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SBA and Treasury Release Regulations Regarding PPP Loan Forgiveness, Review Procedures, and Borrower and Lender Responsibilities

Client Updates

On May 22, 2020, the Small Business Administration (“SBA”) and the Treasury Department (“Treasury”) released an interim final rule regarding Paycheck Protection Program (“PPP”) loan forgiveness (the “Forgiveness Interim Final Rule”), which can be found here, and an interim final rule regarding SBA loan review procedures and related borrower and lender responsibilities (the “Procedures and Responsibilities Interim Final Rule”), which can be found here. In addition, on May 20, 2020, SBA released an interim final rule regarding borrower certification as to necessity and extending the timeframe for lenders’ submission of the initial SBA Form 1502 report for PPP loans (“Lender Extension Interim Final Rule”), which can be found here. SBA also updated its Frequently Asked Questions (“FAQs”) by adding FAQ 48 providing guidance for lenders’ filings of form 1502.

The Forgiveness Interim Final Rule formalizes previous guidance in the PPP loan forgiveness application and FAQs and supplements the previously posted interim final rules in order to help PPP borrowers prepare and submit loan forgiveness applications as provided for in the CARES Act and help PPP lenders who will be making the loan forgiveness decisions. The Procedures and Responsibilities Interim Final Rule supplements the previously posted interim final rules in order to inform borrowers and lenders of SBA’s process for reviewing PPP loan applications and loan forgiveness applications. The Lender Extension Interim Final Rule formalizes SBA’s prior guidance on borrower certification as to necessity of the PPP loan request, which had been the subject of pronouncements in FAQs and other guidance (see our most recent alert regarding the necessity certification here), and revises a prior interim final rule by extending the timeframe for lenders’ submission of the initial SBA Form 1502 report for PPP loans.

Congress created the PPP under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide forgivable loans to eligible small businesses facing economic hardship to retain U.S. employees on their payroll during the COVID­19 pandemic.

PPP loan recipients can be eligible to have their loans forgiven if the funds were used for eligible expenses over the eight­-week coverage period commencing when the loan was originally disbursed. The amount of forgiveness may be reduced if the percentage of eligible expenses attributed to non­payroll expenses exceeds 25% of the loan, if employee headcount decreases or compensation decreases by more than 25% for each employee making less than $100,000, unless the reduced headcount or compensation levels are restored by June 30, 2020.

The interim final rules are important as many borrowers were required to begin spending the PPP loan funds already and have needed more information to determine how to spend the PPP loan funds and remain eligible for forgiveness. In addition, borrowers can seek loan forgiveness after eight weeks following the date of disbursement of their PPP loans. PPP loans began being disbursed on April 3, and eligible borrowers receiving loans on that date can apply for forgiveness on May 29. The interim final rules generally supplant prior informal guidance, but the SBA has requested public comment on the interim final rules.

This alert provides highlights of the interim final rules that formalize and provide further explanation regarding forgiveness of PPP loans, which we discussed in a previous alert here, and supplements prior guidance regarding the PPP, which we discussed in prior alerts, which can be found on our COVID-19 crisis response group website here.

 

What’s New in the Forgiveness Interim Final Rule?

 

Highlights of the new guidance under the Forgiveness Interim Final Rule include:

  • Bonuses and hazard pay and payroll paid to furloughed employees are eligible for loan forgiveness. Bonuses and hazard pay are eligible for loan forgiveness, as are salary, wages, and commission payments to furloughed employees, except to the extent that such amounts for the particular employee would cause their total compensation to exceed $15,385 ($100,000 * 8/52) during the covered period (either (i) the eight-week coverage period commencing when the loan was originally disbursed or (ii) an alternative eight-week period that begins on the first day of their first pay period following the date that they received the PPP loan proceeds from the lender, which would enable it to specify a full eight weeks of payroll that is eligible for forgiveness without having to make a special payroll run within the eight-week covered period).

  • Caps on loan forgiveness for owner-employees and self-employed individuals. The amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation is capped at the lesser of 8/52 of 2019 compensation or $15,385 per individual in total across all businesses.

    • Owner-employees’ available loan forgiveness is capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf.

