SBA Issues Guidance on PPP Loan Forgiveness Requirements; Outlines Loan Review Procedures

By Bob Barton

On Friday May 22, the Small Business Administration released two interim final rules related to forgiveness of loans issued under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

The first set of new Interim Final Rules, SBA-2020-0032, builds upon the information provided in the Loan Forgiveness Application and Instructions released on May 15, and clarifies certain lingering questions that small businesses may have regarding the requirements for loan forgiveness. The second set of Interim Final Rules, SBA-2020-0033, outlines the SBA’s loan forgiveness procedures and certain related duties of borrowers and lenders.

Below are a few of the key takeaways from this new guidance:

SBA-2020-0032 – Requirements – Loan Forgiveness

The 26 pages of loan forgiveness guidance in SBA-2020-0032, together with the Loan Forgiveness Application and Instructions, provide clarity regarding the following loan forgiveness issues and calculations:

Establishment of “Alternative Payroll Covered Period”

It is well-established that, in general, a borrower must spend PPP funds during the eight-week covered period (56 days) following the date of the borrower’s loan disbursement in order to be eligible for loan forgiveness. But the Loan Forgiveness Application and Instructions and SBA-2020-0032 clarify that, when it comes to forgiveness of payroll costs, borrowers with bi-weekly (or more frequent) payroll cycles actually have two options for determining when that eight-week covered period may begin:

  1. The date of disbursement of the borrower’s PPP loan proceeds from the lender (i.e., the start of the “Covered Period”); or
  2. The first day of the first payroll cycle in the Covered Period (the “Alternative Payroll Covered Period”).

Election of the “Alternative Payroll Covered Period” allows borrowers with bi-weekly (or more frequent) payroll cycles to align their covered payroll costs with their payroll cycles to improve the efficiency of the loan forgiveness application process. The U.S. Department of Treasury provides the following example:

  • A borrower has a bi-weekly payroll schedule (every other week). The borrower’s eight-week Covered Period begins on June 1 and ends on July 26. The first day of the borrower’s first payroll cycle that starts in the Covered Period is June 7. The borrower may elect an Alternative Payroll Covered Period for payroll cost purposes that starts on June 7 and ends 55 days later (for a total of 56 days) on August 1. Payroll costs paid during this Alternative Covered Payroll Period are eligible for forgiveness. In addition, payroll costs incurred during this Alternative Payroll Covered Period are eligible for forgiveness as long as they are paid on or before the first regular payroll date occurring after August 1.

Notably, a borrower with a less frequent payroll cycle must elect the Covered Period, rather than the Alternative Payroll Covered Period, when filling out its Loan Forgiveness Application. It should also be noted that borrowers must continue to use the Covered Period for all nonpayroll costs.

Payroll Costs Eligible for Loan Forgiveness

Citing the breadth of the definition of “payroll costs” under the CARES Act, the Interim Final Rules clarify that the following costs are likewise eligible for forgiveness so long as they do not exceed an annualized amount of $100,000 per employee:

  1. Salary, wages, or commissions paid to furloughed employees during the Covered Period;
  2. Employee hazard pay; and
  3. Employee bonuses.

The rules likewise provide a cap on the amount of loan forgiveness available to owner-employees and self-employed individuals for their own payroll compensation. According to the Interim Final Rules, the amount of forgiveness requested can be no more than the lesser of 8/52 of 2019 compensation (i.e., approximately 15.83 percent of 2019 compensation) or $15,385 per individual in total across all businesses. No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners.

Loan Forgiveness Calculations pertaining to maintenance of Employees, Salaries and Wages

The new guidance clarifies several issues regarding borrowers’ loan forgiveness calculations as it pertains to reductions of employees, salaries and wages:

  • While the CARES Act does not define the term “full-time equivalent employee,” the Interim Final Rules interpret it as an employee who works 40 hours or more, on average, each week. The hours of employees who work less than 40 hours per week are counted as proportions of a single full-time equivalent (“FTE”) employee and are aggregated, and borrowers may choose between two methods to calculate full-time equivalency. First, the borrower may calculate the average number of hours a part-time employee was paid per week during the Covered Period (for example, an employee paid for 30 hours per week on average during the Covered Period could be considered to be an FTE employee of 0.75). Second, borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee. Borrowers may select only one method and must apply that method consistently to all part-time employees.
  • A borrower can exclude from its loan forgiveness calculations any employee that refuses to be rehired. Specifically, a borrower will not be penalized for the reduction in FTE if the borrower (i) made a good faith, written offer to rehire or restore reduced hours of an employee during the Covered Period or Alternative Payroll Covered Period; (ii) the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours; (iii) the offer was rejected; (iv) the borrower maintains a record of the offer and rejection; and (v) the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.
  • If an employee of a borrower is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the Covered Period, the borrower may count such employee at the same full-time equivalency level before the FTE reduction event when calculating the FTE employee reduction penalty.
  • A borrower may avoid a reduction in its loan forgiveness amount if it restores reductions made to employee salaries and wages or FTE employees by not later than June 30th.

Nonpayroll Costs Eligible for Loan Forgiveness

According to the Interim Final Rules, non-payroll costs consist of the following:

  1. Interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020 (but not any prepayment or payment of principal);
  2. Payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; and
  3. Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

A nonpayroll cost is eligible for forgiveness if it was (i) paid during the Covered Period, or (ii) incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period. The Loan Forgiveness Application Instructions further state that eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount.

