The U.S. Small Business Administration released revised rules for its forgivable small business loans under the Paycheck Protection Program (PPP). The rules implement changes made by the Paycheck Protection Program Flexibility Act (H.R. 7010), a bill backed by the Insights Association which was signed into law on June 5, 2020.
SBA also recently offered a 3-page "EZ" form for PPP loan forgiveness, significantly shorter than the initial 11-page one. The EZ form is supposed to be for loan recipients who are self-employed or with no employees, or recipients who didn't reduce employees' salaries by more than 25 percent.
The regular loan forgiveness calculation form has now also been shortened by half.
The new PPP rules alter provisions relating to the maturity of PPP loans, the deferral of loan payments, and the forgiveness of the loans. The amendments related to forgiveness and extension of the deferral period are retroactive to March 27, 2020, and the extension of the maturity date for loans is effective as of June 5, 2020.
The new rules revise some of the Q&A, as follows:
j. What will be the maturity date on a PPP loan?
For loans made before June 5, 2020, the maturity is two years; however, borrowers and lenders may mutually agree to extend the maturity of such loans to five years. For loans made on or after June 5, the maturity is five years.
Section 2 of the Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act) amended the CARES Act to provide a minimum maturity of 5 years for all PPP loans made on or after its enactment. The Administrator, in consultation with the Secretary, determined that the date SBA assigns a loan number to the PPP loan provides an efficient, transparent, and auditable means of determining when a PPP loan is “made” that provides certainty to lenders. While the CARES Act provides that a loan will have a maximum maturity of up to ten years from the date the borrower applies for loan forgiveness, the Administrator, in consultation with the Secretary, determined that a five-year loan term is sufficient in light of the temporary economic dislocations caused by the coronavirus. Specifically, the considerable economic disruption caused by the coronavirus is expected to abate well before the five-year maturity date such that borrowers will be able to resume business operations and pay off any outstanding balances on their PPP loans.
n. When will I have to begin paying principal and interest on my PPP loan?
If you submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you will not have to make any payments of principal or interest on your loan before the date on which SBA remits the loan forgiveness amount on your loan to your lender (or notifies your lender that no loan forgiveness is allowed).
Your “loan forgiveness covered period” is the 24-week period beginning on the date your PPP loan is disbursed; however, if your PPP loan was made before June 5, 2020, you may elect to have your loan forgiveness covered period be the eight-week period beginning on the date your PPP loan was disbursed. Your lender must notify you of remittance by SBA of the loan forgiveness amount (or notify you that SBA determined that no loan forgiveness is allowed) and the date your first payment is due. Interest continues to accrue during the deferment period.
If you do not submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you must begin paying principal and interest after that period. For example, if 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 or after October 10, 2021.
o. Can my PPP loan be forgiven in whole or in part?
Yes. The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. An eligible borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes as described below and employee and compensation levels are maintained or, if not, an applicable safe harbor applies. The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments for service that began before February 15, 2020, over the loan forgiveness covered period. However, 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 nonpayroll costs. For example, if a borrower uses 59 percent of its PPP loan for payroll costs, it will not receive the full amount of loan forgiveness it might otherwise be eligible to receive. Instead, the borrower will receive partial loan forgiveness, based on the requirement that 60 percent of the forgiveness amount must be attributable to payroll costs. For 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 nonpayroll costs constituting 40 percent of the forgiveness amount).
r. How can PPP loans be used?
The proceeds of a PPP loan are to be used for:
- payroll costs (as defined in the Act and in 2.f.);
- costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- mortgage interest payments (but not mortgage prepayments or principal payments);
- rent payments;
- utility payments;
- interest payments on any other debt obligations that were incurred before February 15, 2020; and/or
- refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020. If you received an SBA EIDL loan from January 31, 2020 through April 3, 2020, you can apply for a PPP loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
At least 60 percent of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness. While the Act provides that PPP loan proceeds may be used for the purposes listed above and for other allowable uses described in section 7(a) of the Small Business Act (15 U.S.C. 636(a)), the Administrator believes that finite appropriations and the structure of the Act warrant a requirement that borrowers use a substantial portion of the loan proceeds for payroll costs, consistent with Congress' overarching goal of keeping workers paid and employed. This percentage is consistent with the limitation on the forgiveness amount set forth in the Flexibility Act. This limitation on use of the loan funds will help to ensure that the finite appropriations available for these loans are directed toward payroll protection, as each loan that is issued depletes the appropriation, regardless of whether portions of the loan are later forgiven.
Concerns or comments from IA members
If Insights Association members have any comments or concerns, please get in touch with us -- SBA invites comments on these rules by July 16.
This information is not intended and should not be construed as or substituted for legal advice. It is provided for informational purposes only. It is advisable to consult with private counsel on the precise scope and interpretation of any laws/regulation/legislation and their impact on your particular business.