PPP Forgiveness Interim Final Rules Issued

By Christopher Hanewald

The Department of the Treasury (Treasury) and Small Business Administration (SBA) celebrated the holiday weekend early by releasing new Interim Final Rules (Rules) concerning the Paycheck Protection Program’s (PPP) forgiveness calculation. In general, the Rules build upon the application for forgiveness which was released on May 15, but do not address the biggest concerns of businesses—an expansion of the 8-week Covered Period or an elimination of the 75% payroll cost mandate. While both the Senate and House are expected to vote on bills this week which will address those aforementioned concerns, meaningful resolution of those issues will likely not come quick enough for those PPP recipients who received loans in early to mid-April. As of May 23, the SBA had authorized 4,426,118 loans for a total of $511,231,948,095 leaving about $138 billion authorized and available PPP funds remaining.

The Rules:

  • Alternative Method for Covered Period – Borrowers with pay cycles of biweekly or more frequent are permitted to elect an alternative payroll Covered Period which allows for a Borrower’s Covered Period to commence on the first day of the pay period following receipt of PPP funds.
  • Inclusion of Bonus or Hazard Pay – The Rules expand the definition of eligible payroll costs to include bonuses or hazard pay so long as those payments do not cause an employee’s pro-rated payroll costs to exceed the $100,000 threshold.
  • Self-Employed and Owner-Employee Cap – The Rules established a cap on the amount of loan forgiveness available  which is limited to the lesser of 8/52 of 2019 compensation (i.e., no more than 15.38% of 2019 compensation) or $15,385 per individual in total.
  • When is a non-payroll cost ‘incurred’? – Importantly, the Rules provide much needed clarification that non-payroll costs must be paid or incurred during the 8-week Covered Period and paid on or before the next regular billing date—even if that date is beyond the Covered Period. Additionally, the Rules reiterate that advance payments on mortgage interest are not eligible for forgiveness.
  • Refusal to be Rehired – The Rules further expand upon the de minimis exception provided by Question 40 of the FAQs concerning employees who refuse to be rehired following an offer of employment. In particular, the Rules reaffirm that such a reduction of employees will not affect a Borrower’s request for forgiveness so long as the Borrower can demonstrate: (i) the Borrower made a good faith, written offer to rehire; (ii) the offer was for the same salary or wages and same number of hours; (iii) the offer was rejected by the employee; (iv) the Borrower maintained the record documenting the offer; and (v) the Borrower informed the applicable state unemployment insurance office of the rejected offer.
  • Definition of Full-Time Equivalent – Due to the CARES Act failing to provide a definition of full-time equivalents, the Rules provide that a full-time equivalent employee is one working 40 hours per week. Additionally, the Rules elaborate on the method for calculating less than full-time employees using the following example:

“For example, if an employee were paid for 30 hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.75. Similarly, if an employee were paid for ten hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.25.”

  • Proportional Reduction related to 75% Payroll Requirement – Perhaps the most important piece of information to come out of the Rules relates to the dreaded 75% payroll expense requirement. After much uncertainty, the Rules clarify that a Borrower who does not use the PPP loan proceeds to pay 75% towards eligible payroll costs will not suffer a ‘cliff effect’ from a forgiveness standpoint. Rather, the amount eligible to be forgiven is simply reduced according to a percentage calculation based on full-time equivalents during the reference period divided by full-time equivalents during the Covered Period.
  • Reduction in Wages or Employees – Finally, the Rules provide further guidance by way of an example to prevent Borrowers from being doubly penalized for reductions:

“Example: An hourly wage employee had been working 40 hours per week during the borrower selected reference period (FTE employee of 1.0) and the borrower reduced the employee’s hours to 20 hours per week during the covered period (FTE employee of 0.5). There was no change to the employee’s hourly wage during the covered period. Because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTE employee reduction and the borrower is not required to conduct a salary/wage reduction calculation for that employee.”

SBA Issues Forgiveness Guidance for Lenders & PPP Loan Forgiveness Checklist

By Caryn F. Price

Interim Final Rules issued by the Small Business Administration and Treasury Department late Friday night provide additional guidance to lenders on forgiveness of loans made under the Paycheck Protection Program.  Under the rules:

Lender’s Duties With Respect to Forgiveness Applications.  For all loan forgiveness applications, the lender will be required to confirm receipt of the borrower certifications contained in the application and the documentation borrowers must submit to aid in verifying payroll and non-payroll costs, as well as confirm the borrower’s calculations on the application. Lenders also must confirm that the borrower made the loan forgiveness calculation correctly, by dividing the borrower’s eligible payroll costs claimed by 0.75.  Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents.

Reliance on Borrower Representations.  The rules provide that lenders may rely on borrower representations. However,  if the lender identifies errors in the borrower’s calculation or a material lack of substantiation in the borrower’s supporting documents, the lender must work with the borrower to remedy the issue. Lenders will not need to independently verify the borrower’s reported information if the borrower submits documentation supporting its forgiveness request and attests that it accurately verified the payments for eligible costs.

Decisions on Loan Forgiveness Applications.  The lender must issue a decision to the SBA on a loan forgiveness application not later than 60 days after receipt of a complete application from the borrower. That decision may take the form of an approval in whole or in part, denial, or, if directed by the SBA, a denial without prejudice due to a pending SBA review of the loan. In the case of a denial without prejudice, the borrower may subsequently request that the lender reconsider its application unless the SBA has determined that the borrower is ineligible.

When the lender issues its decision to the SBA, it must request payment from the SBA and include the loan forgiveness calculation form and Schedule A.  Subject to any SBA review of the loan or loan application, the SBA will remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, within  90 days. If the lender determines that the borrower is not entitled to forgiveness in any amount, the lender must provide the SBA copies of Schedule A and the PPP borrower demographic information form (if submitted to the lender).  In either case, the lender must confirm that the information provided by the lender to the SBA accurately reflects its records for the loan, and that the lender made its decision in accordance with applicable requirements. The lender must also notify the borrower in writing that the lender has issued a decision to the SBA denying the loan forgiveness application.

