Just as the federal government’s approach to the coronavirus is dynamic and evolving, so are the rules for small business loans made in response to the pandemic. On June 11 and June 12, 2020, the Small Business Administration (SBA) issued two revisions to the First Interim Final Rule, which was originally posted on the Treasury and SBA websites on April 2, 2020 and published in the Federal Register on April 15, 2020 (85 Fed. Reg. 20,811). The revised Interim Final Rule also provided guidance related to the Paycheck Protection Program Flexibility Act (PPPFA) signed into law on June 5, 2020.
Below is a summary of key changes to the PPP following revisions to the First Interim Final Rule.
Covered Period for PPP Loans
- The PPPFA and the June 11 Rule extended the “covered period” for the program from Feb. 15, 2020 through Dec. 31, 2020. This covered period applies to the general program, and not the covered period for forgiveness, which is outlined below. A borrower whose loan was made before June 5 may elect to apply the original 8-week covered period instead of the new 24-week covered period.
- Rehiring of furloughed or laid off employees must occur before the end of the covered period, Dec. 31, 2020 to be eligible for forgiveness.
- The PPPFA and the June 11 Rule also amended the covered forgiveness period to spend PPP funds on payroll costs to 24 weeks after the disbursement of PPP funds. This is a change from the First Interim Final Rule’s 8-week period.
- SBA is still only authorized to guarantee and issue funds through June 30, 2020, absent a further act of Congress. Therefore, potential borrowers should apply before June 30, 2020.
- Full loan forgiveness is available under the June 11 Rule for those who use 60% of PPP funds on payroll costs and 40% of funds on allowable nonpayroll costs.
- The June 11 Rule states that partial forgiveness is available if allowable costs do not meet that percentage.
- A borrower who submits their loan forgiveness application within 10 months after the end of their covered period will not have to make payments of principal or interest on their PPP loan.
- Borrowers should expect SBA to release additional rules on the PPP programs, including loan forgiveness and loan review procedures.
- A streamlined loan forgiveness application is also expected.
Forgivable Uses of Funds
- The June 11 Rule includes uses of PPP funds eligible for forgiveness as payroll costs, continuation of health and leave benefits, mortgage interest payments, rent payments, utility payments, interest on debt obligations incurred prior to Feb. 15, 2020, and the refinance of Economic Injury Disaster Loans (EIDL) made between Jan. 31, 2020 and April 3, 2020 if used for payroll costs.
- If you received an EIDL advance of up to $10,000 (which is a grant that does not need to be paid back) then you must deduct that from the PPP loan forgiveness amount.
- The June 11 Rule revises the ratio of allowable payroll/nonpayroll costs to require that at least 60% of funds be used to cover payroll costs. Not more than 40% of funds may be used for nonpayroll costs to receive full forgiveness.
- Partial forgiveness is available where funds were used for allowable costs but exceed 40% of nonpayroll costs.
Maturity Date for PPP Loans
- The maximum maturity for a PPP loan is 10 years. However, SBA set the maturity for a PPP loan at two years in the First Interim Final Rule.
- The June 11 Rule alters the minimum maturity to five years for loans issued after June 5, 2020.
- According to an SBA press release, borrowers with loans issued prior to June 5, 2020 may extend the maturity date of a PPP loan if the lender agrees.
Deferral Period for PPP Loans
- Under the June 11 Rule, in order for a borrower to receive deferral on all payments and interest on a PPP loan, they should submit a loan forgiveness application within 10 months after the forgiveness period.
- The PPP funds must be used for payroll costs in the 24 weeks following loan disbursement. However, a borrower who received a loan before June 5, 2020 may elect for an 8-week period beginning on the loan disbursal date.
- Lenders are required to notify borrowers of the amount of forgiveness and the payment schedule for any remaining amounts due.
- If a borrower does not submit a forgiveness application within 10 months, the borrower will need to start paying principal and interest.
- The June 11 Rule also emphasizes that borrowers must certify the funds will be used in an effort to retain workers and other allowable uses. Only 40% of funds may be used for nonpayroll costs.
- Liability for fraud may arise if a borrower knowingly fails to use the funds for an authorized purpose.
- Borrowers must also certify that they will provide documentation to verify full-time-equivalent employees, payroll costs, and other allowable costs.
- Loan forgiveness amounts will be given pursuant to these documented costs, however, the forgiven amount will not allow for more than 40% of nonpayroll costs. Therefore, partial forgiveness is available if allowable costs do not meet that percentage.
- The unforgiven portion of the PPP funds will be a loan.
New Rule on Increased Eligibility
- The First Interim Final Rule prohibited applicants who committed a felony within the last five years; the June 12 Rule revises this.
- The new rule issued June 12 loosens restrictions on owners with a 20% stake or more with a criminal history. An owner with a criminal history may be eligible so long as they are not currently incarcerated, on probation, on parole, or subject to an ongoing criminal proceeding.
- Additionally, any conviction in the last five years for felony fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance, or in the last year for any felony will not be eligible.