SBA Issues Guidance on Paycheck Protection Program Flexibility Act
The President signed the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) into law on June 5, 2020. As we summarized in our previous article – President Signs Legislation With Substantial Changes to PPP Loan Forgiveness Into Law – the PPPFA made several substantial changes to the Paycheck Protection Program (PPP), which was established in Section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). On June 11, 2020, the Small Business Administration (SBA) issued an Interim Final Rule (Revised IFR) revising the SBA’s Interim Final Rule originally posted on April 2, 2020 to conform such Interim Final Rule to the changes made by the PPPFA.
The revisions outlined in the Revised IFR address changes to key provisions, including loan maturity, deferral of loan payments, and forgiveness provisions. Additionally, the SBA released a modified Borrower Application Form and Lender Application Form (PPP Loan Guaranty) to reflect the changes made in the PPPFA.
The following are the key takeaways and clarifications made in the Revised IFR:
Extension of Covered Period
The PPPFA changed the “covered period” under Section 1102 of the CARES Act from “February 15, 2020 to June 30, 2020” to “February 15, 2020 to December 31, 2020”. The Revised IFR clarifies that the amended definition of “covered period” for a PPP loan in Section 3(a) of the PPPFA applies only to Section 1102 of the CARES Act, which governs loan use, loan eligibility, and related requirements, and such amended definition of “covered period” does not impact the definition of “covered period” for loan forgiveness purposes (which is covered by Section 3(b) of the PPPFA).
Clarification of Application Deadline
Importantly, we note that the Revised IFR plainly states that the SBA’s authority to guarantee PPP loans, and a lender’s ability to obtain an SBA loan number for PPP loans, expires on June 30, 2020. This is consistent with the Joint Statement provided by the Department of Treasury and the SBA which states, in pertinent part, that “the new rules will confirm that June 30, 2020, remains the last date on which a PPP loan application can be approved.”
Extension of Loan Forgiveness Covered Period
The PPPFA modified the loan forgiveness covered period for all PPP loans from 8 weeks to 24 weeks. The Revised IFR confirms that for any PPP loans made before June 5, 2020, borrowers may elect to keep the original 8-week covered period.
Deferral Period for PPP Loans
The Revised IFR confirms that the PPPFA’s extension of the deferral period applies to all PPP loans made before, on, and after June 5, 2020. Payments of principal and interest on PPP loans will not have to be made prior to the date that the forgiveness amount is remitted to the lender by the SBA or the date the SBA notifies the lender that no loan forgiveness is permitted for the applicable loan.
In the event a borrower does not submit a loan forgiveness application within 10 months after the end of the loan forgiveness covered period, the borrower would have to begin making payments after the expiration of such 10-month period. To illustrate the foregoing scenario, the SBA provided the following example in the Revised IFR:
“For example, if a borrower’s PPP loan is disbursed on June 25, 2020, the 24-week [covered] period ends on December 10, 2020. If the borrower does not submit a loan forgiveness application to its lender by October 10, 2021, the borrower must begin making payments on or after October 10, 2021.”
Lenders are required to notify borrowers either of remittance of the forgiveness amount by the SBA or that no loan forgiveness of the loan was approved, and if any unforgiven portion of the loan remains, the date the first payment is due. However, the Revised IFR does not provide a time requirement for such notification by lenders to borrowers, but the CARES Act itself does require lenders to notify borrowers of its determination of forgiveness within 60 days of receipt of borrower’s forgiveness application.
Payroll Expenditure Requirement
The Revised IFR clarifies the PPPFA by stating that “while the [PPPFA] provides that a borrower shall use at least 60 percent of the PPP loan for payroll costs to receive loan forgiveness, … this requirement [is] a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount, rather than a threshold for receiving any loan forgiveness.” Simply put, the PPPFA does not exclude borrowers from loan forgiveness eligibility if they do not use at least 60 percent of the PPP loan for payroll costs.
Extension of the Maturity Date for PPP Loans
For loans made before June 5, 2020, the maturity date will remain at 2 years. However, lenders and borrowers may mutually agree to extend the maturity date of such loans to 5 years.
For loans made on or after June 5, 2020, the maturity date is now 5 years.
To determine when a PPP loan is made, the Revised IFR states that the PPP loan is deemed “made” on the date the SBA assigns an E-TRAN loan number to the PPP loan. Therefore, lenders should reference the date a PPP loan was assigned an SBA E-TRAN loan number to determine whether the 2-year or 5-year maturity date should apply. The SBA felt this was the most “efficient, transparent and auditable” means of determining when a PPP loan was made.
Additional Guidance Forthcoming
The Revised IFR notes that additional revisions to the SBA’s interim final rules on loan forgiveness and loan review procedures to address changes made by the PPPFA are forthcoming.
Key Takeaways
The Revised IFR makes it clear that modifications to loan forgiveness and deferral periods, as set forth in the PPPFA, impact all PPP loans, whereas the modifications to maturity dates impact loans made on or after June 5, 2020. Given that the modified loan forgiveness and deferral period terms would not be reflected in loan documents for PPP loans already made, prudent lenders should take this into account and review their PPP loan documentation to determine effective and legally sufficient ways to address the modifications for existing PPP loans and loans made on a go-forward basis. In PPP loan forms that we have prepared, we have included a provision stating that any changes made by law or SBA regulations are automatically incorporated into the promissory note and no further amendments are necessary in connection therewith.
Lenders will need to revise their PPP loan forms for loans made on or after June 5, 2020 to ensure compliance with the new loan term requirements and changes to deferral and amortization periods.
Similarly, a PPP borrower should be aware of the recent changes and determine how such changes impact its PPP loan – emphasis should be placed on (i) whether to elect to keep the 8-week loan forgiveness covered period or to use the default 24-week loan forgiveness covered period and (ii) whether to approach its lender to request a mutually agreeable modification to the maturity date if the loan was made prior to June 5, 2020.
Finally, both borrowers and lenders should be alert for any updated guidance from the SBA on loan forgiveness and loan review procedures. We will continue to provide updates as further guidance is issued by the SBA.