Note that borrowers who received PPP loans before the PPP Flexibility Act was signed into law also have the option to seek loan forgiveness over the original eight-week period.
On June 11, 2020, the Treasury Department and Small Business Administration (SBA) released a new interim final rule, which revises the earlier interim final rule released on April 2, 2020, and incorporates revisions to the Paycheck Protection Program (PPP) under the Paycheck Protection Program Flexibility Act signed into law on June 5, 2020.
While the new interim final rule largely restates the provisions of the PPP Flexibility Act (as summarized in our prior Alert), the SBA has clarified that the requirement for borrowers to spend at least 60% of their loan forgiveness amount on payroll costs is not a complete bar to loan forgiveness. Instead, borrowers will have their loan forgiveness amounts reduced proportionally if payroll costs amount to less than 60% of the loan proceeds spent during the loan forgiveness period. In addition, the loan forgiveness period has now been extended to the earlier of (i) 24 weeks from the date of the first disbursement of the loan or (ii) December 31, 2020. Note that borrowers who received PPP loans before the PPP Flexibility Act was signed into law (June 5, 2020) also have the option to seek loan forgiveness over the original eight-week period.
Expansion of Covered Period for PPP Loans
The new interim final rule restates the provision in the PPP Flexibility Act that changes the “covered period” for PPP loans from the period between February 15, 2020, and June 30, 2020, to the period between February 15, 2020, and December 31, 2020. Note that this “covered period” is different than the loan forgiveness period and relates to items such as the use of PPP loans, eligibility for PPP loans and other requirements.
Maturity Date for PPP Loans
Under the PPP Flexibility Act, the minimum maturity for PPP loans made on or after the date of the bill’s passage is five years. The new interim final rule provides that for any PPP loans made before June 5, 2020, the maturity is two years, as originally provided for under the Coronavirus Aid, Relief and Economic Security Act (CARES Act). However, the interim final rule also provides that borrowers and lenders may mutually agree to extend the maturity of loans made before June 5, 2020, to five years. For loans made on or after June 5, 2020, the maturity is five years.
The new interim final rule also discusses the fact that while the CARES Act provides that a PPP loan will have a maximum maturity of up to 10 years from the date the borrower applies for loan forgiveness, the SBA and Treasury Department have determined that a five-year loan term is sufficient “in light of the temporary economic dislocations caused by the coronavirus.”
Extension of Deferral Period and Loan Forgiveness Application Period
Under the PPP Flexibility Act, borrowers are now eligible for deferrals on payments of principal, interest and fees on their PPP loans until the date on which their PPP loan forgiveness amounts are remitted to their lenders.
The new interim final rule provides that if a borrower submits a loan forgiveness application within 10 months after the end of the loan forgiveness period, that borrower will not have to make any payments of principal or interest on its PPP loan before the date that the SBA remits the loan forgiveness amount to the borrower’s lender. If a borrower does not submit its loan forgiveness application within 10 months after the end of the loan forgiveness period, that borrower must immediately begin paying principal and interests on the PPP loan.
Expansion of Loan Forgiveness Eligibility Period and 60/40 Rule
The PPP Flexibility Act, as discussed in our prior Alert, extends the loan forgiveness period to use the loan proceeds and be eligible for loan forgiveness to the earlier of (i) 24 weeks from the date of the first disbursement of the PPP loan or (ii) December 31, 2020. In addition, the prior requirement that borrowers must use 75% of loan proceeds eligible for forgiveness for payroll costs and only 25% for nonpayroll costs now instead requires borrowers to use 60% of the loan proceeds eligible for forgiveness for payroll costs and 40% for nonpayroll costs. However, as discussed below, failure to follow the 60/40 rule is not a complete bar to forgiveness.
The new interim final rule explains that while the PPP Flexibility Act provides for the revised 60% threshold for payroll costs, the SBA and Treasury Department interpret the 60/40 rule as a “proportional limit on nonpayroll costs” as a portion of the loan forgiveness amount, and not as a hard threshold that determines whether a borrower receives any loan forgiveness. The SBA and Treasury Department state that this interpretation, which allows borrowers to apply for and receive loan forgiveness even if they do not meet the 60% threshold for payroll costs, is consistent with the PPP Flexibility Act as well as the prior rules and regulations released by the SBA.
As an illustration of the 60/40 rule, the new interim final rule contains this example: If a borrower receives a $100,000 PPP loan, and during the loan forgiveness period the borrower spends $54,000 (or 54%) of its loan on payroll costs, then the maximum amount of loan forgiveness the borrower may receive is $90,000, with $54,000 in payroll costs equal to 60% of the loan forgiveness amount and $36,000 in nonpayroll costs constituting 40% of the forgiveness amount.
In line with this example, borrowers should expect a proportional reduction in their loan forgiveness amount if they do not spend 60% on eligible payroll costs during the loan forgiveness period. While spending 60% will allow borrowers to receive their maximum amount of loan forgiveness, borrowers unable to spend 60% on payroll will remain eligible for loan forgiveness.
In addition, the new interim final rule states that the SBA will be issuing new rules on loan forgiveness and loan review procedures in light of the PPP Flexibility Act.
Use of PPP Loan Proceeds
The new interim final rule provides that PPP loan borrowers must use at least 60% of their total PPP loan proceeds for payroll costs, confirming that the 60/40 rule applies not only to the forgiveness amount but also the entire loan. The SBA explains that this 60% threshold for the entirety of the PPP loan is consistent with Congress’ “overarching goal of keeping workers paid and employed.” This limitation is also consistent with the 60% threshold in the context of loan forgiveness. However, the SBA has not yet released guidance on the 60% threshold and its interplay with the loan forgiveness provisions, particularly the 60/40 rule. For now, borrowers should plan on spending 60% of the total PPP loan proceeds on payroll costs over the entire life of the loan.
Borrowers should prepare the proper documentation underlying the payment of 60% of total PPP loan proceeds for payroll costs, particularly for borrowers with PPP loans in excess of $2 million, which will be audited automatically by the SBA.
Revisions to Borrower Certifications
The new interim final rule revises the certifications required from borrowers in order to sync with the provisions of the PPP Flexibility Act. The certifications are revised to contemplate, among other items, the 60/40 rule for loan forgiveness.
Revised Eligibility for PPP Loan
The new interim final rule revises eligibility criteria for any borrower with an owner of 20% or more of its equity who has been convicted of a felony. The interim final rule released on April 2, 2020, provided that a borrower will not be approved for a PPP loan if an owner of 20% or more of its equity has been convicted of a felony within the last five years. The SBA has considerably narrowed the prohibition in the new interim final rule. A borrower will not be approved for a loan if such owner (i) is subject to an indictment, criminal information, arraignment or other means by which formal criminal charges are brought in any jurisdiction, (ii) has been convicted of a felony involving fraud, bribery, embezzlement or a false statement in a loan application or an application for federal financial assistance within the last five years, or (iii) has been convicted of any felony within the last year.
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