The SBA released the first PPP loan guidance to modify prior guidance due to the passage of the Paycheck Protection Program Flexibility Act (PPPFA) in a new interim final rule (IFR).[1] The new rule modifies the interim final rule originally published on April 2, 2020 to deal with certain provisions changed by the PPPFA.

Loan Forgiveness - No Cliff Rule

A key area of concern when the Act was passed involved Section 3(b) of the Act which provided, in part:

To receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs, and may use up to 40 percent of such amount for any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), any payment on any covered rent obligation, or any covered utility payment.

The provision appeared to create a cliff for forgiveness—if the borrower failed to use 60% of the loan proceeds to pay payroll costs during the covered period, none of the amount borrowed would be forgiven. However, the Treasury Secretary and SBA Administrator issued a joint statement on June 8, 2020 that indicated guidance would be issued that eliminate this cliff test.

The IFR contains this promised relief from a cliff test. In Section 1.d of the IFR, the SBA explains the interpretation the agency will take of the above provision, and why they are not using the apparently required cliff test:

While the Flexibility Act provides that a borrower shall use at least 60 percent of the PPP loan for payroll costs to receive loan forgiveness, the Administrator, in consultation with the Secretary, interprets this requirement as a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness.

The SBA justifies this position by finding it is not consistent with other provisions of the PPPFA:

This interpretation is consistent with the new safe harbor in the Flexibility Act. The new safe harbor provides that if a borrower is unable to rehire previously employed individuals or similarly qualified employees, the borrower will not have its loan forgiveness amount reduced based on the reduction in full-time equivalent employees. It would be incongruous to interpret the Flexibility Act’s 60 percent requirement as a threshold for receiving any loan forgiveness, because in some cases it would directly conflict with the flexibility provided by the new safe harbor.

As well, the 60% rule was enacted in response to the SBA’s prior 75% rule which did not contain a cliff test:

Further, the 60 percent requirement in the Flexibility Act was enacted against the backdrop of SBA’s existing rules governing the PPP, which Congress was aware of and which provided for proportional reductions in loan forgiveness for borrowers that used less than 75% of their loan amount during the eight-week covered period for payroll costs.

The SBA indicates that such a view is more in line with the general purpose of the Act.

In addition, this interpretation of the 60 percent requirement under the Flexibility Act is most consistent with Congress’s purpose in that legislation – namely, to increase the flexibility provided to borrowers related to PPP loan forgiveness.

Based on the above justification, the SBA modified Part III.2.o of the April 2 IFR to read as follows:

o. Can my PPP loan be forgiven in whole or in part?

Yes. The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. An eligible borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes as described below and employee and compensation levels are maintained or, if not, an applicable safe harbor applies. 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 for service that began before February 15, 2020, over the loan forgiveness covered period.

The SBA modifies the law, adding the word “full” before loan forgiveness in order to eliminate the cliff effect:

However, to receive full loan forgiveness, a borrower must use at least 60 percent of the PPP loan for payroll costs, and not more than 40 percent of the loan forgiveness amount may be attributable to nonpayroll costs.

The guidance contains the following examples of the application of this reduced forgiveness:

For example, if a borrower uses 59 percent of its PPP loan for payroll costs, it will not receive the full amount of loan forgiveness it might otherwise be eligible to receive. Instead, the borrower will receive partial loan forgiveness, based on the requirement that 60 percent of the forgiveness amount must be attributable to payroll costs. For example, if a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54 percent) of its loan on payroll costs, then because the borrower used less than 60 percent of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60 percent of the forgiveness amount and $36,000 in nonpayroll costs constituting 40 percent of the forgiveness amount).

The practical effect of this is to modify the maximum forgiveness amount calculation on the PPP loan forgiveness application. Originally a borrower was to divide total payroll costs paid by 0.75 to obtain the ceiling on forgiveness based on the use of funds for payroll costs requirement. Now the borrower will instead divide payroll costs by 0.60 to obtain that ceiling.

Covered Period

Section 1.a of the IFR updates the covered period under CARES Act §1102 for the loans themselves, providing:

Section 3(a) of the Flexibility Act amended the definition of “covered period” for a PPP loan from “the period beginning on February 15, 2020 and ending on June 30, 2020” to “the period beginning on February 15, 2020 and ending on December 31, 2020.” Therefore, Part III.2.g.iii. of the First Interim Final Rule (85 FR 20811, 20813) is revised by striking “June 30, 2020” and replacing it with “December 31, 2020”. Section 3(d) of the Flexibility Act provides that this amendment shall be effective as if included in the CARES Act, which was signed into law on March 27, 2020.

