Paycheck Protection Program: Regulatory Update (Part 1 of 2)

The Paycheck Protection Program (PPP), a new loan program created within the Treasury Department’s Small Business Administration (SBA) as part of the CARES Act, was designed to provide an avenue of potential loan forgiveness for those businesses whose borrowing and spending met certain requirements. Today in Part 1, we’ll go over the main points of the newest regulations on the PPP, and in Part 2, we’ll address the Paycheck Protection Program Flexibility Act, which was signed into law in early June.

The Treasury Department has been fielding questions about the PPP since its passage in March. The result is an extensive FAQ document, which can be found here. On June 1, Treasury issued an Interim Final Rule (IFR) concerning the forgiveness of PPP loans. This IFR is the latest in a long series of regulations designed to help PPP borrowers prepare and submit loan forgiveness applications, help lenders make forgiveness decisions, and advise both borrowers and lenders about the SBA process for reviewing loan and loan forgiveness applications.

PPP loan forgiveness is limited to payments made during the “covered period” (more on this later) for:

  • Payroll;
  • Interest payments (but not payments of principal) on business mortgage obligations incurred before Feb. 15;
  • Payments on business rent obligations emanating from a lease in force before Feb. 15; or
  • Business utility payments for services that began before Feb. 15.

Initially, loan forgiveness was not available to borrowers who used more than 25 percent of their loan proceeds for expenses incurred in the non-payroll categories. In other words, the PPP required borrowers to use at least 75 percent of the loan for payroll expenses; this requirement was intended to encourage businesses to use PPP funds to continue to employ—and pay—their workers, even if the business itself was forced to shut down temporarily as part of a state or locality’s stay-at-home order. (The 25 percent requirement was revised to be a 40 percent requirement, but that change was not part of this IFR; rather, it was made by legislation passed shortly after the IFR was issued. More to come on the new PPP law in Part 2.)

Payroll costs are eligible for forgiveness if they are used during the “covered period,” which begins either the day the PPP loan proceeds are disbursed or the first day of the first payroll cycle of the covered period. At the time the IFR was promulgated, the “covered period” was eight weeks. However, shortly after that, Congress passed and the president signed legislation to lengthen the “covered period” to 24 weeks. (More on that in Part 2.)

According to the IFR, loan forgiveness can be sought by providing a completed forgiveness application to a lender, which then has 60 days to inform the SBA of its decision regarding forgiveness. If the lender decides to forgive some or all of the amount applied for, the lender must request payment from the SBA when the lender issues its decision. Then the SBA issues the appropriate amount to the lender, plus any interest accrued through the date of payment, no later than 90 days after the lender issues its decision to the SBA. If the lender and the SBA each use all the time they are allotted, it could take up to five months from the time a business submits a forgiveness application to the time the loan is forgiven. Where applicable, the SBA will deduct Economic Injury Disaster Loan (EIDL) advances from the forgiveness amount given to the lender.

Loan forgiveness can be reduced under certain circumstances, depending on the borrower’s payroll and headcount of “full-time equivalents.” The IFR says, if a borrower offers to rehire employees or restore hours, the borrower may qualify for an exemption to the reduction rules, even if the employee has not accepted (or even if the employee declines) the offer. For access to such exemptions, borrowers must keep thorough written records of the steps they took to maintain payroll. The SBA can request access to such files for a period of up to six years after the loan is forgiven or fully repaid. (The IFR also extends the time given to borrowers to repay loans.)

The IFR sets forth a complex structure for calculating loan forgiveness reductions. The borrower must complete that calculation and provide it, along with supporting documentation, with its forgiveness application. The lender is required to engage in a “good faith” review of the application, and the IFR sets forth a bit about what a good faith review will entail.

In general, the IFR clarifies that qualifying loan money may be used in the usual course of business, within reason, even if that means the actual payment is not made during the covered period, as long as the expense is incurred during the covered period (examples in the regulation include payments to an employee made outside the covered period because of the borrower’s pay schedule, or the payment of a utility bill for utility services incurred during the covered period but paid, on time, after the covered period is over).

What is considered “payroll costs” will be viewed somewhat broadly, according to the IFR. Borrowers do not need to deduct from their payroll costs the pay of employees who were fired for cause, though they should document those decisions so that they can provide that documentation to their lender with their forgiveness applications. That exception notwithstanding, the extent of loan forgiveness depends on the borrower demonstrating having the same number of full-time employees (FTEs) or full-time equivalents (the PPP provisions establish that one FTE equals 40 hours of work per week) at the end of the covered period as it had at the beginning.

Notably, the IFR gives the SBA the broad power to review any loan at any time to confirm the accuracy of a borrower’s calculation of loan funds needed and the borrower’s eligibility for loan forgiveness. This power is applicable to all PPP loans, regardless of the loan’s size, and it is still the borrower’s responsibility to calculate the loan amount and the forgiveness amount.

PIA National will continue to work with members of Congress to further improve the PPP and will engage with the Small Business Administration as needed to offer feedback on the regulations this new law is expected to prompt.