Alert: Paycheck Protection Program FAQs On Loan Forgiveness & Processing Of Forgiveness Applications

Moritt Hock & Hamroff LLP
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On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law providing, among other relief, up to $349 billion to fund loans to small businesses affected by the outbreak of COVID-19 (the “PPP”). On April 24, 2020, funding for the Paycheck Protection Program was reauthorized in the amount of $310 billion when the President signed H.R. 266 – the Paycheck Protection Program and Health Care Enhancement Act into law.  On June 5, 2020, H.R. 7010 – the Paycheck Protection Program Flexibility Act of 2020 (the “PFA”) was signed into law by the President, which resulted in significant changes to the initial program greatly benefitting borrowers. Finally (at least as of the date of this writing), on July 4, 2020, the deadline to apply for a PPP loan was extended through August 8, 2020 when the President signed S. 4116 into law.

While many believed that further changes to the PPP (such as automatic loan forgiveness and the opportunity to apply for a second loan[1]) were forthcoming, the country has been caught in a legislative stalemate with no immediately foreseeable resolution. This means that for many early PPP borrowers, the time has come for them to start gathering the documents and information necessary to prepare their loan forgiveness application as the deadline[2] to file is drawing near. For both early borrowers and later borrowers (who have many weeks left before the deadline), are  advised  to complete a draft of the forgiveness application, gather all supporting documentation, and if there are questions or uncertainties, consult with their trusted legal professionals, accountants, and bankers, prior to submitting the completed application to the lender.

Furthermore, as was the case with the implementation of the PPP, borrowers (and lenders) have many questions regarding the forgiveness application, calculations, and supporting documentation. In response to these questions, the Small Business Administration (SBA) in consultation with the Department of the Treasury has started issuing answers to frequently asked questions in connection with PPP loan forgiveness applications.  A link to the current FAQs can be found at: PPP Loan Forgiveness FAQs (the “Forgiveness FAQ”).  As of the date of this writing, the Forgiveness FAQ has been divided into five sections: (i) General Loan Forgiveness FAQs (“Section 1”); (ii) Loan Forgiveness Payroll Costs FAQs (“Section 2”); (iii) Loan Forgiveness Nonpayroll Costs FAQs (“Section 3”); (iv) Loan Forgiveness Reductions FAQs (“Section 4”); and (v) Economic Injury Disaster Loan (EIDL) FAQs (“Section 5”). Some notable highlights addressed in the Forgiveness FAQ are as follows:

    • Provided that the borrower has timely submitted its forgiveness application to its lender, no payments need to be made on the PPP loan prior to the SBA remitting the amount forgiven to the lender. See Forgiveness FAQ Section 1, FAQ #3.
    • Payroll costs that were incurred during the Covered Period, but paid after the Covered Period, provided that same are paid at the next regular payroll date after the Covered Period, are eligible for loan forgiveness. See, Forgiveness FAQ Section 2, FAQ #1.[3]
    • Payroll costs that were incurred before the Covered Period, but paid during the Covered Period, are also eligible for loan forgiveness. See, Forgiveness FAQ Section 2, FAQ #2.[4]
    • Payroll costs include all forms of cash compensation, such as wages, tips, commissions, bonuses and hazard pay. See, Forgiveness FAQ Section 2, FAQ #5.
    • Provided that employer expenses for employee group health care benefits are paid or incurred during the Covered Period, the Alternative Payroll Covered Period[5] or the next premium due date after the applicable period, then these costs are eligible for loan forgiveness. See, Forgiveness FAQ Section 2, FAQ #6.
    • Eligible non-payroll costs, such as mortgage interest, rent or lease payments, and eligible utility costs incurred prior to the Covered Period, but paid during the Covered Period, are eligible for loan forgiveness. See, Forgiveness FAQ Section 3, FAQ #1[6].
    • If a lease existed prior to February 15, 2020 and expired on or after February 15, 2020 and is renewed, the lease payments made pursuant to the renewed lease during the Covered Period are eligible for loan forgiveness. This concept also applies to mortgage debt that existed prior to February 15, 2020 and is refinanced on or after February 15, 2020; specifically, the payments of interest made on the refinanced mortgage during the Covered Period are eligible for loan forgiveness.  See, Forgiveness FAQ Section 3, FAQ #5[7].
    • A borrower will not be subjected to a reduction in the loan forgiveness amount for reduction in FTE for employees that refuse to return to work, provided that the borrower “is able to document in good faith the following: (1) an inability to rehire individuals who were employees of the borrower on February 15, 2020 and (2) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020. Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. The documents that borrowers should maintain to show compliance with this exemption include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.” See, Forgiveness FAQ Section 4, FAQ #1.
    • Borrowers only need to take into account reductions in wages and salaries and not other cash compensation when calculating reduction in wages in excess of 25%. See, Forgiveness FAQ Section 4, FAQ #5.

