Update re Major Changes to Loan Forgiveness Rules Under the Paycheck Protection Program
as of June 11, 2020
On March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which is an approximately $2 trillion stimulus and economic relief package. One principal feature is the loan program known as the Paycheck Protection Program (“PPP”), to be administered by the Small Business Administration (“SBA”). On April 24, 2020, the President signed into law the Paycheck Protection Program and Health Care Enhancement Act, providing additional funds for the PPP (the “Enhancement Act”). The most significant feature of a PPP loan is if the borrower complies with certain requirements, some or all of the PPP loan will be forgiven.
On June 5, 2020, the President signed into law the Paycheck Protection Flexibility Act of 2020 (the “Flexibility Act”), which amends the CARES Act to provide greater flexibility to Borrowers in qualifying for Loan Forgiveness.
Building on the guidance it previously provided, on June 10, 2020, the SBA, in consultation with the U.S. Treasury, issued its Revision to the First Interim Final Rule, which provides additional guidance relating to the changes made by the Flexibility Act (the “Revised Rules”).
1. What Percentage of the PPP Loan Must Be Spent on Payroll Costs?
To receive full loan forgiveness, a Borrower must use at least 60 percent of the PPP loan for Payroll Costs, and not more than 40 percent of the loan forgiveness amount may be attributable to Non-Payroll Costs. The Revised Rules make it clear that the SBA will be maintaining the “forgiven in part” concept, so that even if a Borrower does not reach such 60 percent level with respect to the entire PPP Loan proceeds, a portion of the PPP Loan may still be forgiven. The forgiven amount shall be reduced to ensure that 60 percent of the “forgiven amount” was spent on Payroll Costs.
Example: A Borrower receives a $100,000 PPP Loan, and during the Covered Period the Borrower spends $54,000 (or 54 percent) of its PPP Loan on Payroll Costs, then because the Borrower used less than 60 percent of its PPP Loan on Payroll Costs, the maximum amount of loan forgiveness the Borrower may receive is $90,000 (with $54,000 in Payroll Costs constituting 60 percent of the forgiveness amount and $36,000 in Non-Payroll Costs constituting 40 percent of the forgiveness amount).
2. When Must a Borrower Use PPP Loan Proceeds?
The Revised Rules clarify the definition of the term “Covered Period” as that term is used for “use of PPP loan proceeds”, to mean the period commencing on February 15, 2020, and ending on December 31, 2020. PPP loan proceeds may only be used during this period.
3. What is the Loan Forgiveness “Covered Period”?
The Revised Rules and the Flexibility Act each state that the “loan forgiveness covered period” is the period of time commencing on the date the PPP loan is funded and ending on the earlier of: (a) twenty-four-weeks (168-days) thereafter(previously this was an eight-week (56-day) period), or (b) December 31, 2020. The Revised Rules and the Flexibility Act each gives the Borrower the option to choose the eight-week (56-day) period if the Borrower received the PPP Loan prior to June 5, 2020. NOTE: The SBA has stated that it will be providing additional guidance on loan forgiveness by issuing revisions to its interim final rules on loan forgiveness.
4. What is the Maturity Date of an Unforgiven PPP Loan?
A. Loans Made Before June 5, 2020. The Revised Rules confirm that for PPP Loans made before June 5, 2020, the maturity date is two years from the date of funding; however, a Borrower and its Lender may mutually agree to extend the maturity of such loan to five years.
B. Loans Made on or After June 5, 2020. The Revised Rules confirm that for PPP Loans made on or after June 5, 2020, the maturity date is five years from the date of funding.
5. When Does a Borrower Have to Begin to Pay Principal and Interest?
When a Borrower must begin making payment of principal and interest on any unforgiven portion of the PPP loan is determined in part on what period of time the Borrower has chosen as its “loan forgiveness covered period” (see Item 3 above).
A. Submitting Application for Forgiveness Within 10 Months After Loan Forgiveness Covered Period. If a Borrower submits to its lender a loan forgiveness application within 10 months after the end of such Borrower’s loan forgiveness covered period, the Borrower will not have to make any payments of principal or interest before the date on which the SBA remits the loan forgiveness amount on the Borrower’s loan to its lender (or notifies such lender that no loan forgiveness is allowed). The lender must notify the Borrower of the SBA’s decision with respect to forgiveness and the date on which the first payment, if any, is due. Interest continues to accrue during this entire period.
B. Failure to Submit Application for Forgiveness Within 10 Months After Loan Forgiveness Covered Period. If a Borrower fails to submit to its lender a loan forgiveness application within 10 months after the end of such Borrower’s loan forgiveness covered period, the Borrower must begin paying principal and interest upon the expiration of such 10-month period.
Example: A Borrower’s PPP loan is disbursed on June 25, 2020. The 24-week period ends on December 10, 2020. If the Borrower does not submit a loan forgiveness application to its lender by October 10, 2021, the Borrower must begin making payments on and after October 10, 2021.
6. What Is the Last Day a Borrower May Obtain a PPP Loan?
The Revised Rules confirm that the last day on which a lender can obtain an SBA loan number for a PPP loan is June 30, 2020. Lenders need time to process any application before obtaining such an SBA loan number, so it is advisable that any potential Borrower immediately check with its proposed lender to determine how soon such loan application must be submitted.
Keith T. Zimmet is the Chair of our Commercial Finance Practice Group, and President and Managing Shareholder of our firm.
This information provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact or situation.