New PPP Guidance Provides for Partial Loan Forgiveness

June 16, 2020

By: Kimberly Klein, Allan Grauberd, and Benjamin Danieli

The Small Business Administration (“SBA”) and U.S. Department of Treasury issued two recent interim final rules, on June 11 and 12, 2020, that revised an earlier interim final rule (the “Revised IFR”), clarifying that borrowers who received loans as part of the Paycheck Protection Program (“PPP”) will still receive partial forgiveness of the loan amount even if they spend less than the minimum threshold percentage on payroll costs.[1] In addition, the Revised IFR, which further interprets the PPP Flexibility Act (the “Act”), enacted June 5, 2020, provides additional guidance concerning the loan maturity date, deferral terms, and eligibility for applicants whose owners have been convicted of felonies.

Partial Forgiveness

The Revised IFR provides that borrowers who are unable to spend 60 percent of the loan amount they received from the PPP on payroll costs will still receive partial forgiveness proportional to the new allocation of funds implemented by the Act.  Initially, the Act indicated that 60 percent of PPP funds must be spent on payroll costs as a threshold amount which, if not met, could result in a borrower being denied loan forgiveness altogether.  See our June 8 article: Changes to Law Ease Restrictions on Use of PPP Funds.

The Revised IFR provides however, that loan forgiveness will not be denied in its entirety should a borrower fail to spend 60 percent of their PPP funds on payroll costs, but rather, only that the amount of the loan eligible for forgiveness will be proportionally reduced to the extent of the percentage that was used for payroll costs versus the 60 percent target.[2]  The Revised IFR provides the following example:

If a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54 percent) of its loan on payroll costs, then because the borrower used less than 60 percent of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60 percent of the forgiveness amount and $36,000 in nonpayroll costs constituting 40 percent of the forgiveness amount).

The SBA and Treasury state that that this interpretation is consistent with the Act’s terms regarding additional safe harbor provisions for rehiring employees. That safe harbor, allows employers to avoid any loan forgiveness reduction based on a reduced number of full-time equivalent employees if they can provide documentation showing they were unable to rehire previously employed or similarly qualified employees.  Specifically, the Revised IFR states that “[i]t would be incongruous to interpret the [] Act’s 60 percent requirement as a threshold for receiving any loan forgiveness, because in some cases it would directly conflict with the flexibility provided by the new safe harbor.” 

As noted in our prior alert, the Act reduced the percentage that borrowers had to spend on payroll costs from 75 percent to 60 percent and increased the percentage available for non-payroll costs from 25 percent to 40 percent.

Maturity, Deferral, and Interest Clarification

In addition, the Revised IFR provides that the five year maximum loan maturity term for loans made on or after June 5, 2020, starts to run from the date the SBA assigns a loan number to the PPP loan.  The SBA and Treasury rejected the PPP’s initial ten year maximum maturity term for loans that are not forgiven in whole or in part, instead stating that a five year maximum loan term is sufficient since the “economic dislocations caused by the coronavirus” are temporary and expected to abate “well before the five-year maturity date.”  The two year maximum maturity term remains in place for loans made prior to June 5, 2020; however, as noted in our prior alert, lenders and borrowers may agree to extend the maturity of such loans to the new five year maximum term.

Also as noted in our prior alert, the Act extends the deferral period from six months from the date that PPP funds are disbursed, to the date on which the SBA makes a decision on loan forgiveness.  Interest will accrue during the covered period; however, if the loan amount is forgiven, the interest will be forgiven as well.

20 Percent Owners with Felony Convictions

The current PPP application contained a mandatory requirement which made ineligible all applicants who had an owner with a 20 percent or more equity stake in an applicant if they had been convicted of a felony within the last five years.  The Revised IFR shortens this period from five years to one year “for felonies that do not involve fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance.” 

The SBA and Treasury determined that this shortened timeframe “is more consistent with Congressional intent to provide relief to small businesses.”

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Additional guidance is expected on loan forgiveness and loan review procedures, as well as the SBA’s advance purchase of PPP loans.

This article is current as of June 16, 2020 and reflects the state of the relevant laws, regulations, and guidance to that point.  Any subsequently issued, legislation, rules, and guidance by Congress, the United States Treasury, the Small Business Administration and other various government agencies may change the information contained herein.  While this article is meant as a useful resource concerning matters arising under the Paycheck Protection Program, it should not be considered legal advice for any specific situation.

Please contact Kimberly Klein at (212) 554-7853/kklein@mosessinger.com, Benjamin Danieli at (212) 554-7848/bdanieli@mosessinger.com or Allan Grauberd at (212) 554-7883/agrauberd@mosessinger.com, if you have any questions regarding the most recent changes.

 

[1] The full text of the IFR on Revisions to the First Interim Final Rule, originally posted on June 11, 2020, is available at, https://home.treasury.gov/system/files/136/PPP-IFR-Revisions-to-First-Interim-Final-Rule.pdf.

The full text of the IFR on Additional Revisions to First Interim Final Rule, originally posted on June 12, 2020, is available at, https://home.treasury.gov/system/files/136/PPP-IFR--Additional-Revisions-to-First-Interim-Final-Rule.pdf.

[2] Please see our prior article for definitions of payroll and non-payroll costs: https://www.mosessinger.com/articles/the-sba-issues-ppp-loan-forgiveness-rules