COVID-19: SBA updates PPP rule to implement new flexibility provisions | Pierce Atwood LLP

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On June 11, 2020, the Small Business Administration (SBA) released a revised interim final rule to implement changes made by the Paycheck Protection Program (PPP) Flexibility Act. The law, which we covered in detail in an alert last week, makes several changes to PPP aimed at giving borrowers more flexibility in how and when they spend loan proceeds. The following is an overview of the changes to the new rule and their implications for borrowers.

  • 24 week period for forgiveness. For loans issued before June 5, 2020, a business can choose to apply the initial eight week covered period for forgiveness purposes, or a 24 week period starting from the date the loan proceeds are received. For loans made after June 5, 2020, businesses will have 24 weeks from receipt of the loan to spend the proceeds in order to qualify for a loan forgiveness.

    For borrowers using the 24 week period, it is not clear whether they should wait the entire 24 week period before requesting a rebate, or if they can apply during the 24 week period (assuming that they have already maximized their discount). Informal conversations with the SBA indicate that borrowers will be allowed to apply during their 24 week period, and we anticipate that formal guidelines, including the next pardon request, will provide such a rule.

  • The pardon is reduced in proportion to the payroll. The rule specifies that borrowers will be eligible for a proportionally reduced discount if they spend less than 60% of the loan proceeds on payroll, rather than any discounts – the law itself was unclear on this point, and many commentators believed that a “cliff” applied if the 60% threshold is not reached. The SBA has indicated that it will revise its rules on canceling PPP loans to further address this issue.
  • Safety zone for rehires extended until December 31, 2020. While new loan recipients must spend their loan proceeds within 24 weeks to be eligible for the rebate, the SBA has extended the safe harbor of rehire until December 31, 2020. In other words, businesses will have until December 31, 2020 to restore the number of hires and be eligible for a full pardon, even if their 24-week period expires earlier.
  • Calculation of loan forgiveness. The rule further specifies that borrowers must use at least 60% of the PPP loan for salary costs, and no more than 40% of the loan cancellation amount can be attributable to non-salary costs. The rule provides a useful example of how the SBA will calculate the rebate amount:
    • If a borrower receives a PPP loan of $ 100,000 and during the period covered, the borrower spends $ 54,000 (or 54%) of their loan on personnel costs, then because the borrower has used less. of 60% of their loan in personnel costs, the maximum loan forgiveness amount the borrower can receive is $ 90,000 (with $ 54,000 in salary costs constituting 60% of the forgiveness amount and $ 36,000 non-salary costs constituting 40% of the amount of the discount).
  • Loans issued on or after June 5, 2020, expire in five years. Under the new law, the rule implements a five-year maturity period for new loans and specifies that loans issued before June 5, 2020 will continue to have a two-year maturity period for any part of the loan. loan not canceled. The rule further confirms that borrowers with a two-year term may seek to negotiate with their lender to extend the period to five years, subject to the discretion of the lender. Our conversations with lenders indicate that they will generally review each loan modification request on a case-by-case basis.
  • Deadline to apply for a loan. Eligible businesses have until June 30, 2020 to apply for a PPP loan. As of the end of last week, more than $ 100 billion was still available under the program.

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