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Alerts and Updates

Economic Aid Act Brings Further Changes to Paycheck Protection Program and Loan Forgiveness Time Frames

January 29, 2021

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Borrowers now have the ability to choose the covered period in which to use their PPP loan proceeds. 

On January 19, 2021, the Treasury Department and Small Business Administration (SBA) released an interim final rule discussing changes to the Paycheck Protection Program (PPP) loan forgiveness requirements and loan review process as amended by the Economic Aid Act signed into law on December 27, 2020. Many of the changes discussed have been addressed in our previous Alert. The interim final rule discusses a variety of topics, primarily summarizing changes made to the PPP loan forgiveness requirements and loan review process and restating the regulations issued pursuant to the CARES Act and Paycheck Protection Program Flexibility Act. This Alert discusses 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

  • For second-draw PPP loans in excess of $150,000, borrowers must submit their first-draw PPP loan forgiveness application before or together with the second-draw PPP loan forgiveness application, even if the calculated forgiveness amount on the first-draw PPP loan is zero.
  • Borrowers now have the ability to choose the covered period in which to use their PPP loan proceeds. As long as the selected covered period is between eight and 24 weeks following disbursement of a first-draw or second-draw PPP loan, borrowers now have increased flexibility to choose their own covered periods. Note that covered periods for first-draw and second-draw loans cannot overlap.
  • The SBA may review any PPP loan at any time, and therefore borrowers should carefully and promptly respond to any request for information from the SBA. Unfortunately, there is no affirmative statement of the time for that review period. For borrowers with loans in excess of $2 million, the SBA may require the borrower to submit Form 3509 (for-profit) or Form 3510 (nonprofit) as part of the review process. A borrower will still have the opportunity to appeal any SBA determination regarding the amount of the loan forgiveness.

Expenditures Eligible for Forgiveness

Eligible Payroll and Nonpayroll Costs

As discussed in our previous Alert, the Economic Aid Act expanded the categories of nonpayroll costs eligible for forgiveness to include certain business-related software, property damage repair, supplier and worker protection costs. The other categories of eligible nonpayroll costs include mortgage interest, rent and business utility payments incurred pursuant to mortgage, lease and utility service agreements, respectively, in effect prior to February 15, 2020.

Payroll costs eligible for forgiveness have remained unchanged since the CARES Act originally passed and remain subject to a maximum of $100,000 in total compensation per employee on an annualized basis. Examples of eligible payroll costs are discussed in under the subheading “Amount of PPP Loan Eligible for Forgiveness” in our previous Alert.

Loan Forgiveness Amounts

Borrowers with PPP loans of $50,000 or less―other than borrowers that together with their affiliates received first-draw PPP loans totaling $2 million or more or second-draw PPP loans totaling $2 million or more―are exempt from reductions in the loan forgiveness amount based on reductions in headcount or reductions in employee salaries or wages that would otherwise apply.

Loan Forgiveness Process

The loan forgiveness process remains largely unchanged, except for the requirement that borrowers receiving second-draw PPP loans must apply for forgiveness on their first-draw PPP loans either before or together with their second-draw PPP loans.

Lender responsibilities have largely remained unchanged since our previous Alert discussing lender responsibilities. Lenders are entitled to rely on the documents and representations discussed in our previous Alert discussing changes to the PPP following passage of the Economic Aid Act.

Documentation and Certification Requirements for Second-Draw Loans

Generally, borrowers receiving PPP loans of $150,000 or less should use SBA Form 3508S, and will not be required to submit any additional application or documentation. However, for borrowers of PPP second-draw loans of $150,000 or less, who are applying for forgiveness on Form 3508S, must, before or at the time of application for loan forgiveness, submit sufficient documentation to show that they experienced the reduction in revenue that created the need for the PPP second-draw loan, unless such documentation was submitted when borrowers applied for their second-draw PPP loans.

Additionally, for second-draw PPP loans in excess of $150,000, borrowers must certify on their loan forgiveness applications that all first-draw PPP loan amounts were used on eligible expenses prior to disbursement of the second-draw PPP loan.

Documentation Requirements for Certain Government Employees

For first-draw PPP loans made prior to December 27, 2020, if the president, vice president, head of any executive department or any member of Congress of the United States (including any spouses of any such person) directly or indirectly holds a controlling interest[1] in a borrower on the date of a PPP loan application, the borrower must make certain disclosures set forth on SBA Form 3508D. This form must be submitted no later than 30 days after the PPP application has been submitted, unless such borrower already submitted a loan forgiveness application, in which case the form should have been submitted by January 26, 2021.

Note that an entity is prohibited from receiving a PPP loan after December 27, 2020, if the controlling interest is held by one of the individuals listed above.

SBA Reviews of Individual PPP Loans

The SBA may review any PPP loan, specifically to determine (i) whether the borrower was eligible to receive the loan, including the necessity certification, (ii) whether the amount of the loan and use of the loan are in accordance with the applicable laws and rules, and (iii) the amount of loan forgiveness claimed on a loan forgiveness application.

Note that the SBA has the authority to review any loan at any time at the administration’s discretion. Borrowers should promptly respond to any SBA inquiries as any failure to respond may result in a determination of ineligibility for PPP loans or loan forgiveness. If a borrower is required to submit a Form 3509 or Form 3510, it will only have 10 days to complete and submit the form. Borrowers with loans in excess of $2 million should be prepared to submit the applicable form and should begin gathering the relevant information in order to comply with the 10-day deadline.

If the SBA determines that a borrower’s first PPP loan was ineligible and/or violated the applicable rules, that borrower’s second-draw PPP loan may also be deemed ineligible.

About Duane Morris

Duane Morris has created a COVID-19 Strategy Team to help organizations plan, respond to and address this fast-moving situation. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage. 

For More Information

If you have any questions about this Alert, please contact Nanette C. Heide, Stephen Morrissey, Mark Zhuang, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are regularly in contact.

Notes

[1] Note that a controlling interest means controlling or holding 20% or more, by vote or value, of the outstanding amount of any class of equity interest.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.