SBA Issues Paycheck Protection Program Interim Final Rules on Loan Forgiveness and Loan Review and Lender ResponsibilitiesMay 28, 2020
On May 22, 2020, the Small Business Administration (SBA), in consultation with the Department of Treasury, issued an Interim Final Rule on Loan Forgiveness (“Forgiveness Rule”) and an Interim Final Rule on Loan Review Procedures and Lender Responsibilities (“Review Rule”) for the Paycheck Protection Program (PPP). While the Forgiveness Rule reiterates many of the clarifications made by the SBA through its PPP Frequently Asked Questions and the loan forgiveness application released by the SBA on May 15 (“Forgiveness Application”), the Review Rule provides an outline for borrowers as to how the SBA will review PPP loans and what level of review lenders are to undertake when reviewing a Forgiveness Application.
Interim Final Rule on Loan Forgiveness
The Loan Forgiveness Rule memorializes several items addressed in the SBA’s PPP FAQs and Forgiveness Application. Specifically:
- Timing of Payroll Costs Eligible for Forgiveness and Addition of the “Alternative Payroll Covered Period”: For purposes of calculating payroll costs eligible for loan forgiveness, the Forgiveness Application provided for an “Alternative Payroll Covered Period” that a borrower could use. The Forgiveness Rule memorializes this alternative stating that the eight-week covered period for payroll costs begins either on (i) the date of disbursement of loan proceeds or (ii) the first day of the first payroll cycle in that covered period. Additionally, the SBA reiterates the clarification made in the Forgiveness Application that if a borrower incurs but does not pay a payroll cost during the covered period (or alternative covered period) then the cost is still eligible for forgiveness if the payroll cost is paid on or before the next regular payroll date occurring after the end of covered period (or alternative covered period).
- Compensation to Furloughed Employees and Hazard Pay are Eligible for Forgiveness: The treatment of furloughed employee compensation has represented an outstanding question for borrowers. In the Forgiveness Rule, the SBA states that given the broad definition of “payroll costs” under the CARES Act compensation paid to furloughed employees is eligible for forgiveness subject to the annual salary cap generally applicable to employees. Additionally, hazard pay and bonuses are also eligible for forgiveness subject again to the annual salary cap generally applicable to employees.
- Limitation on Owner/Self Employed Compensation: The Forgiveness Application included a borrower certification stating that compensation for owner-employees and self-employed individuals is capped at $15,385 per individual. In the Forgiveness Rule, the SBA reiterates this limitation noting that such amount can be no more than the lesser of 8/52 of 2019 compensation or $15,385 per individual in total across all businesses.
- Timing of Nonpayroll Costs: As was the case with payroll costs, the Forgiveness Application clarified the timing of nonpayroll costs and the Forgiveness Rule memorializes this point stating that a nonpayroll cost is eligible if (i) paid during the covered period or (ii) incurred during the covered period and paid on or before the next regular billing date. The SBA also makes clear that advanced payments of interest on covered mortgages are not eligible for forgiveness.
- Full Time Employee Reductions: Pursuant to the CARES Act, a borrower’s loan forgiveness is reduced in the event of employee reductions unless the borrower restores employment levels by June 30. The Forgiveness Application reiterated this safe harbor and noted it applies if a borrower restores its employment level to the level in the pay period that included February 15, 2020. The Forgiveness Application also expanded the exceptions to the FTE reduction to include not only positions for which a good-faith written offer to rehire was made and rejected but also those employees who were fired for cause, voluntarily resigned or voluntarily requested and received a reduction of their hours. The Forgiveness Rule memorializes the safe harbor and the expanded set of exceptions to the FTE forgiveness reduction.
- Salary Reductions: Pursuant to the CARES Act, a borrower’s loan forgiveness is reduced in the event of certain salary reductions during the covered period. With respect to salary reductions, the Forgiveness Application made clear that the borrower is to make such calculation “only for employees whose salaries or hourly wages were reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period as compared to the period of January 1, 2020 through March 31, 2020.” The salary reduction worksheet also repeated that employees who in any single pay period during 2019 earned wages or salary at an annualized rate of pay in an amount more than $100,000 are not considered for purposes of determining whether any forgiveness amount is to be reduced because of a salary reduction.