In addition to the Forgiveness FAQ, the SBA issued a Procedural Notice effective July 23, 2020, Control No.: 5000-20038 (the “Procedural Notice”), which addresses, among other things, the procedures for lender submissions of forgiveness applications to the SBA. While this procedural notice is meant as guidance for lenders, it does contain information of which borrowers should be aware, such as the following:

    • Borrowers must use SBA Forms 3508, 3508EZ or an equivalent form from its lender or loan servicer when applying for loan forgiveness.
    • Borrowers can submit the forgiveness application prior to the expiration of the Covered Period provided that the borrower has used all of the loan proceeds.
    • If after review of the forgiveness application, the lender identifies any errors or deficiencies, then the lender must work with the borrower to remedy these issues prior to the lender submitting the forgiveness application and its decision to the SBA.
    • The lender must submit the forgiveness application and its decision regarding loan forgiveness to the SBA not later than sixty (60) days after receipt of the complete application from the borrower, and if any or all of the loan is entitled to forgiveness, the lender must request the forgiveness payment from the SBA at the same time that it transmits the completed application and its decision to the SBA.
    • The SBA must remit the forgiveness amount to the lender, plus any interest accrued through the date of the payment, not later than ninety (90) days after the lender transmits the complete application, its decision, and request for payment to the SBA.
    • The lender, not the SBA, is responsible for notifying the borrower of the amount of forgiveness paid by the SBA to the lender. If the amount paid by the SBA is less than the lender’s forgiveness decision amount, then the lender must notify the borrower of the amount set forth in lender’s forgiveness decision.
    • In the unfortunate event that the lender denies borrower’s forgiveness application in full, then the lender must give the borrower written notice that it has issued a decision to the SBA that is denying the application in full. The borrower has thirty (30) days from the notice from lender to request that the SBA review the lender’s decision, which request shall be sent to the lender. The lender must notify the SBA of borrower’s request for review within five (5) days of receipt of borrower’s request.  The SBA will notify the lender if it declines the review, but no timeframe is specified for this notification. If the SBA reviews the lender decision, it will notify both the borrower and lender of the results of its review.

If possible, it is advisable that borrowers of PPP loans refrain from submitting their application for loan forgiveness until all open questions (which there are many) concerning the forgiveness applications have been adequately addressed through the issuance of rules and guidance from the applicable authorities, and there has been an resolution to the legislative stalemate in connection with further COVID-19 economic relief and stimulus programs.

We are closely monitoring this continually developing area and will keep our clients updated as the Paycheck Protection Program and associated forgiveness application progresses.  We encourage our clients to reach out not only to us, but also to their local lenders with any questions that they may have regarding the economic assistance programs available.

Footnotes:

[1]The Health, Economic Assistance, Liability Protection and Schools Act (the “HEALS Act”) proposed by the Senate, if passed into law, would modify the PPP in many ways, including, without limitation, providing for automatic forgiveness of loans of $150,000 or less based upon a good faith certification from borrower to comply with the forgiveness requirements and that borrower will maintain appropriate records. The HEALS Act would also give qualifying borrowers the ability to apply for a second PPP loan.     

[2]The deadline to file an application for loan forgiveness is 10 months from the last day of the Covered Period.  The “Covered Period” is the time period during which the PPP loan proceeds must be spent by the borrower.  This is the earlier of 24 weeks from the loan origination or December 31, 2020.

[3] This is contrary to previous guidance that the payroll and non-payroll costs must be both paid and incurred during the Covered Period.

[4] See footnote 3 above.

[5] As defined defined in the Paycheck Protection Program Loan Forgiveness Application Revised June 16, 2020. OMB Control Number 3245-0407.

[6] See footnote 3 above.

[7] It is important to note that the FAQ addresses an expired lease that is renewed, and not a lease that is not expired but was renegotiated due to the COVID-19 or other reasons. The FAQ does not indicate that a mortgage must have matured, so borrowers that have refinanced to take advantage of lower rates can breathe a sigh of relief.  

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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