June 23, 2020
It has been a while since we have written a bulletin on the PPP. Why the break? While there continued to be agency announcements on the PPP, there was also Congressional action taking place. Many of the things discussed by Congress were attempts to modify the actions taken by the SBA and Treasury. So rather than write a bulletin one day, and then correcting that bulletin the next day, we decided to let a little time pass and then write a bulletin when the dust had settled. That move was a good one, as many of the PPP rules and forms have been issued and re-issued in the last couple weeks. Just last night there was another major rule re-write.
SBA Issues Interim Final Rule on PPP Eligibility for Certain Telephone Cooperatives
On June 5, the SBA issued an Interim Final Rule that made certain telephone cooperatives eligible for PPP loans. You recall that in the CARES Act, Congress specifically made two kinds of non-profits, 501(c)(3) charitable organizations and 501(c)(18) veteran’s groups, eligible for PPP loans. With no apparent legal authority to do so, the SBA made certain 501(c)(12) electric cooperatives eligible for PPP loans. Using the same lack of legal authority, this Interim Final Rule makes certain telephone cooperatives eligible for PPP loans.
PPP Flexibility Act Passed by Congress and Signed into Law by President Trump
When the first round of PPP funding ran out, Congress immediately looked to appropriate more funds to this popular program. At that time, borrowers and lenders raised several concerns with the PPP, and they urged Congress to address those concerns. Congressional leaders wanted to pass the additional PPP funding as quickly as possible, so they decided that they would not make any substantive changes to the PPP in that funding bill.
Shortly after the funding bill passed, the House passed a very large, and partisan, COVID-19 relief bill. While that full bill had no chance of passing the Senate, there were some provisions in that larger bill that had bipartisan support. Minnesota’s Representative Dean Phillips became the lead author of a smaller bill, which contained the strongly supported provisions of the larger bill. The bill was named the PPP Flexibility Act.
The bill was primarily crafted by the hospitality industry, and it addressed a few issues that they had with the PPP. First, it extended the loan forgiveness period from 8 weeks to 24 weeks, which would help bars, restaurants and other businesses that were forced-closed by government orders. Second, and for the same reason, the bill extended the date by which borrowers could rehire laid-off employees to December 31, 2020. Third, it reduced the percentage of the PPP loan that must be spent on payroll expenses from 75% of the total loan amount to 60% of the total loan amount. Fourth, for new PPP loans made after the PPP Flexibility Act passed, the term of the loan was extended from two years to five years.
The first three of those provisions are designed to make the loan forgiveness process work better, which is good for both borrowers and lenders. The fourth provision clearly benefits borrowers, not lenders. Most lenders want the PPP loans off their books as quickly as possible. Lenders did get an improvement to this provision, though. Originally, this provision was to apply to all PPP loans, retroactively. Thankfully, we were able to ensure the rule would apply prospectively, only.
The bankers also tried to amend the PPP Flexibility Act by setting up a very simplified approach to loan forgiveness. The suggestion was that for loans under a certain dollar amount, like maybe $250,000, borrowers would be entitled to loan forgiveness simply by certifying that they met all the requirements of the PPP. Banks lent out the money based only on certifications, so we argued that the government should provide forgiveness based only on certifications for smaller PPP loans. Unfortunately, we were not able to get that sort of forgiveness process included in the new law.
The PPP Flexibility Act passed the House, then the Senate and was signed into law by President Trump on June 5th.
Agencies Issue New Borrower Forgiveness Application Form 3508
With the passage of the PPP Flexibility Act, the SBA and Treasury needed to update the Borrower PPP Loan Forgiveness application. They issued new forms and instructions on June 16.
Much of the information in these updated forms remained the same as the original forms published by the agencies. Probably because of pushback from businesses that complained the original 11-page form was too long, the agencies separated the Form (now 5 pages) and its Instructions (now 7 pages). In addition, the updated forms needed to account for the 24-week loan forgiveness period, the December 31 rehire date and the new rule that just 60% of the loan had to be used for payroll costs, which were substantive changes.
The general rule is now that borrowers have a 24-week forgiveness period rather than an 8-week forgiveness period. That change will result in more borrowers receiving 100% loan forgiveness. Also, the change from a requirement to use 75% of the loan amount for payroll purposes to just 60% will also help some borrowers. The loan forgiveness amount as calculated from the application form will now be smallest of three numbers:
- Total payroll expenses plus other allowable expenses during the forgiveness period. If a borrower reduces its staffing levels and does not get back to regular levels by December 31, 2020, they may incur a penalty which reduces this number.
- PPP Loan amount.
- Payroll expenses divided by .6. This third number will only be the lowest of the three numbers if the borrower did not use at least 60% of the loan proceeds for payroll expenses. If the borrower does not use 60% of the loan proceeds for payroll expenses and this third number comes into play, the borrower will not get 100% loan forgiveness. Borrowers must understand that fact.
