Search the Site

Modifying PPP Loans in Light of the Paycheck Protection Program Flexibility Act of 2020

On Wednesday, June 3, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Act”) was approved by both houses of Congress and submitted to the President for signature. The President is expected to promptly sign without further revision. The legislative intent of the Act being to offer new and existing borrowers greater flexibility with respect to forgiveness eligibility and, ultimately, repayment of their PPP loans. Though the Act should, in large part, ease some of the more onerous financial conditions of the Paycheck Protection Program, these new terms may necessitate the modification of existing PPP loan documents to one degree or another.

PPP FLEXIBILITY ACT PROVISIONS

Specifically, the Act provides that:

  • All PPP loans made on or after the date of enactment of the Act must have a minimum maturity of five years;
  • Any existing PPP loans made prior to the date of enactment of the Act may be modified to extend the original maturity date to five years or more—presumably, existing PPP loans cannot be modified to extend the maturity for a duration of less than five years;
  • The eight-week “covered period” has been extended to essentially 24 weeks from the date of origination, though existing PPP borrowers may elect for the eight-week covered period to remain in place;
  • Discounting loan forgiveness relating to reductions in full-time equivalent employees does not take into consideration reductions resulting from (1) an employer’s inability to re-hire furloughed or terminated employees, or to hire qualified replacements; or (2) an employer’s inability to return to the same level of business activity due to restrictions put in place by federal governmental officials (e.g., occupancy limits, social distancing, etc.)—no mention is made as to whether similar restrictions instituted by state or local governmental officials would qualify for this exemption;
  • The percentage of PPP loan proceeds that must be used for “payroll costs” has been reduced from 75% to 60%;
  • The six- to 12-month payment deferral period has been extended to a duration of up to 10 months after the expiration of the covered period; and
  • Borrowers whose PPP loans are ultimately forgiven are now eligible to defer payment of payroll taxes as provided in the CARES Act.

It remains to be seen whether the Treasury Department and/or Small Business Administration will choose to issue further guidance or implementing regulations under the PPP Flexibility Act. And as we saw with the CARES Act, regulations and guidance, from time to time, manage to stray a good deal from the laws they are meant to clarify.

POTENTIAL LOAN MODIFICATIONS

Due to the nature of the changes to the Paycheck Protection Program contained in the Act, in many instances, existing PPP loan documents may need be modified to address the following:

If borrower and lender agree to extend the maturity date of an existing PPP loan to five years or more;

  • If repayment terms are structured such that the first six payments will be deferred, the loan documents may need to be modified to reflect a longer and uncertain deferral period;
  • If loan documents include a certification similar to that contained in the PPP application (Form 2483 (04/20))—that not more than 25% of the otherwise forgivable amount of PPP loan proceeds may be used for non-payroll costs—the loan documents should be modified to accurately reflect that non-payroll costs may consist of up to 40% of the forgivable amount of the PPP loan; and
  • To the extent loan documents contain additional certifications relating to use of PPP loan proceeds within the eight-week covered period, modification to reflect the extension of the covered period to 24 weeks may be in order.

We will continue to update our Alerts if and to the extent additional guidance becomes available. For any questions regarding the Paycheck Protection Program or other provisions of the CARES Act, please contact Bruce Toppin by e-mail at btoppin@langleybanack.com or by telephone at (210) 253-7102.

Authors

Bruce E. Toppin, III

Author

Mr. Toppin’s practice concentrates on representing banks, thrifts and other financial institutions on corporate and regulatory matters, such as mergers, acquisitions, securities offerings, holding company formations, Subchapter S conversions, corporate governance, de novo charters, enforcem...

Locations

Find Your Lawyer