The Interim Final Rules specifically clarify, however, that advance payments of interest on mortgage obligation are not eligible for loan forgiveness under the CARES Act’s loan forgiveness provisions. Likewise, principal on mortgage obligations is not eligible for forgiveness under any circumstances.

SBA-2020-0033 – SBA Loan Review Procedures and Related Borrower and Lender Responsibilities

The second set of Interim Final Rules released on May 22, SBA-2020-0033, shed light on the process by which lenders and SBA will review loan forgiveness applications and the responsibilities of lenders and borrowers throughout this process. The most notable provisions are as follows:

General Process for Obtaining Loan Forgiveness

To obtain loan forgiveness under the PPP, a borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) to its lender. Once the borrower has submitted the required documentation, it is the lender’s job to review the application and make a decision regarding loan forgiveness. The lender must issue its decision to SBA within 60 days of the date it received the complete application.

If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for, the lender must request payment from the SBA at the time the lender issues its decision to the SBA. The SBA will remit to the lender the appropriate forgiveness amount not later than 90 days after the lender issues its decision to the SBA. The lender is responsible for notifying the borrower of any forgiveness amount.

If the lender determines that only a portion of the loan may be forgiven, or if the forgiveness request is denied, any remaining balance due on the loan must be repaid by the borrower on or before the two-year maturity of the loan. If the lender determines that the borrower is not entitled to forgiveness in any amount, the lender must notify the borrower in writing and provide the SBA with the reason for its denial. Within 30 days of notice from the lender, a borrower may request that SBA review the lender’s decision to deny forgiveness of the loan. SBA reserves the right to review the lender’s decision in its sole discretion.

Calculation of the Loan Forgiveness Amount

It is the responsibility of the borrower to provide an accurate calculation of the loan forgiveness amount, and the borrower must attest to the accuracy of its calculation. Lenders are expected to perform a good-faith review of the borrower’s calculations and supporting documentation.

SBA’s review of Individual PPP Loans

The SBA may review any PPP loan that the Administrator deems appropriate. Specifically, the SBA is authorized to review (1) whether a borrower is eligible for the PPP loan based on the provisions of the CARES Act, the rules and guidance in place at the time of the borrower’s PPP loan application, and the terms of the borrower’s loan application; (2) whether a borrower calculated its loan amount correctly and used loan proceeds for the allowable uses; and (3) whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s Loan Forgiveness Application. While the SBA may undertake such a review at any time in the SBA’s discretion, the SBA is not required to do this and may rely upon the borrower’s calculations and lender’s review.

If the SBA undertakes a review, the SBA will notify the lender in writing and the lender must notify the borrower in writing within five business days of receipt of the SBA’s notification. If the SBA notifies a lender that SBA has commenced a loan review, the lender may not approve any application for loan forgiveness for such loan until SBA notifies the lender in writing that the SBA has completed its review.

If the loan documentation submitted to SBA by the lender or any other information indicates that the borrower may be ineligible for the PPP loan, the loan amount, or loan forgiveness, the SBA will require the lender to contact the borrower in writing to request additional information. Thereafter, any information obtained by the lender will be provided to SBA. If the SBA ultimately determines in the course of its review that a borrower is ineligible for the PPP loan, the SBA will direct the lender to deny the loan forgiveness application. Similarly, if the SBA determines that the borrower miscalculated the loan amount or is not entitled to the amount of forgiveness claimed on the borrower’s Loan Forgiveness Application, the SBA will direct the lender to deny the loan forgiveness application in whole or in part.

Appeal of SBA Decisions regarding Loan Eligibility, Amount, or Forgiveness

A borrower may appeal the SBA’s determination regarding loan eligibility, loan amount, or the loan forgiveness amount claimed by the borrower. The SBA intends to issue a separate interim final rule addressing this process.

Borrower’s Retention of PPP Documentation

A borrower must retain its PPP documentation in its files for six years after the date the loan is forgiven or repaid in full and must permit authorized representatives of the SBA to access such files upon request.

Importantly, Interim Final Rules SBA-2020-0032 and SBA-2020-0033 come as Congress considers multiple bills that would allow for greater flexibility in the timing and use of funds loaned under the PPP. A bill currently in the Senate, for example, would double the loan forgiveness period to 16 weeks. The House is similarly expected to vote this week on legislation that would extend the loan forgiveness period as long as 24 weeks and eliminate the rules requiring borrowers to spend at least 75% of PPP funds on payroll costs in order to qualify for full forgiveness.

Taylor Porter attorneys continue to closely monitor the developments of the SBA loan programs and the CARES Act. Visit the Taylor Porter Coronavirus – Legal News and Business Resources website for updated legislation, news, and legal developments pertaining to COVID-19.

About Bob Barton: Taylor Porter Managing Partner Bob Barton, practicing law since 1994, represents local and national businesses in matters involving commercial litigation and transactions, regulatory and compliance matters, and general litigation. He is the co-chair of the firm’s Business and Commercial Litigation practice. Bob has been selected for inclusion in both Louisiana Super Lawyers and Best Lawyers in Business Litigation.