CARES ACT - THE SBA’S PAYCHECK PROTECTION PROGRAM—INTERIM FINAL RULES ON LOAN FORGIVENESS AND REVIEW PROCEDURES RELEASED
On May 22, 2020, the U.S. Small Business Administration (SBA) and the U.S. Department of the Treasury published its Paycheck Protection Program (PPP) Loan Forgiveness Rules and Loan Review Procedures and Related Borrower and Lender Responsibilities. The rules provide borrowers and lenders guidance on requirements for loan forgiveness and the SBA’s process for reviewing PPP loans.
Loan Forgiveness Rules
On May 16, 2020, the SBA released the PPP loan forgiveness application (see the Loan Forgiveness Application client alert), which provided details regarding the forgiveness of PPP loans. Additional items to note in the newly released Loan Forgiveness Rules include:
- Borrowers can seek loan forgiveness as early as eight weeks after the loan disbursement date.
- The lender has 60 days after submission by a borrower to issue a decision to the SBA.
- If the SBA does not review the PPP loan prior to a lender’s decision, the SBA then has 90 days to remit the appropriate forgiveness amount to the lender, subject to any review by the SBA.
- The SBA has discretion to approve all, part or none of the loan forgiveness amount, or to determine that the borrower was ineligible for a PPP loan.
- If the amount remitted by SBA to the lender exceeds the remaining principal balance of the PPP loan (because the borrower made scheduled payments on the loan after the initial deferment period), the lender must remit the excess amount, including accrued interest, to the borrower.
- Confirmation that eligible nonpayroll costs cannot exceed 25 percent of the loan forgiveness amount. However, advance payments of interest on a covered mortgage obligation are not eligible for loan forgiveness, and principal on mortgage obligations is not eligible for forgiveness under any circumstance.
- The eight-week period for calculating the amount of forgivable payroll costs can start on the loan disbursement date (the covered period) or the first day of the first payroll cycle in the covered period for borrowers with a bi-weekly (or more frequent) payroll cycle, at the election of the borrower.
- The amount of loan forgiveness for payroll compensation of owner-employees and self-employed individuals is capped at the lesser of 8/25th of 2019 compensation or $15,385 per individual in total across all business.
- No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals because these expenses are paid out of net self-employment income.
- There is no reduction of forgiveness if an employee is fired for cause, voluntarily resigns or voluntarily requests a schedule reduction.
- Employees whom the borrower offered to rehire are generally exempt from the CARES Act’s loan forgiveness reduction calculation. This exemption is also available if a borrower previously reduced the hours of an employee and offered to restore the employee’s hours at the same salary or wages.
- If a borrower eliminates any reductions in FTE employees, wages or salaries occurring during the safe harbor period of June 30, 2020 or earlier, the borrower is exempt from any reduction in the loan forgiveness amount that would otherwise be required due to reductions in FTE employees, wages or salaries.
- To ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.
- For purposes of the reduction of a borrower’s forgiveness amount for FTE reductions during the covered period, FTE employees are calculated by each employee’s average number of weekly hours during the covered period and divided by 40, provided that each employee is capped at 1.0.
- If an employee works less than 40 hours per week during the covered period, the company may either (i) calculate the actual number for each employee (eg, 30 hours would be 0.75 FTE) or (ii) for administrative convenience, the employer can just assume the part-time employee is a 0.5 FTE. However, the borrower must use the same method for all part-time employees.
Loan Review Procedures
The Loan Review Procedures and Related Borrower and Lender Responsibilities establishes the standards by which the SBA will investigate whether a PPP loan met the program requirements. Key considerations of the rule are:
- The SBA may review any PPP loan, at any time, in its discretion, regardless of the size of the loan
- It is authorized to review borrower eligibility, the loan amount and use of proceeds and loan forgiveness amounts based on the borrower’s information in the PPP application and loan forgiveness application.
- If the SBA determines that the borrower is ineligible for a PPP loan, it will instruct the lender to deny the loan forgiveness application.
- The SBA intends to publish a separate interim final rule addressing the appeals process for borrowers that were found to be ineligible.
- If a borrower is found ineligible for a PPP loan, the SBA may “pursue other available remedies” beyond repayment of the outstanding loan balance.
- The SBA will notify a lender if it reviews a PPP loan, and the lender must then notify the borrower in writing within 5 days.
- The SBA may ask for additional information from the borrower, either directly or through the lender.
- While lenders are able to rely on information and certifications provided by borrowers, lenders are required to reasonably verify calculations and confirm receipt of the borrower’s documentation.
- Lenders are required to notify the SBA of denials of forgiveness, and must provide, among other documentation, the reason for the denial.