Since the CARES Act used the term “covered period” multiple times in the Act to describe different periods, the IFR clarifies that this definition does not affect the forgiveness covered period under CARES Act §1106:

This amendment by the Flexibility Act applies to the definition of “covered period” that appears in section 1102 of the CARES Act, governing loan use, loan eligibility, and related requirements. It does not alter the meaning of “covered period” that appears in section 1106 of the CARES Act governing loan forgiveness, which is addressed by a different provision of the Flexibility Act.

Maturity Date for PPP Loans

The PPPFA modified the rules on maturity dates for PPP loans, mandating a minimum five-year period maturity date on loans made on or after the effective date of the PPPFA (June 5, 2020). The IFR explains the new provision in Section 1.b modifying Part III.2.j of the April 2 IFR:

For loans made before June 5, 2020, the maturity is two years; however, borrowers and lenders may mutually agree to extend the maturity of such loans to five years. For loans made on or after June 5, the maturity is five years. Section 2 of the Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act) amended the CARES Act to provide a minimum maturity of 5 years for all PPP loans made on or after its enactment.

The SBA has decided to define the date the SBA approves a loan as the date a loan is made:

The Administrator, in consultation with the Secretary, determined that the date SBA assigns a loan number to the PPP loan provides an efficient, transparent, and auditable means of determining when a PPP loan is “made” that provides certainty to lenders.

While the law still allows a maximum 10-year maturity, the SBA has decided to provide for only the single five-year maturity on these new loans:

While the CARES Act provides that a loan will have a maximum maturity of up to ten years from the date the borrower applies for loan forgiveness, the Administrator, in consultation with the Secretary, determined that a five-year loan term is sufficient in light of the temporary economic dislocations caused by the coronavirus. Specifically, the considerable economic disruption caused by the coronavirus is expected to abate well before the five-year maturity date such that borrowers will be able to resume business operations and pay off any outstanding balances on their PPP loans.

Deferral Period Modification

The PPPFA changed the period during which a borrower will not be required to make payments on a PPP loan to be delayed until the date the borrower receives a decision on whether and to what extent the loan will be forgiven. However, the PPPFA provides a borrower who fails to apply for such forgiveness within 10 months of the end of the forgiveness covered period under CARES Act §1102 (as modified by PPPFA) will be required to start making payments at the end of that 10 month period.

The IFR discusses this provision at Section 1.c of the IFR, which modifies Part III.2.n of the April 2 IFR to provide the following guidance:

If you submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you will not have to make any payments of principal or interest on your loan before the date on which SBA remits the loan forgiveness amount on your loan to your lender (or notifies your lender that no loan forgiveness is allowed).

The guidance continues, describing the nature of the forgiveness (§1106) covered period under the new law:

Your “loan forgiveness covered period” is the 24-week period beginning on the date your PPP loan is disbursed; however, if your PPP loan was made before June 5, 2020, you may elect to have your loan forgiveness covered period be the eight-week period beginning on the date your PPP loan was disbursed. Your lender must notify you of remittance by SBA of the loan forgiveness amount (or notify you that SBA determined that no loan forgiveness is allowed) and the date your first payment is due. Interest continues to accrue during the deferment period.

The SBA in a footnote reminds the reader that the end of the forgiveness covered period can be no later than December 31, 2020 per section 3(b)(1) of the PPPFA.

The guidance provides the following information for borrowers who do not make an application by the date 10 months after the end of the §1106 covered period.

If you do not submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you must begin paying principal and interest after that period. For example, if a borrower’s PPP loan is disbursed on June 25, 2020, the 24-week period ends on December 10, 2020. If the borrower does not submit a loan forgiveness application to its lender by October 10, 2021, the borrower must begin making payments on or after October 10, 2021.

Other Changes

The IFR also makes changes necessary for consistency with the other modifications to the provisions in the April 2, 2020 IFR that discusses acceptable uses of PPP loan funds and the certifications a borrower is to make.

[1] RIN 3245-AH49, “Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to

First Interim Final Rule,” Small Business Administration, June 10, 2020, https://home.treasury.gov/system/files/136/PPP-IFR-Revisions-to-First-Interim-Final-Rule.pdf (retrieved June 11, 2020)