SBA Releases Interim Final Rule for PPP Loans

On April 2, 2020, the Small Business Administration released an Interim Final Rule (the “Rule”) to implement the Paycheck Protection Program (“PPP”), a vital component of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) for small business owners adversely affected by the COVID-19 pandemic. The text of the Rule can be found here: https://home.treasury.gov/system/files/136/PPP--IFRN%20FINAL.pdf. The Rule must be published in the federal register in order to go into effect. It is expected to be published in the coming days.

In the Rule, the SBA made clear that the Rule was issued to allow for immediate implementation of the PPP. The SBA is currently authorized to guarantee PPP loans through June 30, 2020 totaling $349 billion. The Rule provides lenders the guidance necessary to begin providing PPP loans to small business owners who are experiencing economic hardship. It additionally provides small business owners information on how to apply for the loan. The Rule provides the following for PPP loans:

Eligibility
The Rule reiterates the eligibility requirements set forth in the CARES Act and provides detailed examples of reasons small businesses may be ineligible for a PPP loan. These include if the small business is (1) engaged in activity illegal under federal law, (2) a household employer, (3) has an owner of 20% of more that is incarcerated, on probation, the subject of an indictment, or has been convicted of a felony within the last 5 years, or (4) owned or controlled by an owner that has previously defaulted on a loan from the SBA or any other federal agency. The SBA plans to issue additional guidance with regards to the applicability of affiliation rules at 13 CFR §§ 121.103 and 121.301 to PPP loans.

Loan Amount
The amount a small business is allowed to borrow under the PPP is calculated by the annual payroll costs (not including compensation paid to an employee in excess of $100,000) divided by 12 months’ times 2.5 plus the amount of any Emergency Injury Disaster Assistance Loan (EIDL). The Rule provides detailed examples of how to calculate PPP loan amounts and what qualifies as payroll costs. It is worth noting that payroll costs include payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums. However, it does not include federal employment taxes and income taxes required to be withheld for employees. Payment to independent contractors is also not considered a payroll cost because they are separately eligible for PPP loans.

Loan Terms
The interest rate on the unforgiven portion of PPP loans will be 1.0% per annum, the maturity date will be two (2) years, and small businesses will not have to make any payments for 6 months following the date of loan disbursement. There are no prepayment penalties associated with small businesses paying off their PPP loans early. Due to expected volume, small businesses are only eligible to apply for one PPP loan. Given this regulation, the SBA is advising small business owners to apply for the maximum amount. PPP loans are considered to be first-come, first-serve. An authorized member of the small business will be required to make certain certifications on the PPP Loan Application, including:

The uncertainty of current economic conditions makes the loan request necessary to support the ongoing operations of the eligible recipient;
The funds will be used to retain workers, maintain payroll or make mortgage payments, lease payments, and utility payments;
Applicant has not or will not receive another PPP loan from February 15, 2020 through December 31, 2020; and
All supporting documents provided by small business are true and accurate.

Loan Forgiveness
The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest assuming the borrower uses all of the loan proceeds for forgivable purposes and employee and compensation levels are maintained. The amount of loan forgiveness will equal the amount spent by the small business during the 8-week period after loan origination on payrolls costs (i.e. wages to employees; payment for vacation, parental, family medical or sick leave, etc.), interest on any mortgages in place prior to February 15, 2020, payment of rent on any lease in place prior to February 15, 2020, and payment on any utilities in service prior to February 15, 2020. Because of expected volume, 75% of the amount forgiven must be used for payroll. It is also worth noting the amount forgiven is not taxable to the small business.

While the SBA intends to issue additional guidance on loan forgiveness, it is important for small businesses to understand upfront the information necessary to obtain loan forgiveness. Small businesses will be expected to provide:

Documentation verifying the number of full-time equivalent employees on payroll and pay rates for the applicable period, including payroll tax filings reported to the IRS and state income, payroll, and unemployment insurance filings;
Documentation, such as cancelled checks verifying mortgage interest, lease, and utility payments; and
Certification from the small business that (a) the documentation presented is true and correct, and (b) the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation or make covered utility payments.

Misuse of PPP Funds
Small businesses will be directed to repay the SBA for any amounts used for unauthorized purposes. Small businesses will be subject to additional liability such as fraud charges, and the SBA will have recourse any the small businesses principals if they misuse PPP funds. Lenders are held harmless for small businesses’ failure to comply with PPP criteria. Lenders are not required to conduct any verification if the small business submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs.

The Rule’s Instructions to Lenders
All SBA 7(a) lenders are automatically approved to make PPP loans on a delegated basis. The SBA has additionally determined that certain additional lenders should be authorized so that all small businesses who are eligible can receive their loans prior to the June 30, 2020 deadline. Lenders do not have to apply the credit elsewhere test for PPP loans. In order to meet the underwriting requirements of the PPP, lenders must:

Confirm receipt of small business’ certifications contained in PPP Application form issued by the Administration;
Confirm receipt of information demonstrating that a small business had employees for whom the small business paid salaries and payroll taxes on or around February 15, 2020;
Confirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the small business’ application; and
Follow applicable Bank Secrecy Act requirements:

The SBA is responsible for paying lenders fees for processing PPP loans: (1) 5% for loans of not more than $350,000; (2) 3% for loans of more than $350,000 and less than $2,000,000; and (3) 1% for loans of at least $2,000,000. The fees for agents who assist a borrower cannot be paid out of the PPP loan proceeds. Rather, they will be paid by the lenders out of the fees the lender receives from the SBA. The total amount an agent can collect from the lender is (1) 1% for loans of not more than $350,000; (2) 0.5% for loans of more than $350,000; and (3) 0.25% for loans of at least $2 million.

The SBA has indicated that PPP loans may be sold on the secondary market after the loan is full disbursed, but the SBA intends to issue guidance regarding any advance purchase for loans sold in the secondary market. Additionally, a lender can request that the SBA purchase the expected forgiveness amount of a PPP loan at the end of week seven of the covered period.
The SBA Attorneys at Lewis Kappes continue to monitor the developments to SBA programs and the CARES Act as a result of the COVID-19 pandemic. For more information regarding the CARES Act, the Interim Final Rule, or any other matters related to the SBA or matters concerning your business, contact: Chris Poling at cpoling@lewiskappes.com.

Additional information regarding the PPP and links to the Borrower and Lender PPP Application forms can be found here: https://www.sba.gov/funding-programs/loans/paycheck-protection-program-ppp. Further information regarding the SBA’s initial guidance released on March 31, 2020 can be found here: https://lbit.ly/340fomw and the CARES Act can be found here: https://bit.ly.2JmXLxA.

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