SBA Issues Guidance on PPP Loan Program-10 Things to Know
We highlight the following for borrowers:The SBA issued an Interim Final Rule related to “Business Loan Program Temporary Changes; Paycheck Protection Program.” This Rule is effective on publication in the Federal Register and applies until June 30, 2020, or the funds allocated are exhausted. It is available here.
- No more that 25% of the loan proceeds may be expended on eligible expense other than payroll costs. The lender’s application requires the borrower to have a pro forma of how the proceeds will be utilized over the eight-week period after the loan with no more than 25% being allocated to non-payroll costs.
- Payroll costs exclude federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act), and income taxes required to be withheld from employees.
- Payments to independent contractors do not count toward the maximum loan amount. Independent contractors must apply on their own.
- The SBA will “promptly” publish guidance about the application of the affiliation rules. That could mean more eligible businesses.
- The borrower does not have to make any payments for six months following the date of disbursement of the loan. However, interest will continue to accrue on PPP loans during this six-month deferment. The Act authorizes the Administrator to defer loan payments for up to one year. No collateral or personal guarantees are required.
- The interest rate on loans made under the program changed from 0.5% to 1% per annum. This was likely done to encourage banks of all sizes to participate in the program.
- Aggregate payroll costs just include U.S. employees.
- Underwriting expectations are limited to the application form and the certifications in it, the borrower’s payroll documentation and applicable Bank Secrecy Act requirements. Lenders may rely on borrower documentation for loan forgiveness, providing greater protection for lenders should borrowers misrepresent information in their application. “The lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs,” the rule said. “The Administrator will hold harmless any lender that relies on such borrower documents and attestation from a borrower.” This punts ramifications/consequences for misrepresented payroll documentation to the borrower.Note also that the CARES Act section 1106(h)(1) provides that if the lender (the bank) does not agree with forgiving the loan, you as the borrower have zero recourse because you cannot take any enforcement action against the lender.
- If an Economic Injury Disaster Loan (EIDL) was received between January 31, 2020, and April 3, 2020, applicants are eligible for a PPP loan, but if the EIDL was used for payroll costs, the PPP loan must be used to refinance the EIDL. If an EIDL received during that time was not used for payroll, it will have no impact on qualifying under PPP.
- The Interim Final Rule adopts the designation of ineligible industries generally applicable to 7(a) programs. As a result, banks, insurance companies and passive businesses and landlords, among others, are not eligible.
See Q&A2.d. It says: “Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110…” Banks are listed in 120.110(b) and insurance companies in (d) and “(c) Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under §120.111)”.
120.111 can be found here. Even though this regulation would exclude non-profits (sub a), they are specifically made eligible by the CARES Act, and the Rule recognizes that.
|ERICA M. SOROSKY
|ERIN K. OYAMA