On April 2, 2020, the Small Business Administration (the “SBA”) released guidance pertaining to the Paycheck Protection Program (the “PPP”) implemented by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or “the Act”). This memo addresses some of the information contained within the guidance and highlights some important information contained within the Act.
Important: This guidance has changes and clarifications from previous guidance, including the following:
- an increase in the interest rate on PPP loans to 1 percent,
- a limitation on loan forgiveness for non-payroll costs to 25 percent of the loan,
- a limitation on the loan term to 2 years, and
- 6 month deferral on all loans.
If you have questions about the new guidance or the PPP generally, please contact a Rose Law Firm attorney.
When will lenders begin accepting applications?
PPP loans are first-come, first-served. Starting April 3, 2020, small businesses and sole proprietorships can apply. Independent contractors and self-employed individuals can apply later, on April 10, 2020.
When will lenders stop accepting applications?
Applications, along with the required documentation (i.e. payroll documentation, such as payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship), must be submitted by June 30, 2020. For applicants that do not have any such documentation, the applicant must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll account.
What is required for certification of applications?
The applicant must also certify that:
(1) the applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC;
(2) current economic uncertainty makes the loan request necessary to support ongoing operations;
(3) funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments;
(4) documentation verifying the number of full-time equivalent employees as well as the amount of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the 8-week period following when the loan is provided;
(5) that loan forgiveness will be provided for the sum of documented payroll costs, etc.;
(6) that the applicant has not and will not receive another loan under this program from February 15, 2020 through December 31, 2020;
(7) that all the information is true and correct; and
(8) the lender will confirm the eligible loan amount using documents that were submitted.
Who is NOT eligible for a PPP loan?
Entities that fall in the following categories do not qualify: (i) Those engaged in an activity that is illegal under federal state or local law; (ii) Household employers (individuals who employ household employees such as nannies or housekeepers); (iii) If an owner of 20% or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which federal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last 5 years; or (iv) If the applicant or any business owned/controlled by the applicant or any of the owners of the applicant, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last 7 years and caused a loss to the government.
How does an applicant apply?
The applicant must submit SBA Form 2483 (Paycheck Protection Program Application Form) and payroll documentation, as described above. The lender must submit SBA Form 2484 (Paycheck Protection Program Lender’s Application for 7(a) Loan Guarantee) electronically in accordance with program requirements and maintain the forms and supporting documentation in its files.
What lenders are eligible to make PPP loans?
All SBA 7(a) lenders are automatically approved to make these loans. Additionally, and unless these lenders are currently designated in Troubled Condition by their primary federal regulator or are subject to a formal enforcement action with their primary federal regulator that addresses unsafe or unsound lending practices, the following lenders are also authorized to make PPP loans:
(i) Any federally insured depository institution or any federally insured credit union;
(ii) Any Farm Credit System institution (other than the Federal Agricultural Mortgage Corporation) that applies the requirements under the Bank Secrecy Act and its implementing regulations as a federally regulated financial institution, or functionally equivalent requirements; and
(ii) Any depository or non-depository financing provider that originates, maintains, and services business loans or other commercial financial receivables and participation interests; has a formalized compliance program; applies the requirements under the BSA as a federally regulated financial institution, or the BSA requirements of an equivalent federally regulated financial institution; has been operating since at least February 15, 2019, and has originated, maintained, and serviced more than $50 million in business loans or other commercial financial receivables during a consecutive 12 month period in the past 36 months, or is a service provider to any insured depository institution that has a contract to support such institution’s lending activities in accordance with 12 U.S.C. § 1867(c) and is in good standing with the appropriate Federal banking agency.
Can lenders rely on the documentation provided by the applicant?
Yes. The lender does not need to conduct any verification if the borrower submits documentation and attests that it has accurately verified the payments for eligible costs.
How does a business determine the maximum amount it can borrow?
The following methodology will be useful for many applicants:
(i) Step 1: Aggregate payroll costs from the last 12 months for employees whose principal place of residence is the U.S.
(ii) Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
(iii) Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12)
(iv) Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
(v) Step 5: Add the outstanding amount of an Economic Injury Disaster Loan made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan.
What is the interest rate for loans under the PPP?
