SBA Issues Interim Final Rule of PPP Loan Program
On April 3, 2020, the Small Business Administration (SBA) issued its Interim Final Rule (Rules) governing the origination of “Paycheck Protection Loans” (PPP Loans) created under the Coronavirus Aid, Relief and Economic Security Act (CARES Act).
For the most part, the Interim Rules are consistent with the terms of the CARES Act; however, it does include some important updates. Below are some of the highlights of the Rules, a complete copy of which can be found by clicking here https://www.sba.gov/sites/default/files/2020-04/PPP–IFRN%20FINAL_0.pdf:
- Affiliation. The Rules now provide that the affiliation Rules under 13 C.F.R. § 121.301(f) will be used to determine the size of businesses applying for PPP Loans, unless the affiliation Rules are specifically waived under the CARES Act. The Rules state that the SBA will issue additional guidelines on this issue.
- Methodology for Calculating PPP Loan Amount. The Rules clarified the methodology for determining the maximum loan amount as follows:Step 1: Aggregate payroll costs from the last 12 months for employees who are US residents.
Step 2: Subtract compensation in excess of an annual salary of $100,000.
Step 3: Divide the total by 12 to determine the Borrower’s average monthly payroll.
Step 4: Multiply the average monthly payroll by 2.5.
Step 5: Add the outstanding amount of any Economic Injury Disaster Loan made between January 31, 2020 and April 30, 2020, less the amount of any advance under that loan.
Additional questions exist due to a discrepancy between the CARES Act language stating that payroll costs are based on the 12-month period preceding the loan date and the SBA form application’s instruction providing that Borrowers should use the average monthly payroll for 2019. Payroll costs include:
- Salary, wages, commissions, or similar compensation;
- Cash tips or the equivalent;
- Payment for vacation, parental, family, medical, or sick leave;
- Allowance for separation or dismissal;
- Payment for group health care coverage;
- Payment for retirement benefits;
- Payment of state and local taxes assessed on compensation; and
- Independent contractor, wages, commissions, income, or net earnings from self-employment.Unfortunately, the Rules do not clarify whether the $100,000 limit applies to the defined term “payroll costs” or to only the wage/salary portion of payroll costs. Further guidance is needed on this point from the SBA.
- Employees. The Rules specify that the 500 or fewer employee eligibility requirement only counts employees whose principal place of residence is in the United States. Payroll for employees whose principal residence is outside of the United States are not eligible and should not be included in the payroll cost calculations.
- Independent Contractors. The Rules clarify that independent contractors do not count as employees for PPP Loan calculations or loan forgiveness 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.”
- Ineligible Borrowers. Applicants that meet the size requirements for eligibility are nevertheless ineligible for a PPP Loan if:
- The applicant is engaged in any activity that is illegal under federal, state or local law;
- The applicant is a household employer (i.e. individuals who employ household employees such as nannies or housekeepers), because it is not a business;
- An owner of 20% or more of the equity of the applicant (i) is incarcerated, on probation, on parole, or presently subject to an indictment, criminal information, arraignment or other means by which formal criminal charges are brought in any jurisdiction; or (ii) has been convicted of a felony within the last five (5) years; or
- The applicant, or any business owned or controlled by applicant or any of its owners, has ever obtained a direct or guaranteed loan from the SBA or any other federal agency that is currently delinquent or has defaulted within the last seven (7) years and caused a loss to the government.
- Loan Forgiveness. The Rules specify the expenditures used to calculate the loan forgiveness amount are limited to interest on mortgage debt incurred prior to February 15, 2020, not any debt incurred prior to February 15, 2020 (such as bank loans or convertible debt). Payments of interest on non-mortgage debt continue to be a permissible use of proceeds.Notably, the Rules require PPP Loan Borrowers to use at least 75% of the PPP Loan proceeds for payroll costs. The Rules still limit forgiveness of non-payroll costs to not more than 25% of the loan amount; however now the Rules contain an explicit requirement that 75% of the loan proceeds be used for payroll costs.
The Rules indicate that the SBA will issue additional guidance on the loan forgiveness process.
- Deadline. The Rules provide that the last day to apply for and receive a PPP Loan is June 30, 2020. PPP Loan funds will be disbursed on a “first-come, first-served” basis.
- Number of PPP Loans. Borrowers can not apply for more than one PPP Loan. However, the Rules do not restrict affiliated Borrowers from each applying for their own PPP Loan.
