Interim final rules impose tighter rules regarding use of PPP loans; faith-based organizations are exempt from affiliation rules
The U.S. Small Business Administration (“SBA”) released guidance in the form of two interim final rules at the end of last week, as well as a fact sheet regarding affiliation rules, providing further guidance regarding the Paycheck Protection Program (“PPP”) provided under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
The interim final rules provide clarity regarding several elements of the PPP that the CARES Act left to the discretion of the SBA. In addition, the second interim final rule expressly provides that faith-based organizations are not subject to the affiliation rules under the PPP. This means that each religious organization may apply for a PPP loan on its own and will not be disqualified from the program by virtue of being under common control or having an identity of interest with other organizations.
The interim final rules, along with the application form and other guidance about the PPP, are available on the U.S. Treasury (“Treasury”) website here.
Notably, none of the guidance released by Treasury or the SBA to date appear to make mention of the sense of the Senate provided in the CARES Act, that the SBA “should issue guidance to lenders and agents to ensure that the processing and disbursement of covered loans prioritizes small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals…, women, and businesses in operation for less than 2 years.”
The following is a brief summary of the guidance provided to date.
WHEN AND WHO:
Applications for small businesses and sole proprietors may now be submitted to SBA approved lenders. Applications were first accepted on Friday April 3. For this purpose, the small business category includes 501(c)(3) charitable nonprofits, 501(c)(19) veteran’s organizations, and tribal governments, as well as businesses in certain industries that have more than 500 employees so long as they meet applicable SBA employee-based size standards for those industries.
Applications for independent contractors and self-employed individuals may be submitted to SBA-approved lenders starting Friday April 10.
For purposes of determining eligibility, an organization will be aggregated with its affiliates. Affiliation is determined by such factors as ownership, stock options, overlapping management, and identity of interest. A concise summary of the affiliation rules as they apply under the PPP can be found here.
The guidance notes that organizations that would like to avail themselves of relief in the form of a PPP loan are advised to apply as soon as possible, since there is a cap on the amount of funding available under this program. One bank alone reported receiving over 175,000 applications since Friday April 3, amounting to $32.6 billion in loan requests – nearly 10% of the funding earmarked for the program. Many banks have announced that they intend to prioritize loan applications submitted by customers that are current borrowers.
Also, in order to show that the PPP loan was used exclusively for permitted expenditures, borrowers may want to set up a separate bank account for the loan.
WHERE TO APPLY:
Currently, applications may be made to any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating.
Once other lenders who want to participate are approved, applicants may apply for loans with them as well.
Applicants must provide payroll documentation and provide certain certifications as to the need for the loan and as well.
Interest rate on PPP loans is set at a1.0% fixed rate.
Treasury initially announced that the rate would be 0.50%, but later increased it. The Act provided for up to a 4.0% rate.
Payments of principal, interest and any fees are deferred for 6 months.
The loan term is 2 years and there is no prepayment penalty.
No personal guarantees or collateral are required to secure the loan.
Each applicant must make certain certifications, including (i) that it was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes, (ii) that current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant and (iii) that the funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments.
If any portion of a PPP loan is knowingly used for unauthorized purposes, the federal government may hold the applicant legally liable and require that such portion of the loan be repaid to the government.
MAXIMUM LOAN AMOUNT:
Loans may be for up to 2.5 months of average monthly payroll costs from the last year, subject to a $10 million cap. Seasonal or new businesses will use a different applicable time period for the calculation of average monthly payroll.
No more than $100,000 of compensation per employee may be included in the calculation of an applicant’s payroll costs and total payroll costs are capped at $100,000 annualized for each employee. For a business or a charitable nonprofit, independent contractors do not count as employees.
Payroll costs include: salary, wages, commissions; cash tips or the equivalent; payment for vacation, parental, family, medical or sick leave; separation pay; group health care coverage, including premiums and retirement; and state and local taxes assessed on employee compensation.
For independent contractors and sole proprietors, payroll costs include wage, commissions, income or net earnings from self-employment or similar compensation.
Organizations that received an Economic Injury Disaster Loan (“EIDL”) from January 31 through April 3, 2020 are eligible to apply for a PPP loan and may use the PPP to refinance the EIDL loan (since the PPP loan has a lower interest rate). The amount of the refinanced EIDL loan will added to the applicant’s payroll calculation to determine the total amount of the PPP loan (subject to the $10 million cap).
Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the amount forgiven from the PPP loan.
At least 75% of the loan must be used for payroll. No more than 25% of the loan may be used for permitted non-payroll costs: Mortgage interest, rent, utilities, interest on loans incurred before February 15, 2020, and to refinance a qualifying EIDL loan. Note that for purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included. This could mean that a portion of the refinanced EIDL loan may need to be spent on payroll costs.
The CARES Act did not impose this spending requirement and it was not included in previously released guidance. However, Treasury and the SBA determined that these spending rules align with the purpose of the CARES Act, which is to keep workers employed and paid.
Borrowers may apply for loan forgiveness to the extent that they use the loan proceeds for payroll costs, mortgage interest, rent, and utilities payments over the 8 week period following receipt of the loan. Not more than 25% of the forgiven amount may be for non-payroll costs, a limitation that is not in the CARES Act.
The interim final rules confirm that the amount of the loan forgiven will be reduced if the borrower’s workforce or payroll is reduced. Specifically, the amount of the PPP loan that may be forgiven will be reduced (i) proportionately in connection with any reductions in workforce and (ii) by an amount equal to any reduction in amounts paid to any employee (specifically any employee who earned not more than $100,000 annualized in 2019) that exceeds 25% of such employee's compensation. Reductions to the salary of an employee who earned more than $100,000 annualized in 2019 does not appear to trigger a reduction in the amount of the loan that may be forgiven.
If an EIDL loan is refinanced as part of the PPP loan, amounts spent from the refinanced EIDL loan on non-payroll costs could result in a reduction in the amount of the PPP loan eligible for forgiveness.
To request loan forgiveness, borrowers will need to submit a request to the lender that is servicing the loan. The request must include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. The lender must make a decision on the forgiveness within 60 days.