On May 15, 2020, the Small Business Administration (SBA) and Department of Treasury released the long-awaited application pertaining to the Paycheck Protection Program’s (PPP) loan forgiveness. In a May 18, 2020 alert, we identified several key takeaways and noted the SBA’s intent to issue further guidance to assist borrowers as they complete the application. As promised, the SBA issued two interim final rules on May 22, 2020 providing additional guidance on both the application and the process to obtain forgiveness. We have highlighted several key points from these rules below.
Decisions Regarding Forgiveness; SBA’s Loan Review Procedures
For loans not subject to review by the SBA, the forgiveness process could take up to 5 months and even longer for loans reviewed by the SBA. After a borrower submits a complete application for forgiveness to its lender, the lender has 60 days to review the application and submit its decision to the SBA. In making its determination, the interim final rule requires the lender to confirm receipt of the borrower certifications contained in the loan forgiveness application, confirm receipt of documentation verifying payroll and nonpayroll costs – as specified in the loan forgiveness application instructions – and confirm the borrower’s calculations on the loan forgiveness application including by reviewing the documentation submitted with the application. The lender’s decision may take the form of an approval, in whole or in part; a denial; or if directed by the SBA, a “denial without prejudice” due to a pending SBA review of the loan. The guidance indicates that any unforgiven amount must be repaid on or before the two-year maturity of the loan, although borrowers should carefully review their loan documents to determine the specific repayment requirements imposed by its lender. A borrower may request that the SBA review a lender’s decision denying forgiveness within 30 days of receiving the denial notice from the lender. The SBA then, subject to any SBA review of the loan or loan application, has up to 90 days to remit the appropriate forgiveness amount to the lender.
As indicated on the loan forgiveness application, the audit threshold is based on whether the borrower, together with its affiliates, received PPP loans with an original principal amount in excess of $2 million. This new interim final rule also confirms that the SBA may review a PPP loan of any size – regardless of whether a forgiveness application has been submitted – at any time in its discretion. For example, the SBA may review a loan if the loan documentation submitted to the SBA by the lender or any other information indicates that the borrower may be ineligible for a PPP loan, or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower. If the SBA reviews a PPP Loan, the SBA will notify the lender in writing and the lender is required within five (5) business days to notify the borrower in writing of receipt and to provide certain information to the SBA including the loan application, the forgiveness application, and all supporting documentation. If the SBA determines that a borrower was ineligible for the PPP loan, was ineligible for the PPP loan amount obtained or for the loan forgiveness amount claimed, the SBA will direct the lender to deny the loan forgiveness application in whole or in part, as appropriate. The SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.
The borrower may appeal the SBA’s determinations, and the SBA has indicated that it intends to issue a separate interim final rule addressing this appeal process. The interim final rule does not impose a time frame on the SBA for its review of any PPP Loan.
Additional Clarification on Payroll Costs Eligible for Forgiveness
In general, payroll costs paid or incurred during the eight consecutive week covered period (whether the “covered period” or “alternative payroll covered period”) are eligible for forgiveness. The loan forgiveness application – and now this interim final rule – explain when payroll costs are “paid” and when they are “incurred” under these available covered periods. The SBA has further clarified that:
Details of Exemption From Loan Forgiveness Reduction Calculation for Employees Rejecting Offer of Rehire or Restoration
Although the CARES Act requires a reduction in a borrower’s loan forgiveness amount for a reduction in the number of full-time equivalent employees (FTEs) – now defined as employees who work 40 hours or more, on average, each week – the SBA previously announced that employees whom the borrower offered to rehire are generally exempt from the loan forgiveness reduction calculation. The new interim final rule extends this exemption if a borrower previously reduced the hours of an employee and offered to restore the employee’s hours at the same salary or wages. In calculating the loan forgiveness amount, a borrower may exclude any reduction in FTE headcount that is attributable to an individual employee if:
The SBA has noted that further information regarding how borrowers will report information concerning rejected rehire offers to state unemployment insurance offices will be provided on the SBA’s website.
Additional Forgiveness Guidance
Some additional highlights from the SBA’s interim final rule include: