On Friday March 27, 2020, the President signed into law, the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) or “CARES Act,” providing for, among other things, the Payment Protection Program (“PPP”).
On Thursday April 2, 2020, the U.S. Small Business Administration (SBA) issued an interim final rule (the “SBA PPP Interim Final Rule”), which is effective immediately, announcing the implementation of sections 1102 and 1106 of the CARES Act. Section 1102 of the Cares Act temporarily adds a new product, the PPP to the SBA’s 7(a) Loan Program. Section 1106 of the Cares Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP.
The SBA PPP Interim Final Rule is available at: https://mcusercontent.com/14f762d815c0f9b8420b63321/files/a5c74c3e-10d3-4c8b-8cba-ef3d679eb910/PPP_IFRN_FINAL.pdf
This Client Alert discusses some of the additional information regarding the PPP and loan forgiveness described in the SBA PPP Interim Final Rule.
Documentation to establish eligibility
Borrowers must submit such documentation as is necessary to establish eligibility, e.g., payroll processor records, payroll tax filings, or Form 1099 MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
Note: SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules at 13 CFR §§ 121.103 and 121.301 to PPP loans.
Marijuana businesses are ineligible for a PPP loan
The SBA PPP Interim Final Rule provides that any activity that is illegal under federal, state, or local law is ineligible for a PPP loan.
Calculation Methodology for the amount a business can borrow
The SBA PPP Interim Final Rule describes the following methodology as most useful for many applicants.
- Step 1: Aggregate payroll costs from the last twelve months for employees whose principal place of residence is in the United States.
- Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000.
- Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
- Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
- Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).
Are independent contractors counted as employees for purposes of the PPP loan?
No, independent contractors do not count for purposes of a borrower’s PPP loan, as they have the ability to apply for a PPP loan on their own.
Loan terms
The SBA PPP Interim Final Rule describes, among others, the following loan terms:
- The interest rate on PPP loans will be one percent.
- The loan maturity will be two years.
- Eligible businesses will only be able to apply for one PPP loan.
- E-signatures or e-consents may be used regardless of the number of owners.
- Payments of principal and interest on PPP loans will not need to be made for six months following the date of disbursement of the loan (however, interest will accrue during the deferment).
The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. That is, the borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for authorized forgivable purposes and employee and compensation levels are maintained.
The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan.
For purposes of loan forgiveness, the borrower will need to document use of the PPP loan proceeds. At least 75% of the PPP loan proceeds must be used for payroll costs, and not more than 25% of the loan forgiveness amount may be attributable to nonpayroll costs.
Independent contractors do not count as employees for purposes of PPP loan forgiveness, as they have the ability to apply for a PPP loan on their own.
Note: The SBA will issue additional guidance on loan forgiveness.
PPP loan application forms
The borrower must submit SBA Form 2483 (Paycheck Protection Program Application Form) and payroll documentation, as described above. The lender must submit SBA Form 2484 (Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty) electronically in accordance with program requirements and maintain the forms and supporting documentation in its files.
Lender reliance on borrower documentation
The lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs. The SBA will hold harmless any lender that relies on such borrower documents and attestation from a borrower.
Lender fees for processing PPP loans
The SBA will pay lenders fees for processing PPP loans in the following amounts:
- Five percent (5%) for loans of not more than $350,000;
- Three percent (3%) for loans of more than $350,000 and less than $2,000,000; and
- One percent (1%) for loans of at least $2,000,000.
The CARES Act provides that an agent that assists an eligible borrower to prepare an application for a PPP loan may not collect a fee in excess of the limits established by the SBA.
The SBA PPP Interim Final Rule provides that agent fees will be paid by the lender out of the fees the lender receives from the SBA. Agents may not collect fees from the borrower or be paid out of the PPP loan proceeds. The total amount that an agent may collect from the lender for assistance in preparing an application for a PPP loan (including referral to the lender) may not exceed:
- One percent (1%) for loans of not more than $350,000;
- 0.50 percent (.5%) for loans of more than $350,000 and less than $2 million; and
- 0.25 percent (.25%) for loans of at least $2 million.
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