Late in the evening of April 2, 2020, the U.S. Small Business Administration (SBA) issued its Interim Final Rule (Rule) with respect to the Paycheck Protection Program (PPP) established under the Coronavirus Aid, Relief and Economic Security (CARES) Act. The Rule is a 31-page document that is intended to provide lenders and borrowers with new guidance on various aspects of the PPP’s forgivable loans for small businesses affected by the coronavirus pandemic. The PPP is scheduled to roll-out today, April 3rd.
Although the SBA has announced that additional guidance will be forthcoming regarding issues such as business affiliation analyses, loan forgiveness, religious liberty protections and advance purchases for loans sold in the secondary market, the Rule currently serves as the latest guidance to be followed in today’s roll-out.
Additionally, while the Rule is considered “interim” and requests public comments over a 30-day period, it is expected that lenders will move forward immediately in accepting applications in reliance on this interim guidance.
Application Process and Parameters for Borrowers
According to the Rule, applicants must submit directly to their lender a completed SBA Form 2438 (PPP Application Form) and certain supporting payroll documentation described in the Rule. Although a sample application form was issued earlier this week, SBA Form 2438 is updated and slightly different from the original. E-signatures and e-consents are allowable for application submission purposes.
Borrowers receiving a loan through the SBA Economic Injury Disaster loan program (EIDL) from January 31, 2020 through April 3, 2020, are eligible to apply for a PPP loan so long as the EIDL was not used for payroll costs, in which case the PPP must be used to refinance the EIDL loan. Additionally, any advance of up to $10,000 received on the EIDL loan will not be eligible for forgiveness under the PPP, although it still does not need to be repaid under the existing terms of EIDL.
Borrowers may apply for only one PPP loan and must apply between now and June 30, 2020; based on these parameters the commentary to the Rule instructs borrowers to consider applying for the maximum amount for which they are eligible.
The maximum loan amount for borrowers may be calculated as follows:
- TAKE the aggregate payroll costs from the last 12 months for employees who are US residents.
- SUBTRACT compensation in excess of any salary exceeding $100,000 annually.
- DIVIDE the total by 12 to determine average monthly payroll.
- MULTIPLY the average monthly payroll by 2.5.
- ADD any outstanding amount of any EIDL loan made between January 31, 2020 and April 3, 2020, LESS the amount of any advance made under the EIDL loan.
In calculating payroll costs, a business must not count independent contractors as employees. Independent contractors are allowed to apply for their own PPP loans beginning on April 10th.
The Rule explains that the highest allowable interest rate on PPP loans is set at 1% (in contradiction to previous information guidance that interest rates would be .5%) and the maturity date for such loans will be two years (in contradiction to the CARES Act’s provision that the loan term for any amount not forgiven would be ten years).
Underwriting and Other Information for Lenders
All SBA 7(a) lenders are approved to make PPP loans and authorization has been further extended to: (i) all federally insured depository institutions or credit unions; (ii) certain farm credit system institutions; and (iii) financing providers that have originated, maintained and serviced more than $50 million in business loans or other commercial financing receivables during a consecutive 12-month period over the last 36 months or are service providers to an insured depository institution in good standing that has a contract to support such institution’s lending activities pursuant to federal law.
The SBA will allow lenders to rely on the certifications of the borrower in order to determine the borrower’s eligibility for a PPP loan and the maximum loan amount the borrower is entitled to receive. Lenders will be held harmless for the borrower’s failure to comply with program and certification criteria.
- Confirming receipt of borrower certifications;
- Confirming receipt of information demonstrating that the borrower had employees as of February 15, 2020;
- Confirming average monthly payroll costs by reviewing the payroll documentation provided by borrower; and
- Complying with the Bank Secrecy Act (BSA).
After a borrower applies for a PPP loan, lenders must submit SBA Form 2484 (PPP Lender’s Application for 7(a) Loan Guaranty) electronically to the SBA, and maintain the forms and supporting documentation provided by borrower in its files.
In respect of forgiveness, lenders can again rely on borrower documentation and are not required to conduct any additional diligence or verification. No more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.
The Rule addresses informal guidance previously issued by the Department of the Treasury, which indicated that PPP loans may be sold by lenders on the secondary market. Lenders may also request that the SBA purchase the expected forgiveness amount of any PPP loan at the end of the seventh week following the origination of the loan. The advance purchases will occur within 15 days of the SBA receiving a complete report of the expected forgiveness amount. Notably, the Rule does not set forth a procedure governing a situation in which the actual forgiveness is less than the estimated forgiveness amount.
We expect that this will not be the last word on regulations applying to the PPP loan program. Due to its hasty roll out, additional guidance or regulations will undoubtedly be issued to address issues that arise over the coming days and weeks. We will continue to provide real-time updates.
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