Alerts and Updates

Business Loan Program Changes and PPP First-Draw Loan Terms as Amended by Economic Aid Act

January 12, 2021

On January 11, 2021, applications opened for first-draw PPP loans to applicants applying for loans through community financial institutions on Form 2483.

On January 6, 2021, the Treasury Department released an interim final rule discussing changes to the Business Loan Program and the Paycheck Protection Program (PPP) as amended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act) signed into law on December 27, 2020. Many of the changes have been addressed in our previous Alert. The interim final rule covers a variety of topics, primarily summarizing changes made to the PPP loan program in the text of the Economic Aid Act and restating the regulations issued pursuant to the CARES Act and Paycheck Protection Program Flexibility Act. This Alert outlines the key takeaways from the interim final rule and provides a list of the changes that will affect both PPP borrowers and PPP lenders following passage of the Economic Aid Act.

Key Takeaways

  • First-draw PPP loans will be eligible for loan forgiveness. To be eligible for forgiveness of the entire PPP loan, borrowers must use least 60% of the PPP loan for payroll costs, including certain benefits, and avoid reducing headcount below the levels set forth in previous guidance.
  • To better serve underserved communities and smaller businesses, at least $15 billion has been set aside for first-draw PPP loans to borrowers with a maximum of 10 employees or for loans of $250,000 or less in low- or moderate-income neighborhoods. To accomplish this goal, community financial institutions have an exclusive window before all other lenders in accepting and processing PPP loan applications.
  • PPP borrowers can now use their PPP loan funds on several new categories of permitted nonpayroll expenses (see below).
  • The maximum amount a borrower can borrow is the lesser of (i) $10 million or (ii) 2.5 times the average monthly payroll costs in 2019 or 2020 (applying the $100,000 annual compensation limit).
  • As with PPP loans in the past, borrowers can choose either an eight-week or 24-week covered period in which to use their PPP loans.
  • Existing PPP borrowers who did not receive loan forgiveness by December 27, 2020, may (1) apply for first-draw loans if they previously returned some or all of their first-draw PPP loan funds or (2) request to modify their first-draw PPP loan amount if they did not accept the full amount for which they were eligible.
  • Expenses paid for with PPP loan proceeds are tax deductible (reversing the IRS position).

First-Draw PPP Loans

On January 11, 2021, applications opened for first-draw PPP loans to applicants applying for loans through community financial institutions on Form 2483. Second-draw loans will not begin processing until January 13, 2021, on Form 2483-SD. There will be approximately $284.5 billion available for first-draw PPP loans, and all applicants can apply for PPP loans until March 31, 2021, through any existing SBA 7(a) lender or through any federally insured depository institution, credit union, eligible nonbank lender or Farm Credit System institution participating in the PPP.

One of the key features of the first-draw PPP loans is that the SBA has made a concerted effort to assist borrowers in underserved and disadvantaged communities by allocating at least $15 billion to (1) eligible borrowers employing no more than 10 employees and (2) loans of $250,000 or less to eligible borrowers in low- or moderate-income neighborhoods. To facilitate this process, SBA started accepting loan applications from community financial institutions on January 11, 2021, before giving access to all participating lenders.

Like the PPP loans under the CARES Act and PPP Flexibility Act, first-draw PPP loans are available to eligible small entities that, together with their affiliates, have 500 or fewer employees (unless they meet the applicable size threshold for their industry)―including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships and independent contractors.

Additionally, first-draw PPP loans are eligible for total forgiveness provided that borrowers (1) maintain employee and compensation levels; (2) spend loan proceeds on payroll costs and the eligible nonpayroll costs discussed below; and (3) spend at least 60% of the loan proceeds on payroll costs over the eight- or 24-week covered period following loan disbursement.

As mentioned above, existing PPP borrowers that did not receive loan forgiveness by December 27, 2020, have the option of (1) reapplying for first-draw PPP loans if they previously returned some or all of their first-draw PPP loan funds or (2) requesting modification to their first-draw PPP loan amounts if they did not previously accept the full amount for which they were approved.

Updates for Borrowers

While a significant portion of the guidance regarding PPP loan eligibility discussed in previous Alerts has remained the same, the interim final rule introduced the following:

New Entities Eligible for PPP Loans

News organizations employing 500 or fewer employees per physical location or otherwise meeting the applicable SBA size standard, 501(c)(6) organizations and destination marketing organizations are now eligible for first-draw PPP loans.

