Through the Paycheck Protection Program (“PPP”), which was authorized by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), banks certified as 7(a) lenders by the U.S. Small Business Administration (“SBA”) have issued more than 5.1 million loans, totaling more than $523 billion. Now that the PPP has closed on August 8, 2020, many borrowers are ready to seek loan forgiveness.
In anticipation of that process, SBA has issued two loan forgiveness application forms, an “EZ” short form and a long form. Both forms are accompanied by detailed instructions, and SBA has issued a series of interim final rules to address the loan forgiveness process. On August 4, 2020, SBA also issued new Frequently Asked Questions specifically focused on PPP Loan Forgiveness (“FAQs”). While the FAQs largely mirror information contained in the loan forgiveness application instructions or the interim final rules, the information is presented in a more ”user-friendly” format and may serve as a useful reference guide for borrowers.
Although SBA has made it clear that borrowers may apply for loan forgiveness once they have spent their loan proceeds, many banks are only just beginning to accept loan forgiveness applications. Further, because it remains possible that PPP loans below a certain threshold may be converted to grants, we are aware that some banks are delaying acceptance of loan forgiveness applications altogether, even though SBA has indicated via a Procedural Notice issued on July 23, 2020 that its portal – which banks will use to transmit forgiveness decisions for review – would open on August 10, 2020. Finally, of course, future action by Congress could result in additional changes to the program, including even possibly eliminating the need for certain companies with small PPP loans to apply for loan forgiveness altogether. Although uncertainty remains, this Client Alert summarizes key aspects of the existing loan forgiveness guidance and addresses other issues that borrowers may wish to consider as they prepare to seek loan forgiveness.
Considerations Before Applying for Loan Forgiveness
1. The Basics
Following passage of the Paycheck Protection Program Flexibility Act (the “Flexibility Act”) on June 5, 2020, a borrower must show that it spent 60% of its forgiveness amount on payroll costs in order to receive loan forgiveness. Remaining funds must be spent on certain non-payroll costs, such as rent and mortgage obligations and utility payments.
The Flexibility Act also extended the Covered Period for use of funds to 24 weeks (up from the original 8-week Covered Period), in an effort to give borrowers more time to spend PPP funds and to qualify for loan forgiveness. Eligible expenses generally will be forgiven if they were paid during the Covered Period (even if incurred before the Covered Period), or were incurred during the Covered Period, and paid on or before the next regular payroll or billing date after the Covered Period ends. PPP loan recipients should carefully track their use of loan proceeds in light of these spending guidelines.
2. When to Apply
Borrowers can apply for loan forgiveness any time on or before the maturity date of the loan—including before the end of their Covered Period—if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. Thus, borrowers who: (a) have spent all of their loan proceeds, and (b) will not be subject to reductions in their loan forgiveness amounts due to reductions in full-time equivalent employees (“FTE”) or salary/wage cuts, should generally plan to apply for loan forgiveness sooner rather than later.
However, borrowers who need time to cure workforce reductions, or who are still spending their loan proceeds, should wait to apply for loan forgiveness. That is because borrowers who apply for loan forgiveness before the end of their Covered Period will be required to “carry forward” any reductions to salaries or wages in excess of 25 percent for the entire Covered Period. Thus, borrowers who have made such wage reductions should attempt to cure those reductions before applying for loan forgiveness. That said, once a borrower’s Covered Period has ended, it should begin preparing to apply for loan forgiveness, as borrowers who fail to seek loan forgiveness within 10 months after the last day of their Covered Period must begin paying principal and 1% interest on their loans.
Notably, it does not appear that there are any requirements that a borrower maintain employees or wage levels after applying for loan forgiveness. Thus, it appears that a borrower who needs to make reductions to its workforce or wages after submitting a loan forgiveness application may do so.
3. Safe Harbors and Exceptions
In determining when to apply for loan forgiveness, borrowers should also consider whether they have satisfied the PPP’s safe harbors and exceptions for certain workforce reductions.
First, a borrower generally will not have its loan forgiveness amount reduced due to a reduction in FTE if the borrower made a good-faith, written offer to rehire an individual who was an employee on February 15, 2020 and was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. Notably, SBA’s August 4, 2020 FAQs state that 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. These FAQs further indicate that borrowers should maintain documentation regarding: (a) the written offer to rehire an individual, (b) a written record of the offer’s rejection, and (c) a written record of efforts to hire a similarly qualified individual.
Similarly, a borrower will not be penalized if it made a good-faith, written offer to restore any reduction in hours, at the same salary or wages, during the Covered Period (or the Alternative Covered Period) and the employee rejected the offer. Borrowers also will not be penalized for FTE reductions if, during the Covered Period or the Alternative Payroll Covered Period, the borrower (a) fired an employee for cause, (b) the employee voluntarily resigned, or (c) the employee voluntarily requested and received a reduction of their hours. Borrowers must maintain documentation regarding these exceptions.
Safe harbors preventing a reduction in loan forgiveness are also available for borrowers who were unable to operate between February 15, 2020 and the end of their Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19. Copies of the applicable requirements for each borrower location and relevant financial records supporting this certification must be maintained.
Finally, if a borrower cured FTE reductions made between February 15, 2020 and April 26, 2020 either by the date the loan forgiveness application is submitted or by December 31, 2020, its loan forgiveness amount will not be reduced. On this point, there is some uncertainty for borrowers who replaced employees with contract workers. Although the existing guidance indicates that contract workers are not “employees” for purposes of the initial PPP application process, it remains unclear whether borrowers who hired and paid contract workers after receiving a loan will receive forgiveness for those amounts. To date, SBA has not issued guidance on this issue.
4. Documentation Requirements
With their applications for loan forgiveness, borrowers must submit a variety of documents substantiating their use of PPP funds. The loan forgiveness application instructions contain examples of the documents that must be submitted. Moreover, as referenced above, certain other documents must be maintained for six years after the date the loan is forgiven or repaid in full (but need not be submitted with the loan forgiveness application itself). Borrowers should consult the documentation requirements now, to ensure that they are able to compile and maintain appropriate documentation at the time of loan forgiveness and beyond.
After the Application
After receiving a complete loan application from the borrower, the bank must notify SBA of its decision within 60 calendar days. The bank may decide to approve the loan forgiveness application in whole or in part; to deny the request in full; or, if directed by SBA, to issue a denial without prejudice due to a pending SBA review of the loan. After the bank submits its decision, SBA has 90 calendar days to issue its own decision. Borrowers may also request a separate SBA review of a bank’s decision to deny loan forgiveness in full. SBA has announced that it will soon issue guidance about the “appeals process” for these decisions. With the review process now about to open, we expect to soon learn more about how smoothly the process will go, and whether banks and SBA can comply with their allotted timeframes, given the extraordinary volume of loans (more than 5.1 million) at issue.
We encourage PPP loan recipients to engage legal counsel and other advisors to assist with the loan forgiveness process.