PPP Early Loan Forgiveness

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SBA issues new interim final rule, making revisions to previous guidance to reflect PPP Flexibility Act

The U.S. Small Business Administration (“SBA”) has just issued a new interim final rule that addresses a number of issues related to the Paycheck Protection Program (“PPP”) created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Specifically, the new interim final rule makes revisions to previous guidance to reflect the Paycheck Protection Program Flexibility Act of 2020 which became law on June 5 and made significant changes to the PPP, including:

  • Expanding the covered period during which PPP loan funds can be spent and qualified for loan forgiveness to 24 weeks, from eight weeks. The 24-week period applies to all loans made on or after June 5. Recipients of loans before June 5 can opt to retain the original eight-week period or to extend into the 24-week period.
  • Lowering to 60% from 75% the proportion of PPP funding that must be used on payroll costs to qualify for full forgiveness.
  • Expanding the term for new loans to five years from two years. Borrowers with loans received before June 5 can extend their loan term to five years if their lender agrees.

Most of the changes implemented by the new interim final rule were covered in previous guidance and in the PPP loan forgiveness applications released last week, but noteworthy among the new material is the explanation of the process for applying early for loan forgiveness. Now, if a borrower applies for loan forgiveness before the end of the covered period and has reduced any employees’ salaries or wages by more than the 25% allowed for full forgiveness, the borrower must account for the excess salary reduction for the full eight-week or 24-week covered period, as applicable.

Consequently, PPP borrowers that apply early for loan forgiveness forfeit a safe-harbor provision allowing them to restore salaries or wages by Dec. 31 and avoid reductions in the loan forgiveness they receive. For example, if a borrower has a 24-week period that ends in November but wants to apply for forgiveness in September, any wage reduction in excess of 25% as of September would be calculated for the entire 24-week period even if the borrower restores salaries by Dec. 31. An example provided in the interim final rule shows how the calculations would work:

  • Example: A borrower is using a 24-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25% of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).

Notwithstanding this example, still left unresolved is the consequence of having full staff and wages at the time of the early forgiveness application, but then subsequently cutting the workforce or wages prior to December 31.  

The interim final rule does further clarify that Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents. This rule confirms that lenders do not have to independently verify the borrower’s reported information, provided that the borrower supplies documentation supporting its request and attests that it has accurately verified the payments for eligible costs. It is the borrower’s responsibility to provide an accurate calculation of the loan forgiveness amount.

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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