In response to the recent enactment of the Paycheck Protection Program Flexibility Act of 2020 (the PPPFA), on June 11, 2020, the Small Business Administration (SBA) released an interim final rule (interim final rule #17) adopting changes to Paycheck Protection Program (PPP) loan terms mandated by the PPPFA. In doing so, the SBA modified the SBA’s initial interim final rule to provide clarifications for PPP borrowers. Also on June 11, the SBA released a new form of PPP loan application that incorporates changes specified in the PPPFA and interim final rule #17.
For those who have been closely watching developments with respect to PPP loans, these materials provide little in the way of new information but do include a couple of clarifications that borrowers may find helpful—specifically providing that the new “60% Rule” for loan use and forgiveness results in proportionate reductions to loan forgiveness, and not a “cliff” (i.e., a barrier to any loan forgiveness). The clarification keeps hope alive that interest on PPP loans may be subject to forgiveness.
Key takeaways from this guidance and the new form of PPP loan application are summarized below.
Key Takeaways from the Latest SBA Guidance
- The “covered period” governing loan use, loan eligibility, and related requirements refers to the period beginning on February 15, 2020 and ending on December 31, 2020, rather than ending on June 30, 2020. Importantly, this change eliminates any potential concern about borrowers being required to spend their PPP loans by June 30, 2020 to comply with the use requirements of PPP loans. No additional loan amounts are being provided to correspond to the expanded “use” period.
- The maturity for PPP loans provided on or after June 5, 2020 is extended from two years to five years. For earlier PPP loans, there is no automatic change to the maturity of the loan. Instead, lenders may agree to extend the maturity to five years, but are not required to do so. No criteria were provided by the SBA for lenders to apply in determining whether to agree to extend the maturity of loans originated before June 5, 2020.
- The term of PPP loans should be measured from the date the SBA assigned a loan number to the PPP loan, not the date on which the borrower actually received funding. However, the “covered period” still commences on the date of funding.
- The deferral on principal and interest payments on PPP loans was extended from six months to the date on which the SBA remits the loan forgiveness amount to the borrower’s lender (or notifies the lender that no forgiveness is allowed), as long as the borrower applies for loan forgiveness within 10 months after the end of their loan forgiveness covered period. If the borrower does not apply for forgiveness within 10 months after the end of their loan forgiveness covered period, then they must begin payments of principal and interest on or after the last day of that 10-month period.
- The loan forgiveness “covered period” was extended from eight weeks to 24 weeks (but in any event, ending no later than December 31, 2020). Borrowers who received their PPP loan before June 5, 2020 have the option to elect to use their original eight-week “covered period” rather than the extended 24-week period. This may be important for borrowers who need to make headcount reductions or salary or wage reductions after their initial eight-week period, but do not want their loan forgiveness to be reduced. The safe harbor regarding the restoration of full-time equivalent employees (FTEs) and salaries or wages is now defined by reference to the period ending December 31, 2020. It is unclear whether borrowers who choose the original eight week “covered period” will still be entitled to rely on the June 30, 2020 safe harbor for restoring FTEs and salaries or wages.
- The PPPFA changed a requirement that the SBA had announced in its first interim final rule hat borrowers spend at least 75% of their loan proceeds on payroll costs. The PPPFA has lowered this threshold to 60%. The PPPFA also altered both the “use” requirement and the “forgiveness” requirements, although it appeared to use a “cliff” approach for forgiveness by providing that borrowers must spend at least 60% of their loan on payroll costs to qualify for forgiveness. The potential implication of this was that no forgiveness would be available if this threshold was not met. Interim final rule #17 and the new PPP loan application form clarify that the 60% test does not trigger an all-or-nothing outcome on loan forgiveness; instead, there would be a proportionate reduction in loan forgiveness if the 60% test is not satisfied. This is consistent with an earlier joint statement made by Treasury Secretary Mnuchin and SBA Administrator Carranza. The clarification is important for borrowers who are already well into (or past) their original “covered period” for spending their PPP loan and qualifying for loan forgiveness. In making business decisions on how to spend PPP loan proceeds, such borrowers may have relied on the proportional reduction to forgiveness that was contemplated in the SBA’s initial interim final rule.
- There has been inconsistent guidance as to whether interest on a PPP loan would be eligible for forgiveness. Although it does not address this topic directly, interim final rule #17 reiterates language from the SBA’s initial interim final rule that refers to the forgiveness of interest. Additional clarification on this point may come when the SBA updates its loan forgiveness application form to address the changes required by the PPPFA.
- Interim final rule #17 and the new PPP loan application form include updated borrower certifications as to the 24-week “covered period” that applies for all PPP loan borrowers who obtain their loans on or after June 5, 2020. In addition, it provides updated certifications referring to the updated 60% requirement for loan use and forgiveness. The new PPP loan application form also refers to the ability for seasonal businesses to use historic average monthly payroll costs based on any 12-week period between May 1, 2019 and September 15, 2019. This updated form does not impact borrowers who have already obtained their PPP loan.
Although the new SBA guidance may leave many questions still unanswered, this guidance is focused only on updates to the SBA’s initial interim final rule. Interim final rule #17 promises that there will be additional guidance regarding loan forgiveness and the SBA’s loan review procedures to address other amendments required by the PPPFA. Updates to other earlier interim final rules and the FAQs issued by the SBA or Treasury are anticipated as the SBA and Treasury work to give effect to the PPPFA.