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SBA Issues New Rule Changing PPP Provisions to Reconcile with Flexibility Act

On June 11, 2020, the U.S. Small Business Administration (“SBA”) posted a seventeenth Interim Final Rule on Revisions to the First Interim Final Rule. This Interim Final Rule revises SBA’s interim final rule posted on April 2, 2020, by changing key provisions of the Paycheck Protection Program (“PPP”), such as loan maturity, deferral of loan payments and forgiveness provisions, to conform to the Paycheck Protection Program Flexibility Act (“Flexibility Act”). SBA is also making conforming amendments to the use of PPP loan proceeds for consistency with amendments made in the Flexibility Act.

The provisions in this Interim Final Rule related to loan forgiveness and deferral periods for PPP loans are effective March 27, 2020, while the provision related to the maturity date of PPP loans is effective June 5, 2020. The remaining provisions are effective upon the date of publication in the Federal Register.

Section 1 of this Interim Final Rule makes the following changes to Interim Final Rule 1, posted on SBA’s website on April 2, 2020, and published in the Federal Register on April 15, 2020 (85 FR 20811):

Covered Period for PPP Loans. The Flexibility Act amended the definition of “covered period” for a PPP loan (Part III.2.g.iii. of the First Interim Final Rule) from “the period beginning on February 15, 2020 and ending on June 30, 2020” to “the period beginning on February 15, 2020 and ending on December 31, 2020.” The Flexibility Act provides that this amendment shall be effective as if was originally included in the CARES Act, which was signed into law on March 27, 2020.

Maturity Date for PPP Loans. The Flexibility Act amended the CARES Act to provide a minimum maturity of five years for all PPP loans made on or after the date of enactment of the Flexibility Act. Therefore, Part III.2.j. of the First Interim Final Rule is revised to read as follows:

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.

The date SBA assigns a loan number to the PPP loan has been determined by the Administrator to provide an efficient, transparent and auditable means of determining when a PPP loan is “made” that provides certainty to lenders.

Deferral Period for PPP Loans. The Flexibility Act extended the deferral period on PPP loans. Therefore, Part III.2.n. of the First Interim Final Rule is revised to read as follows:

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.

Loan Forgiveness. The Flexibility Act amended the requirements concerning the amount of PPP loan proceeds that must be used for payroll costs in order to be forgivable. The law also created a new safe harbor or exemption for borrowers to avoid a reduction in their loan forgiveness amount when they have a reduction in full-time equivalent (“FTE”) employees. The Flexibility Act provides that a borrower shall use at least 60% of the loan for payroll costs to receive loan forgiveness. The Administrator, in consultation with the Secretary, interprets this requirement as a proportional limit on non-payroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness. This interpretation is consistent with the new safe harbor in the Flexibility Act, which provides that if a borrower is unable to rehire previously employed individuals or similarly qualified employees, the borrower will not have its loan forgiveness amount reduced based on the reduction in FTE employees.

For the reasons described above, Part III.2.o. of the First Interim Final Rule is revised to read as follows:

However, to receive full loan forgiveness, a borrower must use at least 60% of the PPP loan for payroll costs, and not more than 40% of the loan forgiveness amount may be attributable to non-payroll costs. If a borrower uses 59% 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% 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%) of its loan on payroll costs, then because the borrower used less than 60% 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% of the forgiveness amount and $36,000 in non-payroll costs constituting 40% of the forgiveness amount).

In seeking loan forgiveness, an eligible borrower whose loan was made before June 5, 2020 may elect to apply the original eight-week covered period under the CARES Act instead of the 24-week covered period referenced above.

SBA will be issuing revisions to its interim final rules on loan forgiveness and loan review procedures to address amendments the Flexibility Act made to the loan forgiveness requirements.

Use of PPP Loan Proceeds. For consistency with the amendments made in the Flexibility Act regarding the percentage of loan proceeds that must be used for payroll costs in order to be forgiven, Part III.2.r. of the First Interim Final Rule is revised to read as follows:

At least 60% 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.

The Flexibility Act does not make any changes to what PPP loan proceeds can be used for. The proceeds can be used for payroll costs, payments of mortgage interest, rent, utilities and interest on any other debt obligations that were incurred before February 15, 2020 and refinancing an SBA Economic Injury Disaster Loan (“EIDL”) made between January 31 and April 3, 2020.

Borrower Certifications. Changes were made to the wording of the borrower certifications in Parts III.2.t.iii., iv., and v. of the First Interim Final Rule to reflect revisions to the covered period for PPP loans and the use of PPP loan proceeds, as provided for in the Flexibility Act.

This Interim Final Rule is necessary to implement Sections 1102 and 1106 of the CARES Act and the Flexibility Act, in order to provide economic relief to small businesses nationwide adversely impacted under the COVID-19 Emergency Declaration.

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For additional information on the Paycheck Protection Program, as well as other Federal, state and local relief measures, please visit our COVID-19 Resource Center on our website. If you have any questions, please contact your Tronconi Segarra & Associates advisor or a member of our response team at covid19team@tsacpa.com