PPP Loan Forgiveness, Part 2

Carol Beaumier, Senior Managing Director Risk and Compliance – New York
Michael Brauneis, Managing Director Risk and Compliance, U.S. Financial Services Practice Leader

One week after issuing a Loan Forgiveness Application and step-by-step borrower instructions (discussed in an earlier blog), the Small Business Administration (SBA) released two interim final rules (IFRs) on the Paycheck Protection Program (PPP) loan forgiveness requirements and roles and responsibilities of borrowers and lenders. The IFRs cover the process for loan forgiveness and supplement previous guidance and regulations related to loan forgiveness. They also include details on several technical questions related to employee status, payroll calculations and forgiveness-eligible non-payroll expenses, some of which include new information and likely raise more questions, particularly related to the still-limited guidance provided thus far about what specifically must be done to satisfy the “good faith review” of borrower documents that the lender is required to perform. The IFRs are effective immediately.

The IFRs do not change the eligibility terms for forgiveness:

  1. Non-payroll costs (interest payments on business mortgage obligations, payments for business rent on real and personal property under lease, and business utility payments) are capped at 25% of the total forgiveness amount.
  2. Forgiveness is generally calculated for the eight-week period from the disbursement of the PPP loan.
  3. Certain reductions will be made to a borrower’s loan forgiveness amount based on reductions in full-time equivalent employees or in employee salary and wages during the covered period, subject to an important statutory exemption for borrowers who have rehired employees and restored salary and wage levels by June 30, 2020 (with limitations); there is a regulatory exemption to the reduction rules for borrowers who have offered to rehire employees or restore employee hours, even if the employees have not accepted.

Changes to the 25% cap on other allowable expenses could be made at the SBA and the U.S. Treasury Department’s discretion; however, Treasury Secretary Steven Mnuchin has publicly stated his belief that the current cap is appropriate and aligned with the intent of the CARES Act, and will not be changed by Treasury unless so directed by Congress. The eight-week forgiveness period, on the other hand, is stipulated by the CARES Act and so legislative action would be required to extend this period. This change appears to have bipartisan support, but it is not yet clear when or if a vote on this change will be scheduled.

At a high level, the general forgiveness process is described as follows:

  • The borrower completes and submits the Loan Forgiveness Application to the lender.
  • Within 60 days, the lender reviews the application and makes a decision regarding forgiveness. Specifically, the lender must in good faith:
    • Confirm receipt of the borrower certifications contained in the Loan Forgiveness Application Form.
    • Confirm receipt of the documentation borrowers must submit to aid in verifying payroll and nonpayroll costs, as specified in the instructions to the Loan Forgiveness Application Form.
    • Confirm the borrower’s calculations on the Loan Forgiveness Application, including the dollar amount of the Cash Compensation, Non-Cash Compensation, and Compensation to Owners claimed by performing a good faith review of the documentation submitted with the Loan Forgiveness Application.
      • With respect to the level of review required, the rule provides one example, stating that “minimal review” of payroll documentation furnished by a recognized third-party payroll processor might be reasonable, but gives no further guidance regarding what types of actions are expected for the “more extensive” review suggested for payroll information provided based on other sources. No guidance at all is provided about the reviews that should be performed for other types of documents, such as those supporting how non-payroll funds were spent.
    • Confirm that the borrower made the Loan Forgiveness Calculation Form correctly, by dividing the borrower’s Eligible Payroll Costs by 0.75.
  • If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for under the statute and applicable regulations, the lender must notify the borrower and request payment from the SBA at the time the lender issues its decision to the SBA.
  • The SBA will, subject to its review of the loan and/or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to the SBA.
    • If applicable, the SBA will deduct Economic Industry Disaster Loan (EIDL) Advance Amounts from the forgiveness amount remitted to the lender as required by the CARES Act.
    • If the SBA determines in the course of its review that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act, SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application (for example, because the borrower lacked an adequate basis for the certifications that it made in its PPP loan application), the loan will not be eligible for loan forgiveness.
  • Any amount not subject to forgiveness will convert to a two-year term loan consistent with original PPP requirements.

Consistent with the prior announcement that the SBA will review all PPP loans over $2 million, the IFR on loan forgiveness requirements notes that the general loan forgiveness process described above applies only to loan forgiveness applications that are not reviewed by the SBA prior to the lender’s decision on the forgiveness application. It further states that a separate interim final rule on SBA Loan Review Procedures and Related Borrower and Lender Responsibilities will describe the procedures for reviewing PPP loan applications and loan forgiveness applications.

Finally, and in addition to the 90-day SBA review period described above, the IFRs also impose a six-year record retention period on borrowers and remind lenders of the existing record retention requirements applicable to them under SBA regulations. Further, the IFRs establish a step-by-step process that lenders must follow in responding to SBA requests for information about PPP loans they have originated, and note that both the lender processing fee may be clawed back and loans considered ineligible for an SBA guarantee if the SBA determines the lender failed to meet its obligations under the IFR or the Lender Application Form. These provisions, coupled with the ambiguity described above regarding exactly what types of reviews lenders are expected to perform to meet their obligations, should be cause for concern among participating lenders and prompt them to ensure they have robust intake, review, documentation and record retention controls in place for all aspects of the forgiveness process.

The first PPP loans were disbursed on April 3, so some borrowers are well into the eight-week period. Lenders now need to prepare for an onslaught of millions of forgiveness applications.

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