PPP Round 3: New Rules, New Money, New Challenges

Nelson Mullins Riley & Scarborough LLP

This week the U.S. Small Business Administration (SBA) released updated Paycheck Protection Program (PPP) interim final rules which incorporate new requirements imposed by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act” or “EAA”). In addition to modifying certain existing PPP requirements, the Economic Aid Act adds a second temporary program to the SBA’s 7(a) Loan Program which allows certain eligible borrowers to receive a second draw PPP loan.

While lenders should become familiar with the contents of the interim final rules and specifically the lender requirements contained therein (which should be addressed in lenders’ compliance management systems), included below are several key aspects of the rules that lenders should be cognizant of as they roll out the latest PPP updates. As with prior deployment of PPP funds, it remains critically important that lenders document their compliance with the Rules and provide adequate training and compliance resources for their lending personnel. In addition to the prudential changes we have recommended to clients in previous PPP loan program documents, lenders should also modify existing PPP loan documents and certifications to address the changes described in the Economic Aid Act and the accompanying SBA rules and guidance.

  • For ease of borrower and lender reference, the Interim Final Rule on Paycheck Protection Program as Amended by the Economic Aid Act (the “First Interim Final Rule”) consolidates the numerous previously issued rules and guidance governing PPP matters and provides other general rules relating to loan increases and loan forgiveness. However, the First Interim Rule is not intended to substantively alter or affect PPP rules that were not amended by the Economic Aid Act. The consolidation of the prior rules is beneficial, but lenders will still need to be considerate of the prior rules and understand the components of the prior rules which have now been amended by the EAA.
  • The SBA also plans to issue a consolidated rule on all aspects of loan forgiveness and the loan review process. The SBA has promised to revise its FAQs to fully conform with the provisions of the EAA, but this guidance has not yet been published.
  • With respect to a lender relying on a certification or documentation provided by the borrower for an initial or second draw PPP loan, the updated interim final rules incorporate the updated “Hold Harmless” provisions in Section 305 of the EAA. However, in order to avoid an enforcement action or penalty the lender must (A) act in good faith relating to the PPP loan origination and forgiveness process based on such reliance, and (B) satisfy all other relevant federal, state, local, and other statutory and regulatory requirements applicable to the lender. Thus, lenders should continue to ensure that they understand their obligations and put procedures and controls in place to meet those obligations.
  • The prior requirement for the SBA to deduct EIDL Advance amounts received by borrowers from the forgiveness payment amounts is now repealed. The First Interim Final Rule further provides that amounts previously deducted from a borrower’s forgiveness amount will be remitted to the lender, together with interest to that date.
  • As provided in the EAA, the First Interim Final Rule notes that interest charged on a PPP loan after Dec. 27, is on a non-compounding, non-adjustable basis. The rule also notes that this may apply to PPP loans made before Dec. 27, upon the mutual agreement of the lender and the borrower. Lenders will want to ensure the manner in which interest is calculated conforms to this requirement and determine how they will handle pre-Dec. 27 loans (including notification, amendment, and relief notification programs).
  • The interim final rules expand eligible expenses for both initial and second draw PPP loans, including employee group insurance contributions, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures.
  • Certain entities are excluded from the loan eligibility criteria, including:
    • Publicly traded companies;
    • Entities receiving a grant under the Shuttered Venue Operator Grant program (which was established in the EAA); and
    • Entities engaged in political or lobbying activities.
  • If not already registered, lenders must register with SAM.gov within 30 days from the date of the first PPP loan disbursement made by the lender after Dec. 27.
  • The Interim Final Rule on Second Draw Loans (the “Second Interim Final Rule”) implements key provisions of the second draw PPP loan program, which were authorized under Section 311 of the EAA. While Section 311 and the Second Interim Final Rule authorize the SBA to guarantee second draw PPP loans, under generally the same terms and conditions available under the first draw PPP program, there are some variations to the rules which are specific only to second draw loans.
  • Eligibility requirements for a second draw loan include, subject to a few exceptions, the following:
    • Applicant previously received a first draw PPP loan;
    • Applicant has used, or will use, the full amount of its first draw PPP loan on authorized uses on or before the expected date on which the second draw PPP loan will be disbursed.
    • Applicant must have 300 or fewer employees;
    • Applicant must have experienced a revenue reduction demonstrating at least a 25% reduction in gross receipts. Note that the amount of any forgiven first draw PPP loan is not included toward any gross receipts.
  • With regard to a second draw loan, a borrower does not have to resubmit 2019 payroll information if it uses the same lender that it used for its application for a first draw PPP loan. Thus, it seems as though borrowers will favor using the same lender for a second draw loan. Lenders not planning on participating in this round of PPP may want to consider for purposes of customer relations a process for providing those borrowers their payroll records previously submitted and developing relationships with other lenders that may be able to serve their customers.
  • With regard to second draw loans of $150,000 or less, borrowers do not have to submit documentation proving a 25% decrease in revenue at the time of the loan application. However, the information does have to be submitted on or before the borrower submits an application for loan forgiveness and the lender will confirm the dollar amount and percentage of the borrower’s revenue reduction by performing a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning the borrower’s revenue reduction. Lenders should consider the operational burdens of having to collect and confirm this information at a later time and the risks associated with borrowers who are unable to provide such documentation.

Please note that the list is not intended to be comprehensive, but only represents some of the broader general considerations as of Jan. 8.

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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