The Forgiveness Rule adds an illustration of how a borrower is to calculate the forgiveness reduction due to salary decreases and notes that such reduction calculation is to be done on a per employee basis and calculated by the total dollar amount of salary reductions in excess of the 25 percent of base salary between January 1, 2020 and March 31, 2020. The Forgiveness Rule also states that the salary reduction only applies to a reduction “not attributable to the FTE reduction” so that a borrower is not penalized twice.
- FTE Calculations: Per the Forgiveness Application, a full-time equivalent employee is defined as an employee who works on average 40 hours weekly. The Forgiveness Rule provides additional detail on how employees who work less than 40 hours per week are calculated noting that a borrower can either calculate such employees as a proportion of a full-time equivalent based on hours or can simply use 0.5 for each part-time equivalent employee.
Interim Final Rule on Loan Review Procedures and Lender Responsibilities
SBA Loan and Forgiveness Review
In the Review Rule, the SBA outlines the process that it will undertake when reviewing a PPP loan, including whether a borrower’s actions have resulted in receipt of a loan that did not meet the PPP’s requirements. While in FAQ #39 the SBA stated it would review all loans in excess of $2 million, it also indicated that it would review other loans as appropriate. The SBA reiterates in the Review Rule that any loan is a candidate for review.
As outlined in the Review Rule, the SBA will focus its review on the certifications and representations that a borrower makes regarding loan and forgiveness eligibility as well as a borrower’s use of proceeds. The SBA previously indicated in FAQ #17 that it will assess a borrower’s eligibility for a PPP loan based on the following: (i) CARES Act; (ii) rules and guidance available at the time of the borrower’s loan application, which include 13 CFR 120.110 and 13 CFR 121.301(f); and (iii) the terms of the borrower’s application. In addition to borrower eligibility, the SBA states that it will review a borrower’s calculation of the loan amount and its use of proceeds as well as its calculation of the loan forgiveness amount.
If the SBA determines that the borrower is ineligible for the loan amount received or the loan forgiveness amount claimed, the SBA may deny the loan forgiveness application in whole or in part and may seek repayment of the outstanding loan balance. The SBA also has an ability to pursue other remedies in the event of such denial. In the Forgiveness Rule, the SBA indicates that a borrower may appeal an SBA denial, and the SBA will issue additional guidance with respect to such process.
In the Review Rule, the SBA also outlines a lender’s responsibilities with respect to a loan forgiveness application. For this review, a lender is to confirm the following items:
- Receipt of a borrower certifications contained in the Forgiveness Application;
- Receipt of documentation to verify payroll and nonpayroll costs as provided for in the Forgiveness Application;
- Calculations made in the Forgiveness Application; and
- Calculation made in the Forgiveness Application with respect to eligible payroll costs being at least 75 percent of loan forgiveness.
While the SBA reiterates that the accuracy of the loan forgiveness calculations is a borrower’s responsibility and that a lender may rely on a borrower’s representations, a lender is to “perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness. If a lender finds calculation errors or insufficient documentation, the SBA encourages the lender to work with the borrower to address the problem.
A lender is required to issue forgiveness decisions no later than 60 days after receipt of a complete Forgiveness Application. A lender can approve a Forgiveness Application in whole or part or deny the application without prejudice pending an SBA review. In such case, the borrower may request that the lender reconsider its Forgiveness Application. A borrower would not have an ability to make such a request upon an SBA determination that the borrower is ineligible for a PPP loan.
If a borrower is determined to be ineligible, the lender is not to receive a processing fee for such borrower. Furthermore, the SBA may claw back the processing fee if within a year after loan disbursement the SBA determines that the borrower was ineligible for a PPP loan.
The SBA notes that it may issue additional guidance to further assist borrowers and lenders. We will provide a further update upon release of such regulations and guidance.
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