On October 7, 2020, the Small Business Administration and Treasury Department updated their Frequently Asked Questions on the Paycheck Protection Program with FAQ 52. As reflected in the question, the PPP Flexibility Act made certain changes to the terms of loans made under the Paycheck Protection Program, including an extension of the deferral period before any payments would be required. FAQ 52 confirms that these changes automatically applied to all outstanding PPP loans, and that lenders are required to give immediate effect to the statutory extension. While no formal modification of the promissory note is required (thus avoiding any need to re-execute the promissory note or an amendment), the FAQ provides that lenders “should” give notice to borrowers of the changes caused by the PPP Flexibility Act.
As the changes of the PPP Flexibility Act were 100% in the favor of the borrower, this is consistent with the approach that Bryan Cave Leighton Paisner LLP recommended to PPP lenders in advance of the publication of the new FAQ. In addition to the extension of the deferral period, the PPP Flexibility Act also provided for a permissible extension of the covered period for potential forgiveness from 8-weeks to 24-weeks, and a reduction in the percentage of forgiveness that must be used for payroll expenses.
In our preparation of PPP Flexibility Act notices for clients, we have found that in addition to notifying the borrowers specifically about the extension of the payment deferral, frequently updates regarding the first payment date, the number of payments, and the monthly payment amount are appropriate. In light of the variability of the extension of the deferral period, we have generally found the best practice to be to indicate that the payment amounts and payment dates will be provided following completion of the PPP forgiveness determination (or 10 months after the end of the covered period if no forgiveness application is submitted). Some promissory notes also referenced pre-PPP Flexibility Act requirements with regard to the length of the covered period and/or an obligation to spend 75% of the PPP note on payroll costs; we believe these changes should also be given automatic effect, but with courtesy notice to the borrower.
The PPP Flexibility Act also permitted, but did not require, the extension of the maturity date from two years to five years, with the consent of the PPP borrower and lender. As such a change requires the mutual consent of the borrower and lender, this change would not be automatically effective. In the event a borrower and lender desired to extend the maturity date of a PPP loan to five years, we believe a formal modification of the PPP promissory note would be required.