- Interest Rate; Payment Deferral; Loan Maturity. The interest rate on PPP Loans was increased to 1%; prior guidelines indicated that the interest rate would be 0.50%. Interest accrues on the PPP Loan during the 6-month payment deferral. The payment deferral is only for 6 months. The maturity on a PPP Loan is now set at 2 years, a significant change from the CARES Act which allowed a maximum maturity of “up to” 10 years.
- Unauthorized Use of Loan Proceeds; Recourse Liability. Borrowers will not be required to post collateral or make personal guarantees. However, Borrowers must understand that they may be subject to additional liability, including fraud charges if they knowingly use PPP Loan proceeds for unauthorized purposes. Furthermore, the Rules also provide that the SBA will have recourse against that shareholder, member or partner if one of the Borrower’s shareholders, members, or partners uses PPP Loan proceeds for unauthorized purposes. When applying for the PPP Loan, the Borrower will be required to make the following certification: “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.”
- Lender Eligibility. The Rules clarify which lenders may make a PPP Loan. All SBA 7(a) lenders are automatically approved to make PPP Loans on a delegated basis. The following types of additional lenders have also been approved: (i) federally insured depository institutions or any federally insured credit unions, (ii) Farm Credit System institutions as defined in 12 U.S.C. 2002(a), and (iii) any other depository or non-depository financing provider that, among other criteria, has been operating since at least February 15, 2019, and has originated, maintained, and serviced more than $50 million in business loans or other commercial financial receivables during a consecutive 12-month period in the past 36 months. The SBA administrator and the Treasury Secretary can approve additional lenders to make PPP Loans.
- Lender underwriting standards. Lenders will be required to review a Borrower’s PPP Loan application and confirm receipt of the required certifications as well as supporting information demonstrating that the Borrower had employees for whom the Borrower paid salaries and payroll taxes on or around February 15, 2020. All lenders must confirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted by the Borrower. Lenders must also follow applicable Bank Secrecy Requirements.
- Electronic Signatures. The Rules provide that the SBA will accept e-signatures or e-consents on documents required to evidence the PPP Loan.
- Reliance by Lender on Borrower Certifications; Lenders Held Harmless by SBA. Lenders will be permitted to rely on the Borrower’s certifications in the PPP Loan application in order to determine: the eligibility of the Borrower, the amount of the PPP Loan, and the use of PPP Loan proceeds. While lenders must comply with the applicable lender obligations set forth in the Rules, they will be held harmless by the SBA if the Borrower fails to comply with the required PPP Loan criteria.
- Faith-Based Organizations. In the past, 501(c)(3) non-profit organizations have not been eligible for loans under the SBA programs. The CARES Act, however, made 501(c)(3) non-profit organizations eligible to get PPP Loans and Economic Injury Disaster Loans. Last Friday, the SBA also issued guidance confirming the eligibility of churches and faith-based organizations for these loans. In a “Frequently Asked Questions” (FAQ) document https://www.sba.gov/sites/default/files/2020-04/SBA%20Faith-Based%20FAQ%20Final.pdf released late in the evening of April 3,theSBA officially stated “no otherwise eligible organization will be disqualified from receiving a loan because of the religious nature, religious identity, or religious speech of the organization.” According to the guidelines:
- Faith-based organizations can receive the loans regardless of whether they provide secular social services.
- The religious instruction limitation referenced in 13 CFR 120.110 will not be applied, and will thus not inhibit religious organizations in how they use these loans.
- Churches and other faith-based organizations do not need to consider other entities or organizations to which they are related for sincere religious purposes as “affiliates” (i.e. a church is not affiliated with other churches of its denomination).
- No additional restrictions will be imposed on how faith-based organizations may use the loan proceeds; and
- Notably, the SBA guidelines provide that churches are “not required to apply to the IRS to receive tax-exempt status” in order to access the loans.
While the Rules and final Borrower Application Form (https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf) do not clearly address all the questions raised by the CARES Act, they go a long way to clarifying some of the ambiguities. Hopefully this information will help lenders and borrowers as they move forward in preparing, accepting and submitting PPP loan applications. Further guidance from the SBA is expected in the next week.
Michael Smith is a commercial lending attorney who helps lenders and borrowers get to closing with the best mix of terms and timelines possible. For more information on the SBA, the PPP, and the CARES Act, contact Michael at 301-657-0166 or [email protected].