Ice Miller LLP: Insights

SBA Releases Revisions to PPP Loan First Interim Final Rule

On June 11, 2020, the Small Business Administration (“SBA”) released revisions to the existing Paycheck Protection Program (“PPP”) First Interim Final Rule, which was released April 2, 2020. Key provisions of the First Interim Final Rule were revised to conform to the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) including loan maturity, deferral of loan payments and forgiveness provisions. Many of the revisions are retroactive to the enactment date of the CARES Act. The revisions are summarized below.

Covered Period for PPP Loans

Section 3(a) of the Flexibility Act amended the definition of “covered period” for a PPP loan to be “the period beginning on February 15, 2020 and ending on December 31, 2020.”

This amendment is effective as if included in the CARES Act, which was signed into law on March 27, 2020.
NOTE: The “covered period” referred to in this section applies to loan use, loan eligibility, and related requirements—not the “covered period” governing loan forgiveness.

Maturity Date for PPP Loans

The maturity date for a PPP loan is as follows:

For loans made before June 5, 2020, maturity is 2 years; however, borrowers and lenders may mutually agree to extend the maturity of such loans to 5 years.
For loans made on or after June 5, 2020, maturity is 5 years.
NOTE: A loan is “made” when the SBA assigns a loan number to the PPP loan.

Deferral Period for PPP Loans

The Flexibility Act extended the deferral period on PPP loans, and the revised first interim final rule now reflects these revisions:

If a borrower submitted its loan forgiveness application within 10 months after the end of borrower’s loan forgiveness covered period, the borrower will not have to make any payments of principal or interest on its loan before the date on which the SBA remits the loan forgiveness amount on the loan to the lender (or, alternatively, notifies the lender that no loan forgiveness is allowed).
For example, if a borrower’s PPP loan is disbursed on June 25, 2020, the 24-week period loan forgiveness covered period ends on December 9, 2020. If the borrower does not submit a loan forgiveness application to its lender by October 9, 2021 (which is 10 months after the end of its loan forgiveness covered period), the borrower must begin making payments on or after October 9, 2021.

Loan Forgiveness

The Flexibility Act also amended the requirements regarding forgiveness of PPP loans with respect to payroll costs as well as reductions in full-time equivalent employees. The revised first interim final rule reflects these amendments:

It appeared that the Flexibility Act required a borrower to use at least 60% of its PPP loan proceeds for payroll costs as a condition to receiving loan forgiveness. However, the SBA has interpreted the requirement as a “proportional limit on non-payroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness.”
Said another way, if a borrower uses less than 60% of its loan proceeds for payroll costs, this will not completely bar it from loan forgiveness. Instead, the borrower’s loan forgiveness will be proportionally decreased.
This new rule is consistent with the full-time equivalent safe harbor, which provides that if a borrower is unable to rehire individuals who were furloughed or laid off, its loan forgiveness amount is not impacted based on the reduction in full-time equivalent employees.
For example, a borrower obtained a PPP loan in the amount of $100,000 and during the covered period used $54,000 (54%) of the loan proceeds on payroll costs and $46,000 (46%) on non-payroll costs. The borrower will not receive forgiveness on the full $100,000 because it did not spend 60% of the forgiveness amount on payroll costs. Instead, the forgiveness amount will be reduced so that the amount spent on payroll costs represents 60% of the lower amount. The maximum amount of loan forgiveness the borrower may receive will be $54,000 / 0.60 = $90,000 (subject to other limits on forgiveness—i.e., the FTE and compensation reduction tests). The remaining $10,000 will be treated as a loan.
The SBA has not modified its forgiveness application to incorporate the changes introduced by the Flexibility Act. We expect the SBA will do so in the coming days.

Use of PPP Loan Proceeds

The revised first interim final rule formally changes the percentage of PPP loan proceeds that must be used for payroll costs (which for this purpose includes the amount of any EIDL refinancing) from 75% to 60%. This (as in the original first interim final rule) is stated to be a test separate from the 60% test for forgiveness described above: this test requires that 60% of the total PPP loan proceeds be spent on payroll costs; the test described above requires that 60% of the forgiveness amount be spent on payroll costs.

It is unclear how or whether this requirement is being implemented. When the SBA released its PPP forgiveness application, the application included only the 60% test with respect to forgiveness. We had assumed that the 60% test on total loan proceeds had been merged into the 60% test on forgiveness. Given that the SBA must revise the forgiveness application to incorporate the other changes described in this article, it will be interesting to see whether it incorporates this 60% of loan proceeds requirement as an additional test. We do not expect the SBA to do so, but we will have to wait and see.

PPP Borrower Application

The SBA also revised the application form borrowers use to apply for a PPP loan. The pertinent changes are summarized below.

The new form now reflects the 60% payroll costs requirement for loan forgiveness.
The new form contemplates a 24-week forgiveness covered period as opposed to the former 8-week period.
The new form clarifies that for seasonal businesses, “Average Monthly Payroll” may elect to instead use average monthly payroll for the time period between February 15, 2019 and June 30, 2019, or any 12-week period between May 1, 2019 and September 15, 2019. This change is new to the form but is consistent with prior SBA guidance.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.