New Eligible Nonpayroll Costs

In addition to mortgage interest, rent, utility and other interest payments, PPP borrowers can now use their PPP loans to pay for the following nonpayroll costs:

  1. Covered operating expenditures, meaning business software or cloud computing services used to facilitate business and human resource operations;
  2. Covered property damage, meaning costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 not otherwise covered by insurance;
  3. Covered supplier costs, meaning expenditures for goods that are both essential to the borrower’s operations at the time of the expenditure and made pursuant to a contract or purchase order in effect at any time before the covered period of the loan or, with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan; and
  4. Covered worker protection, meaning costs incurred to comply with federal, state and/or local guidance on containing the COVID-19 pandemic, such as ventilation and filtration systems, physical barriers (i.e., sneeze guards), face masks, expansion of indoor and outdoor spaces and other necessary worker protection measures.

Loan Forgiveness Updates

The SBA promises to release further guidance separately to clarify the loan forgiveness process and review. In the interim final rule, three changes were made:

  1. Economic Injury Disaster Loans (EIDL) advances are no longer deducted from a borrower’s forgiveness amount.
  2. PPP borrowers can select a covered period that ends anywhere between eight weeks and 24 weeks after loan disbursement, rather than either eight weeks or 24 weeks.
  3. PPP borrowers with loan amounts of $150,000 or less will be able to submit a one-page forgiveness application, which will require certain certifications. This form is to be available on January 20, 2021.

Persons and Activities Excluded from PPP Loan Eligibility

A borrower is prohibited from using PPP loan proceeds for lobbying activities. Top executive branch officials (including the president, vice president and heads of administrative agencies) in addition to members of Congress and their family members cannot directly or indirectly hold a controlling interest in a borrower.

Calculating Maximum PPP Loan Amounts for Seasonal Businesses

The interim final rule added a new calculation for seasonal employers to calculate the maximum PPP loan amounts they can borrow. Seasonal employers are defined as businesses operating seven or fewer months in any calendar year or, if during the preceding calendar year, it had gross receipts for any six months that were not more than 33.33% of the gross receipts for the other six months of that year. A seasonal employer must determine its maximum loan amount by using the employer’s average total monthly payments for payroll or any 12-week period selected by the seasonal employer beginning February 15, 2019, and ending February 15, 2020.

Updates for PPP Lenders and Borrowers

Interest Rates

Interest on PPP loans made on or after December 27, 2020, will bear interest at 1%, calculated on a noncompounding, nonadjustable basis. This is the default amount for loans made on or after December 27, 2020―but for loans made before December 27, 2020, lenders and borrowers may mutually agree to apply the new interest terms.

Agent Fees

The SBA reiterated that agent fees may not be paid out of the proceeds of a PPP loan. Borrowers that knowingly retained an agent to assist in the application process must pay such fees themselves. Lenders are responsible for fees to agents for services for which the lender directly contracts with the agent. Maximum fees payable to agents by lenders may not exceed (1) 1% for loans of $350,000 or less; (2) 0.5% for loans between $350,000 and $2 million; and (3) 0.25% for loans of $2 million or greater.

Seasonal Employers

If a seasonal employer received a PPP loan before December 27, 2020, and would be eligible for a higher maximum loan amount under Section 336 of the Economic Aid Act, the lender may electronically process a request through the SBA’s E-Tran Servicing site to increase the seasonal employer’s PPP loan amount even if the loan has already been fully disbursed and even if the lender has already submitted SBA Form 1502 with respect to that loan. The increased loan amount may not exceed the maximum PPP loan amount of $10 million for an individual borrower or $20 million for a corporate group. Additionally, the seasonal employer must provide the lender with required documentation to support the calculation of the increase.

Updates for PPP Lenders

In addition to the existing requirements imposed on PPP lenders, discussed in a previous Alert, the interim final rule created or modified several new requirements applicable to PPP lenders.

SAM.gov Registration

PPP lenders should note that they will have 30 days from the date of the first PPP loan disbursement made by them after December 27, 2020, to complete System for Award Management (SAM) registration and provide their unique entity identifier to the SBA. SAM.gov is the website maintained by the federal government that is required for entities doing business with the federal government.

Underwriting Requirements

The SBA confirmed that lenders may rely on any certification or documentation provided by applicants for PPP loans that (1) is submitted pursuant to all applicable statutory and regulatory requirements for PPP loans and (2) attest that the applicant has accurately provided the certification or documentation to the PPP lender in accordance with the applicable statutory and regulatory requirements for PPP loans. Lenders that rely on such PPP applicant certification or documentation will not be subject to enforcement actions or penalties relating to PPP loan forgiveness or origination, if (1) the lender acted in good faith relating to PPP loan origination or forgiveness and (2) all other relevant federal, state, local and other requirements applicable to the lender are satisfied with respect to the PPP loan.

Reporting Disbursements on PPP Loans Approved for Increases Under Economic Aid Act

For PPP loans that are approved for loan amount increases, lenders must submit SBA Form 1502 within 20 calendar days after a PPP loan increase is approved following the reporting process in SBA Form 1502.

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