June 25, 2020
On June 22, 2020, the SBA released new guidance (the “Revision”) titled Interim Final Rule on Revisions to Loan Forgiveness Interim Final Rule (the “Loan Forgiveness IFR”) and SBA Loan Review Procedure Interim Final Rule (the “Loan Review IFR”). The Revision reflects the changes made to the Paycheck Protection Program (the “PPP”) by the Paycheck Protection Program Flexibility Act (“Flexibility Act”). We previously discussed the Loan Forgiveness IFR and the Flexibility Act. This client alert highlights notable clarifications made by the Revision to the Loan Forgiveness IFR and the Loan Review IFR.
Changes to Loan Forgiveness IFR – Early PPP Loan Forgiveness
The Revision clarifies that a borrower can apply for PPP loan forgiveness on or before the maturity date of the loan – including before the end of their covered period – if the borrower has used all of the PPP loan proceeds for which the borrower is requesting forgiveness. However, by doing so a borrower could forfeit the safe harbor allowing it to restore salaries or wages by December 31.
The Revision provides that if a borrower applies for loan forgiveness before the end of the covered period and has reduced any employees’ salaries or wages by more than the 25% allowed for full forgiveness, the borrower must account for the excess salary reduction for the full eight-week or 24-week covered period, whichever one applies to its loan. The Revision provides the following example:
A borrower is using a 24-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25% of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).
Accordingly, a borrower may submit a loan forgiveness application before the end of the covered period, but it must still account for salary reductions for the entire covered period.
Changes to Loan Forgiveness IFR –Indirect Compliance with COVID-19 Guidance
The Revision clarifies that borrowers that can document an inability to return to the same level of business activity as such business was operating at before February 15, 2020 due to direct or indirect compliance with requirements established or guidance issued (“COVID Guidance”) by the Secretary of Health and Human Services (“HHS”), the Director of the Centers for Disease Control and Prevention (“CDC”), or the Occupational Safety and Health Administration (“OSHA”) during the period beginning on March 1, 2020, and ending December 31, 2020 are exempt from the loan forgiveness reduction arising from a reduction in the number of FTE employees during the covered period.
This permits a borrower to rely on a state or local shutdown order as long as the shutdown order is “based in part on guidance from the three federal agencies [HHS, CDC or OSHA].” The Revision provides the following example:
PPP borrower is in the business of selling beauty products both online and at its physical store. During the covered period, the local government where the borrower’s store is located orders all non-essential businesses, including the borrower’s business, to shut down their stores, based in part on COVID Guidance issued by the CDC in March 2020. Because the borrower’s business activity during the covered period was reduced compared to its activity before February 15, 2020 due to compliance with [COVID Guidance], the borrower satisfies the Flexibility Act’s exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered period, if the borrower in good faith maintains records regarding the reduction in business activity and the local government’s shutdown orders that reference a COVID Guidance.
As noted in the example, it is important for the borrower to retain documentation regarding the reduction in business activity as well as a copy of the shutdown order that is based in part on the HHS, CDC or OSHA guidance.
Changes to Loan Review IFR
The Revision clarifies that it is the borrower’s responsibility to provide an accurate calculation of the loan forgiveness amount. Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents, but lenders do not have to independently verify the borrower’s reported information provided that the borrower (i) supplies documentation supporting its request, and (ii) attests that it has accurately verified the payments for eligible cost.
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.