On Thursday evening, April 2, 2020, the United States Small Business Administration (the “SBA”) issued an interim final rule implementing the emergency small business lending facility called the Paycheck Protection Program (the “PPP”), which was part of the larger financial aid and stimulus legislation known as the Coronavirus Aid, Relief and Economic Security Act, otherwise known as the CARES Act, enacted on March 27, 2020. The interim final rule provides critical additional guidance to lenders and borrowers alike and supplements the preliminary guidance issued by the United States Treasury Department on March 31, 2020.
Though additional regulations and guidance are forthcoming, the interim final rule released today offers considerably more details about the terms and conditions of the PPP. The following is a summary of the pertinent provisions of the interim final rule, the entire text of which is attached to this Alert:
- GENERAL PROVISIONS – The PPP will commence on April 3, 2020 and remain open until the earlier to occur of (i) June 30, 2020; or (ii) the $349 billion appropriated to the program is exhausted. The interim final rule will become effective without advance notice or public comment to allow for immediate implementation of the PPP; however, the customary 30-day comment period will still apply, beginning on the date the interim final rule is published in the Federal Register.
- ELIGIBILITY – Small businesses in operation as of February 15, 2020 with fewer than 500 full time or part time employees, sole proprietors, independent contractors and those who are self-employed, nonprofit organizations, veterans’ organizations and Tribal concerns. Businesses with more than one location are eligible and affiliation rules are waived for franchises with fewer than 500 employees. Prospective applicants are ineligible to participate in the PPP if, among other things, the applicant (or related business) ever obtained a direct or guaranteed loan from the SBA or another government agency that is currently in default or was in default within the past seven years and caused a loss to the federal government.
- LOAN AMOUNT – Equal to the sum of (1) 2.5 times the average total monthly payments for Payroll Costs; plus (2) the outstanding amount of any SBA Economic Injury Disaster Loans made between January 21, 2020 and April 3, 2020. Maximum loan amount is $10,000,000. “Payroll Costs” include (i) salary, wage, commission or similar compensation (limited to $100,000 in annual wages per employee); (ii) payment of cash tips or equivalent; (iii) payment for vacation, parental, family, medical or sick leave; (iv) allowance for dismissal or separation; (v) payment of healthcare benefits; (vi) payment of retirement benefits; and (vii) payment of payroll taxes. Independent contractors DO NOT count toward the calculation of Payroll Costs.
- LOAN TERMS – Interest rates on PPP loans are 1.00%, which was increased from the 0.5% interest rated published in the initial guidance. Loan term is two years. Electronic signatures on loan documents are acceptable. Lenders must provide for complete payment deferment for six months, but not more. (The initial guidance indicated that deferrals could be extended for up to 12 months). No personal guarantee. No collateral required. No prepayment penalty. THE PPP IS “FIRST COME, FIRST SERVED.”
- USE OF PROCEEDS – Proceeds from a PPP loan may be used to pay (i) payroll costs; (ii) costs related to group health care benefits for paid sick medical and family leave and related insurance premiums; (iii) mortgage interest (but not principal); (iv) rent payments; (v) utilities; and (vi) interest on Economic Injury Disaster Loans made between January 31, 2020 and April 3, 2020; however, if a borrower’s Economic Injury Disaster Loan was used to pay the borrower’s payroll costs, the borrower must use proceeds from its PPP loan to pay off the portion of its Economic Injury Disaster Loan used to pay payroll costs.
- LOAN FORGIVENESS – Amount of loan spent during eight-week period after origination date is eligible for full forgiveness if no staff reductions before June 30, 2020. Forgiveness amount is reduced proportionately by any reduction in employees and by the amount of reduced pay of any employee if reduced beyond 25%. To encourage employers to rehire employees who were previously released due to COVID-19, and to increase wages for those whose wages were reduced due to COVID-19, borrowers that rehire released employees and increase wages that have been reduced will not be penalized for having reduced payroll at the beginning of the covered period, as long as employees rehired and wages increased by June 30, 2020. Not more than 25% of loan forgiveness amount may be attributable to non-payroll costs (g., rent, mortgage interest and utilities). BORROWERS MUST THOROUGHLY DOCUMENT COMPLIANCE WITH RULES TO OBTAIN FORGIVENESS. Lenders may rely on borrower documentation when evaluating loan forgiveness eligibility. Lenders ARE NOT required to verify if a borrower submits documentation supporting its request for forgiveness and attests that it has accurately verified payments for eligible costs.
- TAXABILITY – Amount of loan forgiveness will not be considered income to borrowers and will not be subject to federal income tax.
- DOCUMENTATION – Applicants must submit the following forms:
- SBA Form 2483 – Paycheck Protection Program Application Form;
- Payroll documentation (g., payroll processor records, payroll tax filings, FORM 1099 MISC or income expenses (for sole proprietorships));
- SBA Form 2484 – Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty; and
- Possibly other documents.
- Lenders must maintain electronic copies of all forms and supporting documents.
- BORROWER CERTIFICATIONS – An authorized representative of the applicant must certify in good faith to certain terms related to the eligibility and possible forgiveness of the PPP loan proceeds (similar to those contained in the Application). Lenders may rely on certifications of the borrower in order to assess eligibility to participate in the PPP. The SBA “will hold lenders harmless for borrowers’ failure to comply with program criteria…”
- LENDER ELIGIBILITY – All existing SBA 7(a) lenders are automatically approved to make PPP loans on a delegated authority basis. SBA has determined that authorizing additional lenders to make PPP loans is necessary due to the size of the PPP appropriation and anticipated number of applicants.
- UNDERWRITING REQUIREMENTS – Lenders must take the following actions to underwrite PPP loans:
- Certify receipt of borrower certifications (described above);
- Certify receipt of information demonstrating that borrower had employees that were paid salaries and paid payroll taxes “on or around” February 15, 2020;
- Confirm the dollar amount of average monthly payroll costs for preceding 12 calendar months by reviewing payroll documentation provided by borrower; and
- Follow current Bank Secrecy Act and Anti-Money Laundering requirements applicable to insured depository institutions.
- Each lender’s underwriting obligation under the PPP “is limited to the items above and reviewing the PPP Application form.”
- LENDER FEES – Lender’s may charge the following processing fees on PPP loans:
- For loans up to $350,000 – 5%;
- For loans between $350,000 and $2,000,000 – 3%; and
- For loans between $2,000,000 and $10,000,000 – 1%.
- AGENT FEES – Agents (g., attorneys, accountants, loan packagers, etc.) may charge the following fees on PPP loans, which will be paid by Lenders out of the Lenders’ fees:
- For loans up to $350,000 – 1%;
- For loans between $350,000 and $2,000,000 – 0.5%; and
- For loans between $2,000,000 and $10,000,000 – 0.25%.
- SECONDARY MARKET – PPP loans may be sold in the secondary market once funds have been fully disbursed. PPP loans may be sold at a premium or at a discount to par. Lenders may request that the SBA purchase PPP loans or pools of PPP loans no earlier than the end of the seventh week of the covered period. For loans or pools of loans purchased by the SBA, it will purchase the expected forgiveness amount based on a formula and within 15 days of receipt of request from the lender.
We will continue to update our Alerts as 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 email@example.com or by telephone at (210) 253-7102.
 The SBA has indicated it would issue additional guidance on PPP loan forgiveness.
 The SBA plans to issue additional guidance on secondary market transactions.