For borrowers that use at least 60% of the loan proceeds for payroll expenses, their loan forgiveness amount will be the lesser of their total payroll plus other allowable PPP expenses or their loan amount. The 24-week loan forgiveness period will help ensure that the borrower’s total allowable PPP expenses incurred is larger than their loan amount.
Remember this loan forgiveness rule: To get 100% forgiveness, the borrower must show that total allowable PPP expenses are greater than or equal to their loan amount, AND the borrower must show that 60% or more of their loan proceeds were used for payroll purposes.
Some borrowers that did not reduce staffing levels will be able to complete the loan forgiveness applications soon. Others that did reduce staffing levels and are working to rehire people will need to wait before they complete the forms because they will need to know whether the penalty for not rehiring people by December 31 comes into play.
Agencies Issue New Borrower Forgiveness Application Form 3508EZ
A subset of PPP borrowers will be able to use a simpler loan forgiveness form, Form 3508EZ. This new EZ document is somewhat shorter; the Form is 3 pages long and the Instructions are 4 pages long, which is only a little bit better than the revised regular form and instructions.
There are three different ways that a borrower can qualify for using the 3508EZ Form. They can use the form if any one of the three apply.
- Self-employed borrowers who did not include any other employee payroll expenses in their PPP application can use this form. If they included other employees, they cannot use this form.
- Borrowers that did not reduce any employee wages or salary by more than 25% during the Covered Period or Alternative Covered Period, as applicable, compared to the period January 1, 2020 and March 31, 2020; AND did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period. For purposes of this rule, Borrowers can ignore reductions if they have re-hired similarly qualified employees on or before December 31, 2020. They also ignore reductions in an employee’s hours if the employee refused employment.
- Borrowers that did not reduce any employee wages or salary by more than 25% during the Covered Period or Alternative Covered Period, as applicable, compared to the period January 1, 2020 and March 31, 2020; AND was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
For purposes of the second bullet point above, the Borrowers will need to determine whether they qualify. This rule is similar to the calculation borrowers would use on the original forgiveness form to determine whether they would have incurred a penalty for reducing employment levels and not rehiring people by December 31. Neither the 3508EZ Form nor its Instructions give borrowers a worksheet to complete to determine eligibility to use the EZ form. Borrowers will need to make their own calculations, perhaps using the worksheets that are part of the regular 3508 form and instructions.
On the EZ form the loan forgiveness amount is determined the same way as it is on the regular form. It is again the lesser of three numbers: Total allowable PPP expenses; PPP loan amount; and payroll expenses divided by .6.
The same rules discussed above will apply. If a borrower does not use at least 60% of their PPP loan for payroll expenses, the third number will be the lowest, and the borrower will not get 100% of their loan approved. If a borrower does use at least 60% of their loan for payroll expenses, their forgiveness amount will be the lesser of their loan amount or their total allowable payroll expenses.
And again, remember the loan forgiveness rule. To get 100% forgiveness, borrowers must show that total allowable PPP expenses are greater than or equal to their loan amount, AND borrowers must show that 60% or more of their loan proceeds were used for payroll purposes.
SBA Issues Interim Final Rule Updating Loan Forgiveness Process
Back on May 22, the SBA issued an Interim Final Rule that set the procedures for the loan forgiveness process. With the passage of the PPP Flexibility Act, much of the information in that rule needed to be updated. Last night, the SBA issued a new Interim Final Rule with new updated loan forgiveness procedures.
The first point to be made on these procedures is the fact that lenders will play a huge role in the loan forgiveness process. We had questioned how the SBA was going to be able to process and approve the 4.7 million PPP loan forgiveness applications. Now we know how they are going to do it: they are going to make the lenders do the vast majority of the work. Lenders did all the hard work during the application process, and they will once again do all the hard work during the loan forgiveness process.
The original Interim Final Rule had set the information lenders must review when making the loan forgiveness decision. Lenders should review the new Interim Final Rule to ensure they are following the updated application review requirements and timeframes.
The second point that has caused confusion was how the rule extending the loan forgiveness “covered period” from 8 weeks to 24 weeks would work, from a process standpoint. For example, people questioned when the borrower could submit the loan forgiveness application. Did they have to wait until the end of the 24-week period, or could they submit it once they had incurred all their allowable PPP expenses? This new rule clarified that borrowers did not have to wait until the end of the 24-week period. They can submit the form whenever they have incurred enough allowable expenses to get their whole loan forgiven. (Final reminder, Remember the 60% rule.)
We strongly encourage bankers to review both the original and the revised loan forgiveness rules. There are a lot of technical, picky rules that will matter for borrowers, which mean they also matter to the lenders. These forgiveness rules make the loan application process look simple by comparison. When banks were putting their money on the line, the government made the process fast and simple so the money would fly out the doors. Now that the government is putting their money on the line through loan forgiveness, the rules have become much more detailed and complicated. Interesting how that works, right?