Paycheck Protection Program Loans Under the SBA Interim Final Rule

April 2, 2020 guidance from the SBA sheds light on the Paycheck Protection Program loan.

As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act authorized Paycheck Protection Program (PPP), the Small Business Administration (SBA) issued its Interim Final Rule on April 2, 2020, providing the much-anticipated guidance concerning sections 1102 and 1106 to both lenders and borrowers opting to participate in the program. To view the full text of the SBA Interim Final Rule, click here.

We previously discussed available relief for small businesses under the CARES Act (click here). Below is additional guidance provided by the Interim Final Rule pertaining to borrowers seeking a Paycheck Protection Program loan.

What are the eligibility requirements for a loan?

To be eligible for the PPP loan you must:

• Be a small business, 501(c)(3), 501(c)(19) veterans organization, or tribal business concern described in 31(b)(2)(C). Sole proprietors, independent contractors, and other eligible self-employed individuals may also apply.
• Employ no more than 500 employees or the applicable size standards for the industry as provided by the SBA, if higher.
• Have been in operation on February 15, 2020, and either had employees for whom you paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.

I have determined I am eligible; will any other considerations make me ineligible?

Yes, although you or your business may meet the eligibility requirements under section 1102, any of the following will make you ineligible for a PPP loan:

• You are engaged in any activity that is illegal under federal, state, or local law.
• You are a household employer (individuals who employ household employees such as nannies or housekeepers).
• 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 formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years.
• You, or any business owned or controlled by you or any of your owners, 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 seven years and caused a loss to the government.

When can I apply for the loan?

Depending on the lender, borrowers may apply as soon as April 3, 2020. Sole proprietors, independent contractors, and other self-employed individuals can apply on April 10, 2020. Loans are awarded on a first-come, first-served basis.

How will the lender evaluate me or my business, and what documents do I need to provide to the lender for a loan?

Applicants must submit to the lender the following:

• SBA Form 2483, Paycheck Protection Program Application Form (the SBA permits e-signatures on the application); and
• such documentation as is necessary to establish eligibility such as payroll records, payroll tax filings, Form 1099-MISC, or income and expenses from a sole proprietorship (if a borrower lacks any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount).

Applicant will be required to certify in good faith the following in its application:

• 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.
• Current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant.
• Funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; and borrower understands that if the funds are knowingly used for unauthorized purposes, the federal government may hold borrower legally liable such as for charges of fraud. Not more than 25% of loan proceeds may be used for non-payroll costs.
• Documentation verifying the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following the loan will be provided to the lender.
• Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. As explained, not more than 25% of the forgiven amount may be for non-payroll costs.
• During the period beginning on February 15, 2020, and ending on December 31, 2020, the applicant has not and will not receive another loan under this program. (Note: The Act limits certain kinds of multiple relief for the same purpose. For example, applicants may apply for both the COVID-19 EIDL and get a COVID-19 EIDL advance while awaiting approval and also apply for a PPP loan, but the applicant may hold only one award for the same purpose – i.e., no double dipping.)
• The information provided in the application and the information provided in all supporting documents and forms is true and accurate in all material respects. Borrower understands that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than 30 years and/or a fine of not more than $1 million.
• Borrower acknowledges that the lender will confirm the eligible loan amount using tax documents submitted. Borrower affirms that these tax documents are identical to those submitted to the Internal Revenue Service. Borrower also understands, acknowledges, and agrees that the Lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.

Lenders will be permitted to rely on certifications of the borrower in order to determine eligibility of the borrower and the use of loan.

I do not have “employees,” but I use independent contractors. How does this affect my application and/or forgiveness consideration?

One of the most problematic provisions of the PPP loan is how independent contractors are calculated in loans and whether payments to independent contractors may be forgiven. Under the Interim Final Rule released on April 2, 2020, independent contractors do not count as employees for PPP loan calculations or for PPP loan forgiveness.

Independent contractors may apply for a PPP loan on their own beginning April 10, 2020.

What is the formula for calculating my maximum loan amount?

The following is one methodology provided by the Interim Final Rule:

Step 1: Aggregate payroll costs from the last 12 months for employees whose principal place of residence is the United States.

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.

Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).

Step 4: Multiply by 2.5 the average monthly payroll costs from Step 3.

Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, less the amount of any “advance” under a COVID-19 EIDL loan (because it does not have to be repaid).

How much of my loan will be forgiven?

The full principal loan amount and any accrued interest may be forgiven if (a) the borrower uses all of the loan proceeds for forgivable purposes and (b) employee and compensation levels are maintained.

The actual forgiveness amount depends on the actual amounts used for payroll costs and non-payroll costs. A minimum of 75% of the loan forgiveness amount must be for payroll costs and no more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. Forgiveness is limited to payments made for eight weeks from the loan origination date, based on maintaining the requisite headcount by maintaining threshold and pay for people even if they are not able to work because of shelter-in-place orders. The amount forgiven will be reduced proportionally based on any reduction in the number of employees retained compared to the prior year. The proportional reduction in loan forgiveness also applies to reductions in the pay of any employee where the pay reduction exceeds 25% of the employee’s prior-year compensation. A borrower will not be penalized by a reduction in the amount forgiven for termination of an employee made between February 15, 2020, and April 26, 2020, if an employee is rehired by June 30, 2020.

Borrowers are required to apply for forgiveness directly to the lender. Lenders do not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs.

What are some key loan provisions that have been clarified?

• Loans are for two years with 1% interest, although the Act itself sets other maximum limits.
• No payments are required during the first six months, although interest accrues during that time.

What are the associated fees for the loan, and who pays for them?

The SBA did not change the processing fees paid to the lenders. The Rule clarifies that borrowers will not be charged fees for PPP loans. Any “agent” fee, whether borrower’s agent or lender’s agent, must be paid by the lender (and not with PPP funds) and are limited to:

• 1% for loans $350,000 and under;
• 0.5% for loans greater than $350,000 to $2 million; and
• 0.25% for loans greater than $2 million.

The Rule identifies “Agents” as authorized representative and can be:

• an attorney;
• an accountant;
• a consultant;
• someone who prepares an applicant’s application for financial assistance;
• someone who assists a lender with originating, disbursing, servicing, liquidating, or litigating SBA loans;
• a loan broker; or
• any other individual or entity representing an applicant by conducting business with the SBA

What happens if I do not use the loan for authorized uses?

PPP funds used for unauthorized purposes will be subject to repayment of those amounts. If borrowers knowingly use the funds for unauthorized purposes, additional liability such as charges for fraud may be issued. If a shareholder, member, or partner uses any PPP funds for unauthorized purposes, the SBA will have recourse against the individual for the unauthorized use.

Can I apply for and receive more than one Paycheck Protection Program loan?

No. Although the Act is silent on this issue, the Administrator has determined that eligible borrowers may receive only one PPP loan. The SBA suggests that applicants apply for the maximum amount. Loans are made on a first-come, first-served basis.

What should I do if I am denied a loan?

The Act is silent on applying again after you are denied. Unless further clarifying guidance limiting subsequent applications after a denial is prohibited by the Administrator, businesses should consult with their lender regarding the reasons for the loan denial and ability to cure the application, if possible.

Sacks Tierney has qualified attorneys to answer your questions about these provisions and to help guide your business if you wish to apply for and obtain any of the assistance available through the CARES Act.