SBA Review of PPP Loans.  The SBA may review any PPP loan at any time in its discretion.  That review may examine the borrower’s eligibility, the calculation of the loan amount, whether the borrower used the loan proceeds for allowable uses and whether the borrower is entitled to loan forgiveness in the amount claimed in the borrower’s loan forgiveness application.  If the SBA undertakes such a review, the SBA will notify the lender in writing and the lender must then notify the borrower.  In addition, the lender will be required to transmit to the SBA, among other things, electronic copies of the borrower application (SBA Form 2483 or lender’s equivalent form), and the loan forgiveness application, if any (SBA Form 3508 or lender’s equivalent form), as well as all supporting documentation provided by the borrower. The lender must also request that the borrower provide a copy of the Schedule A worksheet to the loan forgiveness application and submit the worksheet to the SBA. 

If the loan documentation submitted to the SBA or any other information indicates that the borrower may be ineligible for a PPP loan or may be ineligible to receive the loan amount or loan forgiveness amount claimed, the lender will be required to contact the borrower to request additional information and provide any additional information provided to the SBA.  If the SBA notifies the lender that it has commenced a loan review, the lender may not approve an application for loan forgiveness until the SBA notifies the lender in writing that it has completed its review.

SBA Denial of Forgiveness Application.  The SBA may direct a lender to deny a loan forgiveness application if it determines that a borrower is ineligible for the PPP loan.  It may direct a  lender to deny an application, in whole or in part, if it determines that the borrower is ineligible for the loan amount or loan forgiveness amount claimed.  It may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.

Document Retention.  Lenders must comply with applicable SBA requirements for records retention, which for Federally regulated lenders means compliance with the requirements of their federal financial institution regulator.

Eligibility for Processing Fees.  Lenders will be required to forfeit and repay to the SBA any lender processing fee received for any SBA-reviewed PPP loan if, within one year after the loan was disbursed, the SBA determines that a borrower was ineligible based on the provisions of the CARES Act or applicable rules or guidance available at the time of the borrower’s loan application, or the terms of the loan application.  If a lender fails to satisfy its applicable obligations, the SBA may also seek repayment of the lender processing fee from the lender and may determine that the loan is not eligible for a guaranty.

PPP Loan Forgiveness Checklist

Required Documentation for Borrower’s Forgiveness Application:

  • confirm receipt of the borrower certifications contained in the forgiveness application
  • confirm receipt and review the documentation borrower must submit to aid in verifying payroll and non-payroll costs
  • check the borrower’s calculations on the application (divide the borrower’s eligible payroll costs claimed by 0.75)
  • confirm the borrower has corrected any errors identified during the review

Within 60 days after receipt of complete Forgiveness Application:

  • issue decision to the SBA of lender’s decision on the loan forgiveness application
    • approval in whole or in part
    • denial
    • if directed by the SBA, a denial without prejudice due to a pending SBA review of the loan

Note:  If the SBA notifies the lender that it has commenced a loan review, the lender may not approve an application for loan forgiveness until the SBA notifies the lender in writing that it has completed its review.

  • request payment from the SBA and include the loan forgiveness calculation form and Schedule A
  • provide the SBA copies of Schedule A and the PPP borrower demographic information form (if submitted to the lender) if there is a determination that the borrower is not entitled to forgiveness in any amount
  • confirm that the information provided by the lender to the SBA accurately reflects its records for the loan, and that the lender made its decision in accordance with applicable requirements
  • notify the borrower of the lender’s decision on the loan (written notice of denial required)

When the SBA undertakes a review of a PPP loan:

  • notify the borrower if/when notified that SBA is undertaking review
  • transmit to the SBA electronic copies of the borrower application and the loan forgiveness application, as well as all supporting documentation provided by the borrower
  • request that the borrower provide a copy of the Schedule A worksheet to the loan forgiveness application and submit the worksheet to the SBA 
  • if required, contact the borrower to request additional information and provide any additional information provided to the SBA

Guidance Released on “Good-faith Certification”

By Christopher R. Hanewald

The Small Business Administration (SBA), in consultation with the Department of Treasury (Treasury), took steps this week to alleviate confusion concerning the Paycheck Protection Program (PPP) which was instituted as part of the monumental CARES Act legislation. Since the introduction of the PPP, the SBA and Treasury have fast-tracked guidance for taxpayers and business owners through the issuance of a number of Frequently Asked Questions (FAQ).

In response to criticism received following stories that large public companies had claimed significant PPP loans, a new FAQ was issued on April 23, 2020 which was meant to remind companies of the required certifications made at the time of submitting a PPP loan. The answer to question 31 provided that any borrower who determined they did not meet such required certification was permitted to repay the loan without penalty by May 7, 2020. In conjunction with the issuance of this FAQ, Treasury Secretary Mnuchin publicly threatened that any company that received a loan in excess of $2 million would be subject to scrutiny and audit. Following those developments, widespread confusion gripped business owners who had already received loans or were contemplating submission of an application.

Following weeks of uncertainty about how and if audits would be conducted, FAQ 46 was issued on May 13, 2020 which clarified that “[a]ny borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” This admission by the SBA and Treasury is important as it provides clarity for all PPP loan recipients who received loans of less than $2 million in total—including affiliates aggregated together. Additionally, the FAQ mitigated the severity of threatened audits for recipients in excess of $2 million as it explained that if the:

“SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.”

Finally, FAQ 47 extended the repayment date for any borrower to May 18, 2020.