June 15, 2020
On June 11, 2020, the Small Business Administration (SBA) released revisions to its initial interim final rule on the Paycheck Protection Program (PPP) (click here to read). Thursday’s interim final rule is in response to the Paycheck Protection Program Flexibility Act (PPPFA) signed into law on June 5th. The PPPFA made a number of amendments to the CARES Act intended to provide additional flexibility to PPP loan borrowers (click here for more details). This is the first of several anticipated revisions to previously issued SBA guidance to conform to the changes made by the PPPFA. This initial revision includes changes to the following key provisions: loan maturity, deferral of loan payments, and loan forgiveness.
The PPPFA amended the CARES Act to provide a minimum maturity of 5 years for PPP loans made on or after the effective date of the PPPFA, June 5, 2020. Any loans made prior to June 5, 2020 retain a maturity of 2 years. That said, the PPPFA explicitly stated that nothing in the CARES Act or PPPFA would prohibit PPP loan borrowers and lenders from mutually agreeing to extend the maturity of existing loans to 5 years. For purposes of determining when a PPP loan is “made”, the SBA has indicated that the date that the SBA assigns a loan number shall be the date the loan is “made”.
Deferral of Loan Payments
The period during which PPP borrowers may defer making PPP loan principal and interest payments was also extended as a part of the PPPFA. The PPPFA provides that so long as the borrower applies for forgiveness within 10 months after the end of the covered period, loan principal and interest payments will be deferred until the SBA remits the loan forgiveness amount to the lender or otherwise notifies the lender that no forgiveness will be allowed. If the borrower does not apply for forgiveness within 10 months after the end of the covered period, they must begin making payments after the 10 months elapses. In either case, interest continues to accrue during the deferral period.
One of the largest criticisms of the PPP loan forgiveness rules was the SBA’s creation of the so-called “75% rule”, requiring that 75% of the forgiven amount be used for Payroll Costs. The PPPFA amended the CARES Act to effectively replace the SBA’s own “75% rule” with a congressionally legislated “60% rule”. While the plain text of the PPPFA appeared to create a “cliff” whereby the borrower would not receive any forgiveness unless they spent at least 60% of the loan proceeds for Payroll Costs, the SBA interpreted the “60% rule” in a manner similar to their previous “75% rule” (i.e. at least 60% of the amount forgiven must be for Payroll Costs). Said another way, no more than 40% of the amount forgiven may be for Non-Payroll Costs. As a part of its rationale for its interpretation of the “60% rule”, the SBA reasoned that the entire purpose of the PPPFA was to provide more flexibility to borrowers and interpreting the “60% rule” as a minimum threshold would be incongruous with the spirit of both the Cares Act and the PPPFA.
Thursday’s interim final rule provides welcome relief and additional clarity to borrowers (particularly as it relates to the “60% rule). We are hopeful that the SBA will continue to fill-in the many gaps in guidance as it continues to revise previously issued rulings for changes made by the PPPFA. We expect a series of such revisions to be released in the coming weeks and will continue to update you as new information becomes available. If you have questions or wish to discuss these matters, please contact us.