100 basis points or one (1) percent. Note that this differs from initial guidance, which suggested that it would 0.5 percent. While all payments are deferred for 6 months, interest will continue to accrue over that period. Note that this deferment is shorter than the one year period authorized by the Act. Contrary to that language, the SBA has determined that a 6-month deferment period is appropriate.
Are there any fees?
There is no up-front guarantee fee payable to the SBA by the Borrower. There will be no lender’s annual service fee payable to the SBA. There will be no subsidy recoupment fee. There will be no fee payable to SBA for any guarantee sold into the secondary market.
For agents who assist the borrower, agent fees will be paid by the lender out of the fees the lender receives from the SBA. Agents cannot collect fees from the borrower or be paid out of loan proceeds. The total amount an agent may collect for rendering assistance in preparing a PPP loan application may not exceed: (i) 1% for loans of not more than $350,000; (ii) 0.50% for loans of more than $350,000 and less than $2 million; and (iii) 0.25% for loans of at least $2 million
What will be the maturity date on a PPP loan?
The maturity is two years.
How many loans can an applicant take out under the PPP?
Applicants can only take out one loan under the PPP.
Will the terms of the loan differ depending on the applicant?
No, the terms of the loan will be the same for everyone.
How can PPP loans be used?
The loan proceeds can used for any of the purposes below. Note that, as referenced below, even if the loan can be used to pay these costs, the amount forgiven varies depending on what the monies are used for.
(1) Payroll costs
(2) Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
(3) Mortgage interest payments (but not mortgage prepayments or principal payments)
(4) Rent payments
(5) Utility payments
(6) Interest payments on any other debt obligations incurred before February 15, 2020; and/or
(7) Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.
- If you received an SBA EIDL loan from January 31, 2020 through April 3, 2020, you can apply for a PPP loan. If the EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan. If the EIDL loan was used for payroll costs, the PPP loan must be used to refinance the EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
What qualifies as payroll costs?
Compensation to employees (whose principal residence is in the U.S. in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records or, in the absence of such records, a reasonable, good-faith employer estimate); payment for vacation, parental, family, medical or sick leave; allowance for separation or dismissal; payment for the provision of employee benefit consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
What is expressly excluded from the definition of payroll costs?
(1) Compensation to an employee whose principal place of residence is outside of the U.S.;
(2) Compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
(3) 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 Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
(4) Qualified sick and family leave wages for which a credit is allowed under Sections 7001 and 7003 of the Families Fist Coronavirus Response Act.
Are 100% of non-payroll costs forgiven?
No, only 25% of the forgiven amount may be for non-payroll costs. Meaning, for forgiveness of the entire loan, at least 75% of the PPP loan proceeds must be used for payroll costs and employee and compensation levels must not change.
Do independent contractors count as employees for purposes of the above-mentioned calculations?
No, independent contractors have their own ability to apply for a PPP loan.
Are e-signatures or e-consents permitted?
Can the PPP loan be forgiven in whole or in part?
Yes. The amount of forgiveness can be up to the full principal amount of the loan and any accrued interest. Meaning, the borrower is not responsible for any loan payment if the borrower uses all of the proceeds for forgivable purposes and employee/compensation levels are maintained.
What happens if PPP loan funds are misused?
If you use PPP funds are used for unauthorized purposes, SBA will direct the borrower to repay those amounts. If the borrower knowingly used funds for unauthorized purposes, the borrower will be subject to additional liability such as charges for fraud. If a shareholder, member, or partner of the borrower uses PPP funds for an unauthorized purpose, SBA will have recourse against the individual.
Can PPP loans be sold into the secondary market?
Yes, after the loan is fully disbursed, a PPP loan may be sold on the secondary market at a premium or a discount to par value.
How soon can the lender be paid by the SBA?
Yes. A lender may request the SBA purchase the expected forgiveness amount of a PPP loan or a pool of PPP loans at the end of week 7 of the covered period. The SBA will then repurchase within 15 days of the borrower receiving a complete report evidencing that the expected forgiveness amount is reasonable.
What type of verifications do lenders need to provide on borrower documentation for loan forgiveness?
Lenders are not required to verify anything if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs. The lender is held entitled to rely on the borrower’s documentation and attestation in being held harmless.
 The Act provides that a loan will have a maximum maturity of up to ten years from the date the borrower applies for loan forgiveness; however, the SBA, in consultation with the Secretary, determined that a two year loan term is sufficient.