On June 10, 2020, and as revised on June 11, 2020, the Small Business Administration (SBA) issued an Interim Final Rule (IFR) (SBA-2020-0035) entitled Business Loan Program Temporary Changes; Paycheck Protection Program — Revisions to First Interim Final Rule. This IFR essentially amends the rules and guidance that the SBA and Department of the Treasury previously issued to conform them to changes effected by the recent enactment on June 5, 2020, of the Paycheck Protection Program Flexibility Act of 2020 (PPPFA). The IFR specifically changes key provisions, such as the loan maturity, deferral of loan payments, and forgiveness provisions, to conform to the PPPFA and makes conforming amendments to the use of PPP loan proceeds for consistency with amendments made in the PPPFA.
Particularly noteworthy in this IFR are the following:
— Extension of “Covered Period” for Use of Loan Proceeds: Somewhat confusingly, the CARES Act included two definitions for “covered period.” The definition of “covered period” in Section 1102 of the CARES Act is that period during which loan proceeds may be used; it is the measuring period for determining certain criteria for loan eligibility. The PPPFA changed that Section 1102 definition of “covered period” from that period beginning on February 15, 2020, and ending on June 30, 2020, to that period beginning on February 15, 2020, and ending on December 31, 2020.
— “Forgiveness Covered Period” Extension to 24 Weeks: This is distinguishable from the “covered period” originally defined in Section 1106 of the CARES Act. That “covered period” (sometimes referred to as the “forgiveness covered period”) governs that period used to measure the amount of loan forgiveness: loan forgiveness is measured as the total amount of allowable costs and expenses that are incurred and paid during the forgiveness covered period. Originally under the CARES Act, this forgiveness covered period ran from the date the PPP loan was funded and ended 8 weeks later. (Subsequent SBA rules allow for an “alternative payroll covered period” that would begin with the first payroll date after funding and end 8 weeks thereafter.) The PPPFA amended the definition of the forgiveness covered period to begin on the date the loan is funded and to end 24 weeks later or on December 31, 2020, whichever occurs first. For PPP loans made prior to June 5, 2020, Borrowers may elect to use the original 8-week forgiveness covered period (or alternative payroll covered period) if they so desire.
— Maturity Date for Some PPP Loans: The IFR notes that the PPPFA extended the maturity of loans first made after its enactment (June 5, 2020) to five years. For these purposes, the date the loan is “made” is the date that the SBA assigns a loan number to the loan.
And a PPP borrower whose loan was made prior to June 5, 2020, still can negotiate with its lender and they can mutually agree to extend the maturity of the loans to five years.
— Deferral Period for PPP Loans: The IFR notes that, with respect to any unforgiven portion of a PPP loan, the PPPFA provides that no payments are due until the SBA remits to the lender the forgiveness amount. (This is a change from six months after funding, as originally provided in the CARES Act.) There have been some lingering questions surrounding the timing requirement with respect to submitting an application for loan forgiveness. The IFR provided some insight, albeit hardly anything definitive. In offering an example, the IFR stated, “If you submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period …” Elsewhere the IFR states that, if a PPP borrower does not submit a loan forgiveness application to its lender within the 10 months after the end of the loan forgiveness period, the borrower must then begin making principal and interest payments. While this doesn’t state with clarity that a borrower has a full 10 months to submit a forgiveness application, it offers a glimpse of what we might expect in future guidance from the SBA or the Department of the Treasury if they choose to address this issue.
Practical Tip: We are aware of some lenders that have specified a time period in their PPP loan documents for forgiveness applications. It would be well worth reviewing those documents to determine if they contain any such provisions or what the consequences might be for failing to meet that deadline.
If in fact a PPP borrower has up to 10 months after the end of the forgiveness covered period, then the payment deferral period can be quite long. Based upon an earlier SBA rule, a lender must make a decision with respect to loan forgiveness within 60 days following its receipt of a completed forgiveness application. The lender will then transmit its decision to the SBA, which has 90 days to remit the forgiveness amount to the lender. The lender must then notify the PPP borrower of the amount of the remittance and the date that the first payment is due. In the case of a forgiveness covered period that ends on December 31, 2020, and the forgiveness application submitted 10 months later, this could mean that the first payment could be deferred until March 2022. Interest continues to accrue during the deferment. We need to reiterate that neither the SBA nor the Department of the Treasury has issued any rules or guidance regarding the timing requirements for submitting a loan forgiveness application. Until they do (and perhaps even if they do), any timing requirements in your PPP loan documents will apply.
— Proportional Limit Based On at Least 60% of Forgiveness Amount for Payroll Costs: The IFR noted the change effected by the PPPFA lowering the percentage of the PPP loan proceeds that must be applied toward payroll costs from 75% to 60%. The IFR clarified some confusion stemming from the wording of the PPPFA suggesting that applying at least 60% of the loan proceeds to payroll costs was a condition to receiving any forgiveness. Rather, the IFR clarifies that the 60% payroll cost requirement is “a proportional limit on non-payroll costs as a share of the borrower’s loan forgiveness amount, rather than a threshold for receiving any loan forgiveness.” Failure to meet the 60% requirement will reduce the loan forgiveness amount but still allow partial forgiveness calculated so that 60% of the forgiveness amount must be attributable to payroll costs.
— More Rules and Guidance: The IFR signaled that the SBA will be issuing additional interim final rules on loan forgiveness and the loan review procedures to conform to the provisions of the PPPFA, and may be issuing further guidance, “if needed.”