Paycheck Protection Program Clarifications Continue

In July, PIA National submitted comments on two different regulatory proposals promulgated by the Small Business Administration (SBA) concerning the implementation of the Paycheck Protection Program (PPP). Since then, regulatory activity has continued apace in formal and informal ways. The latest entry in the growing literature on How to Interpret the PPP is an August 4 “Frequently Asked Questions” (FAQ) series regarding PPP loan forgiveness, an area of increasing interest as early borrowers seek forgiveness for their March/April loans.

The FAQ is especially valuable because it provides examples of special situations that were addressed by regulation earlier this summer. The Interim Final Rule on PPP loan forgiveness outlined existing guidance intended to aid small businesses by clarifying forgiveness requirements. During the comment period, PIA National staff talked with PIA members about their experiences with the PPP loan process. Our comments reflect those conversations. Specifically, we noted that the Economic Injury Disaster Loan (EIDL) expansion contained within the Coronavirus Aid, Relief, and Economic Security (CARES) Act (Pub. L. 116-136) provided welcome early relief to businessowners, many of whom received a CARES Act EIDL advance while their PPP loan applications were pending. EIDL advances were essential for many of these businesses because the funds were readily available. By contrast, the PPP application process was challenging and its outcome uncertain. During that time, borrowers who sought and received EIDL advances were told that their advances would not need to be repaid, even if their underlying EIDL loan request was ultimately rejected.

However, many business owners who obtained EIDL advances went on to borrow PPP funds and, weeks or months later, learned that their EIDL advances would be deducted from their PPP loan forgiveness amount. Borrowers who applied for both may have made different choices (borrowed less PPP funds, spent it differently, or skipped the PPP loan process entirely) if they had realized their EIDL advance would be deducted from their PPP loan forgiveness. Confusion on this point was exacerbated by the fact that the permissible-use categories for EIDL advances and PPP loans had a lot of overlap; businesses could use one or the other for many of the same expenses.

Perhaps worst of all, the borrowers most affected by this are those that acted the most assertively to protect their businesses. In that sense, the deduction of EIDL advances feels punitive towards those who responded proactively to the looming economic crisis.

The other regulatory input we provided last month was in response to Revisions to a First Interim Final Rule, which made changes to existing guidance to help small businesses obtain PPP loan forgiveness, understand borrower requirements, and engage in the SBA reimbursement process. These changes matched PPP regulations up with lenders’ and borrowers’ revised statutory requirements, which had been changed by the Paycheck Protection Program Flexibility Act (Flexibility Act) (Pub. L. 116-142).

This regulation also clarified an ambiguity that arose after the passage of the Flexibility Act, which changed the percentage of PPP loan funds that borrowers had to use for payroll costs, from 75 percent to 60 percent, to qualify for loan forgiveness. That adjustment was meant to give borrowers more flexibility in using their loan proceeds; it let them use funds for non-payroll expenses without jeopardizing their chance to have their loan forgiven. However, the Flexibility Act did not say whether the new requirement was meant to put a limit on the total loan amount eligible for forgiveness, or whether it was meant to be a prerequisite for any degree of forgiveness. If the 60 percent were meant to limit the total amount of loan forgiveness available to a borrower, a borrower who spent less than 60 percent on payroll could still be eligible for forgiveness of some of their loan. On the other hand, if the 60 percent were a threshold for any loan forgiveness eligibility, a borrower who spent less than 60 percent on payroll would be denied any loan forgiveness at all.

The regulation resolves this by saying that the 60 percent requirement is “a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness” at all. This interpretation makes the new law consistent with the PPP structure created in the CARES Act, and it reflects Congress’s intent—that is, to provide borrowers with increased flexibility in the spending of PPP loan proceeds and pursuit of loan forgiveness—in passing it.

The PPP is scheduled to stop accepting new loan applications on August 8, but PIA National remains committed to continuing its work with Congress to ensure that financial support remains available to businessowners as we work our way out of this financial crisis.