    • “Schedule C” (the Internal Revenue Service tax form filed by sole proprietorships and single member LLCs) filers’ available loan forgiveness is capped by the amount of their owner compensation replacement, calculated based on 2019 net profit.

    • General partners’ available loan forgiveness is capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235 (representing self-employment income reduced by the “employer’s” share of payroll taxes of 7.65%, to track more closely with gross wages received by employees, which, for purposes of calculating payroll under the PPP, are not increased by the employer’s share of payroll taxes).

    • For self-employed individuals, including Schedule C filers and general partners, no additional forgiveness is provided for retirement or health insurance contributions, as such expenses are paid out of their net self-employment income.

  • Borrowers must report rejected rehire offers to state unemployment office. If a borrower has a decrease in full time equivalent employees (“FTEs”) over the covered period compared to a baseline period, when it calculates the reduction of forgiveness of their PPP loans due to the lower FTEs, the borrower may exclude any reduced FTE with respect to employees whom the borrower offered to rehire or restore their previously reduced hours, even if the employees rejected such offers. However, for the borrower to exclude that FTE, the Forgiveness Interim Final Rule requires that the borrower have notified the state unemployment office of a rejected rehire offer within 30 days of its rejection. SBA has noted that further guidance on how borrowers will report rejected rehire offers to state unemployment insurance offices will be provided.

  • No double penalty for reductions in employees and reduction in employee compensation. Where a reduction in an employee’s compensation is attributable to a reduction in the number of hours worked by the employee, it will not be counted as both a reduction in FTEs and compensation for purposes of the limitation on compensation reductions to 25% of employees making less than $100,000. That is, compensation reduction applies only to the decline in employee salary and wages not attributable to the FTE reduction; the loan forgiveness totals will not be reduced for both hours and wage reductions for the same employee.

 

What’s New in the Procedures and Responsibilities Interim Final Rule?

 

Highlights of the new guidance in the Procedures and Responsibilities Interim Final Rule include:

  • SBA may review any PPP loan at any time for 6 years after forgiveness. SBA may review any PPP loan at any time, regardless of size, to determine if the borrower is eligible for PPP loans under the CARES Act, whether the borrower calculated the loan amount correctly and used the funds for eligible costs, and whether the borrower is eligible for the amount of loan forgiveness it requests. As such, borrowers should retain all potentially relevant records for at least six years. This would include for example, any contemporaneous analysis or discussion the company undertook in assessing why it was eligible for a PPP loan and, in particular, why it felt that it could certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

  • Borrowers subject to review by lender and SBA. Borrowers must complete and submit the loan forgiveness application (SBA Form 3508 or the lender’s equivalent form) to the lender. First, the lender and then SBA will review the application and the underlying loan information in determining whether and the extent to which the loan will be forgiven, and may pose questions to the borrower seeking further information or justification.

  • Lenders must review and issue a decision on forgiveness within 60 days. Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents for loan forgiveness. Lenders must issue a decision to SBA regarding whether the borrower’s loan may be forgiven within 60 days after receipt of the complete loan forgiveness application from the borrower. If the lender determines that the borrower is entitled to forgiveness, the lender must request payment from SBA at the time the lender issues its decision to SBA and SBA will, subject to any SBA review of the loan or loan application, remit forgiveness amount to the lender within 90 days thereafter. If the lender issues its decision to SBA that the borrower is not entitled to forgiveness, the lender must provide SBA with the reason for its denial, together with required documentation and notify the borrower in writing. If an application is denied due to a pending SBA review of the loan, the borrower may request that the lender reconsider its application for loan forgiveness. Within 30 days of notice from the lender, a borrower may request that SBA review the lender’s decision by reviewing the loan in accordance with the Procedures and Responsibilities Interim Final Rule.

  • SBA has 90 days to review the loan forgiveness application after lender approval. If the lender determines that the borrower is entitled to forgiveness, SBA then has 90 days to review the loan forgiveness application, to determine if the borrower is eligible for PPP loans under the CARES Act, whether the borrower calculated the loan amount correctly and used the funds for eligible costs, and whether the borrower is eligible for the amount of loan forgiveness it requests, though it will evaluate them based on the “rules and guidance available at the time of the borrower’s PPP loan application." If a lender receives notice from the SBA that SBA is reviewing a PPP loan it must provide specified documentation to SBA and may not approve any application for loan forgiveness until it has confirmed that SBA has completed its review. The lender also must notify the borrower within 5 business days of receipt of notice from SBA. SBA is not required to review loans under $2 million and may rely upon the borrower’s certifications and the lender’s review.

