Late on June 10, 2020, the Small Business Administration (SBA) and Treasury Department issued the 17th “interim final rule,” providing the initial regulations to implement the Paycheck Protection Program Flexibility Act (Flexibility Act), which became law last week. These new regulations provide important initial guidance concerning the Flexibility Act, which is significant insofar as it extended the PPP loan forgiveness covered period to 24 weeks. Importantly, the SBA and the Treasury addressed and clarified the Act’s technical requirement that PPP loan borrowers use 60% of the PPP loan for payroll costs, which had become an additional source of angst for borrowers.
The key highlights of the new regulations include:
60% Use on Payroll Costs: Despite the plain language in the Flexibility Act, borrowers are not required to use 60% of the PPP loan proceeds on payroll costs. Rather, the regulations state that a maximum of 40% of the loan may be used for non-payroll costs. The regulations likewise provide that, in situations where less than 60% of the loan proceeds are used for payroll costs, the borrower will only receive partial forgiveness—this will ensure that 60% of the forgiven amount is used for payroll costs.
The regulations provide an example of a borrower who received a PPP loan in the amount of $100,000, but who only spent $54,000 on payroll costs. The borrower would receive a maximum of $90,000 of loan forgiveness, with $54,000 in payroll costs constituting 60% of the forgiveness amount, and $36,000 in non-payroll costs constituting 40% of the forgiveness amount.
This regulatory change provides an important fix to the Act’s text, which received much debate during the legislative process.
Loan Maturity: For loans made before June 5, 2020, the loan matures in two years, but the borrower and lender may mutually agree to extend the maturity to five years. Loans made on or after June 5, 2020, will have a five-year maturity date.
Loan Deferral Period: For borrowers who submit their loan forgiveness application within 10 months after the end of the covered period, no payment of principal or interest is due until the SBA remits the forgiven amount to the lender (or informs the lender that no loan forgiveness is allowed). If the borrower does not submit a forgiveness application within 10 months after the end of the covered period, the borrower must begin making payments toward principal and interest at the end of that 10-month period.
Covered Period: The 24-week loan forgiveness covered period begins on the date of loan disbursement. All loans made on or after June 5, 2020, will have a 24-week loan forgiveness covered period. Borrowers who received their PPP loan before June 5, 2020, may elect to apply the original eight-week covered period in the CARES Act, or may use the newly enacted 24-week covered period if they desire.
Borrower Certifications: When applying, borrowers will continue to make certifications including among other things that funds received will be used to “retain workers and maintain payroll,” but also importantly that they understand that “knowingly” using funds for unauthorized purposes may mean the federal government will hold the borrower liable “such as for charges of fraud.”
These regulations only address a few key, initial questions that the SBA and the Treasury Department believed needed to be immediately addressed, particularly given that many PPP loan borrowers have reached or are nearing the end of the eight-week covered period. But as has been a consistent theme, the SBA and the Treasury have promised additional regulatory guidance on loan forgiveness and loan review procedures to implement the Flexibility Act.
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