SBA Issues Interim Final Rule, Revised Application Forms to Implement Statutory Changes to Paycheck Protection Program

• The definition of “covered period” governing loan use, loan eligibility, and related requirements (section 1102 of the CARES Act) is amended to begin on February 15, 2020 and end on December 31, 2020, rather than June 30, 2020.
• The revised interim final rule defines the “loan forgiveness covered period,” as the 24-week period beginning on the date a borrower’s PPP loan is disbursed. If a PPP loan was made before June 5, 2020, the borrower may elect to have its loan forgiveness covered period be the eight-week period beginning on the date its PPP loan was disbursed.
• The Flexibility Act provides for a minimum maturity of five years for all PPP loans made on or after the date of its enactment. For loans made before June 5, 2020, the maturity remains two years. Borrowers and lenders, however, may mutually agree to extend the maturity of such loans to five years.
• If a borrower submits to its lender a loan forgiveness application within 10 months after the end of its loan forgiveness covered period, the borrower will not have to make any payments of principal or interest on the PPP loan before the date on which SBA remits to the lender the loan forgiveness amount (or notifies the lender that no loan forgiveness is allowed). Lenders must notify borrowers of the remittance by SBA of the loan forgiveness amount or the SBA determination that no loan forgiveness is allowed and the date its first payment is due. Interest continues to accrue during the deferment period. Borrowers who do not submit a loan forgiveness application within 10 months after the end of its loan forgiveness covered period must begin paying principal and interest after that 10-month period.

The most notable facet of the Interim Final Rule is SBA’s implementation of the Flexibility Act’s requirement that PPP borrowers spend at least 60 percent of their loan proceeds on payroll costs in order to achieve full loan forgiveness. In implementing the original CARES Act provisions establishing the PPP, the SBA’s initial rule imposed a requirement not found in the CARES Act that “at least 75 percent of the PPP loan proceeds shall be used for payroll costs.” In addition to changing the minimum payroll cost percentage to 60, the Flexibility Act appeared to clarify that this percentage relates to forgiveness only and does not otherwise limit loan use.

The new Interim Final Rule, however, simply amends the provisions of SBA’s initial rule by substituting the number 60 for the number 75. In so doing, the Interim Final Rule continues to state: “At least 60 percent of the PPP loan proceeds shall be used for payroll costs.” Moreover, the Interim Final Rule amends the relevant borrower certifications as follows:

"The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; I understand that if the funds are knowingly used for unauthorized purposes, the Federal Government may hold me legally liable such as for charges of fraud. As explained above, not more than 40 percent of loan proceeds may be used for nonpayroll costs."

In spite of the apparent mandate that at least 60 percent of PPP loan proceeds be used for payroll costs, the Interim Final Rule also explains how to calculate a proportional reduction in forgiveness if less than 60 percent of loan proceeds are spend on payroll costs. Specifically, the Interim Final Rule provides the following example:

"If a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54 percent) of its loan on payroll costs, then because the borrower used less than 60 percent of its 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)."

It is not clear whether the foregoing provisions of the Interim Final Rule relating to loan forgiveness and loan use are reconcilable.

In addition to its new regulations, the SBA has issued revised versions of the: (1) PPP loan application; (2) PPP forgiveness instructions; and (3) PPP forgiveness application in light of the Flexibility Act’s program changes. The revised forgiveness instructions and application otherwise follow the same mechanics as the original instructions and application, which we summarized here.

The SBA also has issued a new “EZ” streamlined forgiveness application and EZ forgiveness application instructions that apply to: (1) self-employed individual borrowers who had no other employees at the time of the PPP loan application; or (2) borrowers able to certify that they are not subject to loan forgiveness reductions. Specifically, a borrower can make such a certification under either of the below scenarios set forth in the EZ application:

Scenario No. 1:

• The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); and
• The Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period. (Ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. Also ignore reductions in an employee’s hours that the Borrower offered to restore and the employee refused).

Scenario No. 2:

• The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); and
• The Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

The new Interim Final Rule provides that that SBA will issue further interim final rules relevant to loan forgiveness, loan review procedures and advance purchases of PPP loans. We will release additional alerts on these developments.

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