  • Borrowers have 30 days to appeal SBA determinations. Borrowers may appeal SBA determinations as to eligibility, loan amounts, use of proceeds and loan forgiveness amounts within 30 days of receipt. SBA has stated that additional guidance regarding the appeal process will be provided in a later interim final rule. Until that process is developed it appears that the only appeal avenue is SBA’s current appeal procedures for adverse decisions by the Office of Hearings and Appeals, pursuant to 13 CFR Part 134. That procedure is not structured to provide expedited decisions on contested determinations.

  • PPP loans determined to be ineligible are not entitled to forgiveness and lenders which approved them are not entitled to processing fees. For those PPP loans that are determined to be ineligible by SBA, borrowers will not be entitled to forgiveness of their PPP loan, the remaining balance must be repaid on or before the 2-year maturity of the loan, the loans will no longer be non-recourse, and lenders will not be paid their processing fees and any processing fees for the PPP loan previously received by the bank are subject to clawback, regardless of whether the lender was at fault. The loans will continue to be guaranteed by SBA so long as the lender has complied with its obligations.

  • PPP loans may lose SBA guaranty if lender has not met obligations. If a lender has not met its obligations under the First Interim Final Rule (which can be found here) or the document collection and retention requirements described in the lender application form (SBA Form 2484, found here), SBA (in addition to seeking repayment of processing fees from the lender) may determine that loan is not eligible for a guaranty. Under the First Interim Final Rule, among other things, lenders are required to confirm receipt of borrower certifications, confirm supporting documentation supporting employee numbers and payroll amounts, confirm the dollar amount of average monthly payroll costs for the preceding calendar year, review the borrower’s PPP application form and follow applicable requirements of the Bank Secrecy Act and its implementing regulations. The lender application form requires, among other things, that lenders confirm borrower has made required certifications and representations, that the lender has obtained and reviewed the borrower’s PPP loan application and supporting documents and that the lender will retain copies of such documents.

What’s New in the Lender Extension Interim Final Rule?

 

Highlights of the Lender Extension Interim Final Rule include:

  • formalizing prior guidance on borrower certification as to necessity of the PPP loan (“that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing obligations” of the applicant) and extension of the deadline by which PPP borrowers could repay their loans and qualify for the safe harbor with respect to requirements to provide a good faith certification of necessity; and

  • extending the timeframe for submission of the initial SBA Form 1502 report for PPP loans, such that lenders must electronically upload SBA Form 1502 reporting information by the later of: (i) May 29, 2020 or (ii) 10 calendar days after disbursement or cancellation of a PPP loan.

What’s Missing in the Interim Final Rules?

 

The Interim Final Rules do not make changes to two provisions in the current rules that have generated some of the most requests for modification:

  • the eight-week period during which PPP funds must be spent to qualify for forgiveness; and

  • the rule requiring PPP borrowers to spend at least 75% of the funds on payroll costs to qualify for full loan forgiveness.

These provisions are notable subjects of multiple bills currently pending in Congress. The House of Representatives is expected to take up a bill this week that would extend the current eight-week period during which borrowers must use the funds to be eligible for forgiveness to 24 weeks or December 31, whichever occurs sooner, would eliminate the 75% rule and extend the maturity date of PPP loans to 5 years from 2 years. A bill has been introduced in the Senate that would extend the deadline to apply for a PPP loan to the December 31, 2020 from June 30 and double the coverage period for spending loan funds to qualify for loan forgiveness to 16 weeks from 8 weeks. A separate Senate bill would also expand the loan forgiveness period to 24 weeks and eliminate the 75% rule.

 

Critics have noted that the eight-week loan payment period is too short and not flexible enough and the 75% rule is too restrictive not accommodating enough for businesses that have dealt, and continue to deal, with state and locally mandated shelter-in-place orders that have kept many types of businesses closed or operating or re-opening at significantly reduced capacity, and have kept many employees from working during that time.

 

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