by applicants (see good faith certifications, above) and are more consistent with the language of the CARES Act. The interim final rule provides that, “If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts.” However, the interim final rule also provides that, if funds are knowingly used for unauthorized purposes, businesses and individuals may be subject to additional liability such as fraud charges. If a shareholder, member, or partner of an applicant business uses PPP funds for unauthorized purposes, the SBA will have recourse against such individual for the unauthorized use.
- Guidance on required documentation. The interim final rule included suggestions regarding the kinds of documentation that could be used to establish eligibility for a PPP Loan. This includes payroll processor records, payroll tax filings, Form 1099-MISC for independent contractors, or records of income and expenses from a sole proprietorship. In the absence of such documentation, lenders may rely on other supporting documentation, such as bank records, that are sufficient to demonstrate the qualifying payroll amount. For businesses involving tipped employees, the records could include the employer’s records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate. It will be important for borrowers to ensure that this documentation is consistent with any tax reporting to the IRS.
- Payment of agent fees. The interim final rule includes guidance providing that lenders, and not borrowers, should be paying any agent fees associated with applying for PPP Loans. The SBA has provided for fees to be paid to SBA lenders, and lenders are to pay the agent fees out of the fees the lender receives from the SBA.
MAXIMUM LOAN AMOUNT
The specific calculations associated with determining the maximum amount that may be borrowed have also been a significant source of questions. The interim final rule provided some important clarifications on these calculations as described below:
- Payroll Costs are calculated on a trailing 12-month basis but may be based on 2019 Payroll Cost data. The new rule provides that average monthly Payroll Cost is calculated based on the borrower’s aggregate payroll costs from the 12 months before the loan is made, which is consistent with the CARES Act. However, the “sample” application form made available by the SBA earlier this week and the instructions to Form 2483 indicate that many applicants will calculate their borrowing amount based on their average monthly payroll for 2019. This inconsistency may provide borrowers the opportunity to use the Payroll Cost data that is most readily available. With respect to this calculation, it will be important for applicants to work closely with their specific lender to ensure that the information provided is consistent with their lender’s requirements.
- Payroll Costs include up to $100K of compensation for employees with annual salaries above $100K. There has been discussion about whether salaries for employees making more than $100K a year would be excluded entirely from Payroll Costs for purposes of PPP Loans. The interim final rule clarifies that only compensation in excess of an annual salary of $100K is excluded, prorated as necessary. The interim final rule also indicates, although the language remains unclear and subject to conflicting interpretations, that any compensation in excess of an annualized $100K amount could be excluded, not just wages and salary in excess of $100K.
- Payroll Costs do not include a company’s independent contractors. PPP Loans are capped at 2.5x average monthly “Payroll Cost” (or $10M, if less). For details on calculating Payroll Cost, see our prior publication, Expanded FAQ on Government-Supported Loan Programs for Businesses Impacted by COVID-19. Previously, it was understood by many that the cost of compensating independent contractors could be included in Payroll Cost. The interim final rule clarifies that because independent contractors have the ability to apply for a PPP Loan on their own, they do not count for purposes of a borrower’s PPP Loan calculation.
PPP LOAN TERMS
Differing information has been provided regarding the interest rate and maturity of PPP Loans. The interim final rule provided “final” answers on these topics and explained the rationale for these terms.
- Interest rate on PPP Loans will be set at 1.00%. The CARES Act provides for interest at a rate of up to 4.00%, and prior guidance issued by the SBA and Treasury Department had said that the interest rate would be 0.50%. The SBA justified the 1.00% interest rate by reference to the yields available to lenders on CD deposits and Treasury securities of comparable maturity.
- Loan maturity date will be 2 years. Consistent with guidance provided earlier this week, the interim final rule confirms that the maturity date for the portion of PPP Loans that is not forgiven will be two years. The interim final rule did not specify whether this would be two years from the date of origination or from the determination that a portion of the loan would not be forgiven. The CARES Act allows for a maturity of up to 10 years. The SBA justified the two-year maturity by indicating that, “the considerable economic disruption caused by the coronavirus is expected to abate well before the two year maturity date such that borrowers will be able to re-commence business operations and pay off any outstanding balances on their PPP loans.”
Use of Proceeds and Loan Forgiveness
The CARES Act generally provides for forgiveness of loan proceeds that are used for permitted purposes. Guidance provided by the SBA earlier this week regarding limits on forgiveness were affirmed in the interim final rule, and the SBA also opened the door for interest to potentially be forgiven. However, the rules regarding forgiveness may change again as further rulemaking is issued.
- At least 75% of PPP loan proceeds must be used for Payroll Costs and no more than 25% of loan forgiveness may be attributable to non-Payroll Costs. The CARES Act provided that, in addition to Payroll Costs, PPP Loans could be used for certain rent, utility, and mortgage interest payments and that all such uses of proceeds during the eight-week period following the making of a PPP Loan could be forgiven, subject to certain limitations. The new rule confirms the SBA and Treasury Department’s guidance from earlier this week that these non-Payroll Costs may not comprise more than 25% of the loan forgiveness amount and further provides that at least 75% of PPP Loan proceeds must be used for Payroll Costs. Borrowers will be required to provide documentation verifying how proceeds are used.
- Principal and interest may be forgiven.The CARES Act provides for forgiveness of all or a portion of the principal amount loaned under the PPP loans. The interim final rule indicates that interest accrued on a PPP Loan may also be subject to forgiveness, subject to the limitations set forth in the CARES Act and elsewhere in the interim final rule. The interim final rule also notes that additional guidance will be issued by the SBA regarding loan forgiveness. Under the CARES Act, such additional guidance is due to be issued by April 26, 2020.
As illustrated by the many changes noted above, eligibility requirements for PPP Loans, the process for obtaining a PPP Loan, and the terms of the PPP Loans are all rapidly evolving. For the latest information and clarification regarding specific circumstances, please contact your Perkins Coie lawyer.