SBA Issues Further Guidance on PPP Loan Forgiveness

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The Small Business Administration (SBA) issued new guidance Friday, May 22, 2020, regarding loan forgiveness applications under the Paycheck Protection Program (PPP) in the form of two new interim final rules. The first new interim final rule instructs borrowers on the application process and details which employer costs are eligible for loan forgiveness. The new rule also explains how a decrease in the number of full-time equivalent (FTE) employees or a reduction in an employee’s salary or wages will affect a borrower’s ability to receive loan forgiveness. Although largely a reproduction of previously issued guidance, the first interim final rule does provide new answers to questions regarding payroll calculation, full time employee status determination, and the effect that various scenarios will have on a borrower’s loan forgiveness eligibility. The second new interim final rule clarifies the SBA’s loan review authority, details the loan forgiveness process, and informs lenders of their responsibilities in reviewing loan forgiveness applications.

First Interim Rule

The most notable portion of the first interim final rule establishes when a loan's eight week covered period begins. Generally, employers can recover payroll costs paid or incurred eight weeks from the date that they receive the loan. The new guidance creates an exception to allow employers that pay their employees every two weeks (or more frequently) to establish an alternative covered period that begins on the first day that payroll is paid out. While allowing for an alternative timeframe that the eight weeks may span, the new guidance does not extend the duration of the covered period. Costs are paid the day that paychecks are issued or an ACH credit transaction is initiated. Costs are incurred the day the employee performs the work. In the case of employees that are not working but still receiving payroll, the employer’s schedule dictates the date costs are incurred. Borrowers may recover costs incurred during the final pay period if they are paid on or before the next payroll date. The new guidance also declares that bonuses, hazard pay, and pay issued to furloughed employees during the covered period is considered payroll as long as the paid employee’s salary does not exceed $100,000 annually. Finally, the new guidance places a cap on the amount an owner-employee or self-employed borrower may recover for payroll costs at 15.38% of their 2019 compensation or $15,385 per individual, whichever is less.

The guidance next explains which non-payroll costs borrowers may recover. The new guidance defines non-payroll costs as any interest payments incurred or utility or rent paid for obligations arising before February 15, 2020. Borrowers may not account for any interest prepayment or payment of principal because these obligations did not arise during the covered period. Borrowers may recover any non-payroll costs paid or incurred during the covered period up to 25% of the loan’s principal.

The final section of the first interim final rule explains how a reduction in the number of full time equivalent (FTE) employees or in employee salary or wages during the covered period will affect the amount eligible for loan forgiveness. The SBA decided to classify a Full Time Equivalent employee as an employee who works 40 hours a week on average. If an employer reduces the number of FTE employees during the covered period when compared to a reference period of the borrower’s choice, the loan forgiveness amount will be reduced by the percentage of the reduction. If a borrower employed 10 FTE employees during the reference period but only employs 8 during the covered period, the loan forgiveness amount will be reduced by 20%. If the employer reduces an employee’s salary or wages from the amount paid during the reference period, the loan forgiveness amount will be reduced by any portion in excess of 25% of the employee’s previous pay. For example, say an employee made $10,000 during the reference period, but the employer pays him $7,500 during the covered period. This employer’s loan forgiveness amount would not be reduced because the salary reduction did not exceed 25%.

The guidance also carves out several instances that would exempt an employer from reduction of the loan forgiveness amount. The first exception deals with the effect a reduction in the number of FTE employees has on an employer’s overall wage disbursement. Borrowers do not have to double account for reduction in salary or wages caused by an FTE reduction.  If an FTE employee goes part-time but still receives the same hourly wage, the employer only needs to account for the FTE reduction and not the decrease in the total amount of wages paid by the employer. The second exemption allows employers that restore reduced workforces or salary amounts by a deadline of June 30, 2020, to recover the full amount of the loan free from reduction. The final exception exempts borrowers whose reduction is attributable to an employee being fired for cause, voluntarily resigning, or voluntarily requesting less work, provided that the borrower provides documentation of the dismissal or resignation.

Second Interim Rule

The second interim final rule issued establishes the SBA’s authority to review loan applications for eligibility, details the effects of an SBA ineligibility determination, and describes the lender’s obligations in the loan application process.

The guidance reserves to the SBA the right to review any PPP loan application for borrower eligibility, loan amounts and use, and loan forgiveness amounts. If the SBA determines that the borrower is ineligible for any of the proceeds previously approved, the borrower is then given an opportunity to respond and provide additional information. Loans received by ineligible borrowers cannot be forgiven. Additionally, lenders cannot receive processing fees for loans disbursed to ineligible borrowers. If the SBA deems a borrower ineligible within one year of the date of disbursement, the lender is liable for any processing fees they received in association with that loan. If the lender is in full compliance with SBA regulations, the guaranty of the loan will not be affected by an ineligibility determination. 

The guidance issued Friday also instructs lenders reviewing loan forgiveness applications on what steps to take, the timeframe for review, and what duties they have to the borrower in the event the SBA reviews the loan. First, lenders should verify that the borrower has all the proper certifications and documentation of eligible costs. Next the borrower should confirm the various calculations made on the application. Accuracy of the information is guaranteed by the borrower; however, the lender has a duty to conduct a good faith review of the accuracy of the assertions made on the application. The source of the information on the application will dictate the necessary level of review. Documentation from a third-party payroll company requires less inspection than payroll documents produced entirely in house.

The lender must decide on loan forgiveness no later than 60 days after the completed application is submitted. Borrowers whose loan forgiveness has been denied without prejudice may seek review from the lender. As stated earlier, borrowers deemed ineligible cannot receive loan forgiveness. If the loan forgiveness application is approved, the SBA must pay the lender 90 days from the date that they receive the decision. If the lender denies the loan forgiveness application, they must give the SBA a reason and provide written notice to the borrower. The SBA can review that decision on their own initiative or by request of the borrower made within 30 days of notice of denial from the lender. The SBA has 90 days to review the denial. The final aspect of the new guidance instructs lenders what to do in the event the SBA does review a loan. A lender who learns that the SBA is reviewing a loan should notify the borrower within 5 days and submit to the borrower’s application forms to the SBA.

This post was authored by Greg J. Angelico, a Loyola University New Orleans College of Law student who is spending part of his summer working at King & Jurgens. 

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