One week after issuing the long-awaited Paycheck Protection Program (PPP) Loan Forgiveness Application, summarized here, the Small Business Administration (SBA) issued two interim final rules on May 22, 2020 addressing loan forgiveness, loan review procedures, and borrower and lender responsibilities.
The first interim final rule issued on May 22 addresses the requirements for loan forgiveness. Key points are as follows:
Many borrowers have sought guidance on the deadline for submitting the Loan Forgiveness Application. The interim final rule does not clarify whether the borrower is subject to a deadline for submitting the application. For loans that are not reviewed by the SBA prior to the lender’s decision on loan forgiveness, lenders must issue decisions on loan forgiveness to the SBA within 60 days from receipt of a completed application, and the SBA will remit the appropriate forgiveness amount, plus any accrued interest, to the lender within 90 days thereafter.
The issue of whether expenditures must be both incurred and paid versus incurred or paid within the eight-week forgiveness period has generated considerable confusion. The interim final rule provides that, “In general, payroll costs paid or incurred during the eight consecutive week (56 days) covered period are eligible for forgiveness.” This language appears to suggest that payments made early in the eight-week period are eligible for forgiveness even if they relate to payroll incurred prior to the start of the eight-week period, although we will monitor subsequent guidance closely for further clarifications or changes. Tracking the language of the application, the interim final rule confirms that the eight-week period begins on the date of loan disbursement, although borrowers may elect an “alternative payroll covered period” beginning on the first day of the first payroll cycle after loan disbursement.
The interim final rule provides that payments of salary, wages, or commissions to furloughed employees, bonuses, and hazard pay are eligible payroll costs, subject to the limitation that cash compensation does not exceed $100,000 on an annualized basis.
A prior interim final rule limited compensation to self-employed individuals to the lesser of $100,000 per year on an annualized basis or 8/52 of 2019 compensation. The application appeared to expand that rule to owner-employees and general partners without any underlying discussion. The May 22, 2020 interim final rule on loan forgiveness requirements confirms this expansion by stating that owner-employees are capped by their 2019 employee cash compensation, retirement, and health care contributions. Self-employed individuals filing Schedule C are capped at owner compensation replacement income from 2019, in accordance with the prior interim final rule. General partners are limited to their 2019 net earnings from self-employment, reduced by section 179 deductions, unreimbursed partnership expenses, and depletion from oil and gas properties, multiplied by 0.9235. Further, self-employed individuals, including general partners, may not receive forgiveness for retirement or health insurance contributions. Remember that the annualized $100,000 limitation applies to cash compensation in addition to the rules set forth above.
The interim final rule confirms the prior guidance that nonpayroll costs are eligible for forgiveness if (i) paid during the covered period, or (ii) incurred during the covered period and paid on or before the next regular billing date.
Advance payments of interest on a covered mortgage obligation are not eligible for forgiveness. Payments of principal are not eligible under any circumstances.
Eligible loan forgiveness amounts are subject to reductions if the borrower does not maintain the number of full-time equivalent employees, as summarized in prior guidance, and subject to certain exceptions. The interim final rule restates the prior regulatory exemption in which reductions in loan forgiveness are waived where the borrower makes a good faith, written offer to rehire (or restore hours for) an employee during the applicable eight-week period, and the employee rejects that offer. One new requirement applicable to this exemption is set forth in the May 22, 2020 interim final rule, which is that the borrower must inform the state unemployment office of the employee’s rejected offer of employment within 30 days of such rejection.
The interim final rule defines a full-time equivalent employee as an individual who works 40 hours or more each week. The SBA considered using a 30-hour standard but determined that the 40-hour standard better reflects full-time employment for most Americans. The interim final rule tracks the application in providing that employees who work 40 hours or more each week are limited to an FTE quotient of 1.0. For employees who work less than 40 hours per week, the borrower may calculate the average number of hours paid per week divided by 40, or the borrower may use an FTE equivalency of 0.5 for each employee. The chosen method must be applied consistently to all employees in all relevant periods.
The interim final rule restates prior guidance on the salary/hourly wage reduction to loan forgiveness. However, to avoid doubly penalizing borrowers, the rule helpfully states that salary/hourly wage reductions will only be taken into account if they are not attributable to an FTE reduction. An example provides that if an hourly wage employee had been working 40 hours per week but only works 20 hours per week during the covered period, but the employee’s hourly wage is not reduced, the reduction in hours is taken into account for FTE purposes, but the borrower is not required to apply the salary/hourly wage reduction to such employee.
The second interim final rule issued on May 22 addresses loan review procedures and related borrower and lender responsibilities. Key points are as follows:
The SBA may review any PPP loan deemed appropriate, and the SBA Administrator is authorized to review borrower eligibility (based on the CARES Act, subsequent guidance, borrower certifications, the loan application, and the forgiveness application), the amount and use of loan proceeds, and the borrower’s entitlement to loan forgiveness. The SBA may undertake a review of any loan of any size in its discretion. If the SBA identifies that the borrower may be ineligible for a PPP loan in general or ineligible to receive the requested forgiveness amount, the SBA may require the lender to obtain additional information from the borrower, or the SBA may request information directly from the borrower. The SBA will consider all additional information from the borrower in completing its analysis.
The SBA intends to issue a subsequent interim final rule establishing appeal procedures for borrowers that disagree with the SBA’s determinations.
Each lender is required to
The accuracy of the calculations is the responsibility of the borrower, but the interim final rule states that lenders are expected to perform a good-faith review in a reasonable amount of time.
The rule provides an example that, where payroll costs are based on a payroll report prepared by a recognized third-party processor, minimal review is appropriate, whereas more extensive review would be required for payroll costs not documented with recognized sources. The lender is not required to obtain independent verification of the borrower’s reported information.
Within 60 days of the receipt of the application, the lender must issue a decision to the SBA either approving the forgiveness amount (in whole or in part), denying the forgiveness amount (in which case it must notify the borrower as well), or, if directed by the SBA, denying the forgiveness amount without prejudice due to a pending SBA review.
Within 30 days of receiving notice from the lender, a borrower whose application has been denied may request SBA review of the lender’s decision.
The SBA may review a PPP loan of any size at any time but must notify the lender in writing, and the lender must notify the borrower within five business days. In addition, within five business days, the lender must transmit the initial application and all supporting documentation as well as the loan forgiveness application and all supporting documentation to the SBA. Further, the lender must request that the borrower submit the Schedule A Worksheet, and the lender must submit the worksheet to the SBA within five days of receipt. Finally, the lender must also submit a signed and certified transcript of account, a copy of the PPP note, and any other related documents requested by the SBA.
If the SBA determines that a borrower was ineligible for the PPP loan in the course of conducting a loan review, the lender is not eligible for a processing fee. In addition, if the SBA determines that a borrower was ineligible for a PPP loan within one year after the disbursement date, the SBA will seek repayment of the processing fee from the lender. However, such a finding will not invalidate the SBA guarantee as long as the lender complied with its obligations.