Paycheck Protection Program Interim Regulations

Published 4.3.2020. Updated 4.21.2020.

In the evening of April 2, 2020, mere hours before the application period was set to open, SBA and Treasury published interim regulations, a revised Borrower’s Application, and Lender’s Application for the Paycheck Protection Program (PPP).  These rules are immediately effective, although there will be a 15 day comment period after which final rules will be issued which supersede the interim rules.  Below is a list of the material changes these regulations made to the PPP program as well as a longer summary of the important confirmations, clarifications and changes made in the regulations.

Please be in touch with your bank or other PPP lender as soon as possible.  Some banks have announced they will not be accepting applications on April 3, 2020, or that they will be accepting applications from only certain existing customers.  Other lenders may follow suit given the number of changes to the PPP in the interim regulations released last night.

UPDATE: The SBA Frequently Asked Questions ("FAQs") initially released April 6, 2020 substantially modified a number of provisions detailed below. The FAQs are being updated periodically, and lenders and borrowers should verify they're using the most up to date Treasury and SBA guidance. 

Material Changes in PPP

• Independent contractors do not count as employees for PPP loan calculations or loan forgiveness.
• UPDATE: The SBA FAQs state employee FICA and federal income tax withholding are included in "payroll costs" which is a significant change from the interim regulations.
• Interest rate is 1.0%.
• At least 75% PPP loans proceeds must be used on payroll costs (whether or not used in the 8 week period eligible for forgiveness, and to be eligible forgiveness such payroll cost must be paid during such 8 week period).  
• Borrowers knowingly using PPP loan funds for unauthorized purposes may result in additional liability, including fraud.  In addition, if one of the borrower’s shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against that shareholder, member or partner.  

Summary

Eligibility

• The SBA did not make any significant changes to who is eligible for PPP loans.
  • SBA affiliation rules still apply (except to the extent specifically waived in the CARES Act).
  • However, SBA said they will “promptly issue additional guidance with regard to the applicability of affiliation rules” to PPP loans.
  • This guidance may have material implications for many businesses.
• The SBA did not amend the list of businesses that are ineligible for PPP Loans (including “passive businesses” such as landlords and developers).
• Knowingly using PPP funds for unauthorized purposes may be subject the borrower or its shareholders, members, or partners to additional liability and fraud.

Loan Terms

• The maximum payroll costs (including benefits) that can be attributed to any individual employee is $100,000, for purposes of calculating the loan amount and loan forgiveness.
  • UPDATE: The SBA FAQs clarify noncash benefits, such as health care, provided to employees are not included in compensation for purposes of measuring the $100,000 limitation.
• Independent contractors do not count as employees for PPP loan calculations or loan forgiveness despite language in the CARES Act that states otherwise. The interim rules state that since “independent contractors have the ability to apply for a PPP loan on their own . . . they do not count for purposes of a borrower’s PPP loan calculation.”  There is still language in the interim rule and the Borrower’s Application which imply that independent contractors may be included as employees; however we believe that the clear statements in Sections III.2.h and III.2.p override stray references to independent contractors elsewhere in the regulations. Moreover, those references to independent contractors may be an attempt to clarify that independent contractors can separately apply for a PPP loan.
• Payroll costs for calculating the loan amount should be average monthly payroll costs for calendar year 2019. Again, there is still language in the regulations that refer to the “last twelve months”, which is the language in the CARES Act.  However, we believe that Section III.3.b. and the Borrower’s Application are clear that lenders must confirm the “the dollar amount of average monthly payroll costs for the preceding calendar year” in a borrower’s application.  We suggest all borrowers provide both 2019 and year to date 2020 payroll data because lenders will also have to confirm the borrower paid salaries and payroll taxes on or around February 15, 2020.
  • UPDATE: The FAQs clarify a borrower can use the past 12 months, or calendar year 2019 for purposes of calculating the amount of the loan.
• Any cash tips included in payroll costs must be “based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips.”
• UPDATE: The SBA FAQs state employee FICA and federal income tax withholding are included in "payroll costs" which is a significant change from the interim regulations.
• Interest rate is 1.0%.
• Borrowers can not apply for more than one PPP loan. Note this does not restrict affiliated borrowers from each applying for their own loan.
• Interest accrues on the loan during the 6 month payment deferral. The payment deferral is only for 6 months.
• PPP loans may be used for interest payments on other debt obligations that are not mortgages, but it appears that such amounts are not eligible for forgiveness. Interest payments on mortgages are eligible for forgiveness, subject to the 75% cap on non-payroll costs forgiveness (detailed immediately below).
• At least 75% PPP loans proceeds must be used on payroll costs (whether or not used in the 8 week period eligible for forgiveness and to be eligible forgiveness such payroll cost must be paid during such 8 week period).
  • This is a material departure from the statute. In fact, the interim regulations recognize that this directly contracts the statute which permits loan funds to be used for any allowable purpose in the SBA 7(a) program.
  • The regulations say this change is required because of the “finite appropriations” made to support the PPP.
• PPP funds are “first-come, first-served”. This along with multiple references to the “finite appropriations” or “finite program resources” are clear indications that SBA and Treasury expect the PPP to be oversubscribed.
• Borrowers knowingly using PPP loan funds for unauthorized purposes may result in additional liability, including fraud.
• In addition, if one of the borrower’s shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against that shareholder, member or partner.
• The application will require the following certification: “I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable such as for charges of fraud.”

Loan Forgiveness

• Loan forgiveness includes accrued interest on any forgiven principal.
• At least 75% of the loan amount forgiven must be spent on payroll costs.

Application Process

• The SBA requires a specific application from the borrower (SBA Form 2483) and the lender (SBA Form 2484).
• The Borrower’s Application removes the requirement for 20% owners of the applicant to sign the application and certain certifications.  Instead, applicants make those certifications on behalf of 20% owners.
• The Lender’s Application was substantially modified from an earlier draft circulated to banks.
• Lenders are generally entitled to rely on an applicant’s certifications, and must generally certify to the SBA that the applicant has made the proper certifications and provided “proper documentation” to the Lender supporting how the loan amount was calculated.  Lender must retain such documentation but there does not appear to be a requirement that Lender’s verify such information.
• Banks are required to follow normal Bank Secrecy Act (BSA) requirements, except they are not required to re-verify existing customers. Non-bank lenders are required to adopt an AML program similar to the BSA.
  • This is a significant incentive to apply for a PPP loan with a bank in which you have already passed KYC.
• Bank’s underwriting obligations are limited to the specific items in the regulations:
  • Confirming receipt of Borrower certifications contained in the Borrower’s Application.
  • Confirming receipt of information demonstrating that a Borrower had employees for whom the Borrower paid salaries and payroll taxes on or around February 15, 2020.
  • Confirming the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the Borrower’s application.

Conclusion

Small businesses, lenders, accountants, attorneys and other advisors have been seeking clarification and guidance on a number of issues from SBA so that small businesses can quickly get the relief they need.  Although the interim regulations clarify some aspects of the PPP program and streamline the application process, the regulations also materially change how Borrowers calculate payroll costs and how loan proceeds may be used.  We recommend that all potential applicants consult with their bank, accountant, attorney and/or other advisor so they understand how to properly apply for a PPP loan and ensure they understand how the loan may be used to both maximize loan forgiveness and minimize potential liability to the business and its owners.

KMK Law has commercial finance, tax and employment attorneys as well as a multi-disciplinary team advising numerous clients on such matters. Please contact a KMK attorney for assistance, including those listed below.

Nicholas L. Simon
Partner
513.579.6574
nsimon@kmklaw.com 

Alan S. Fershtman
Managing Partner
513.579.6961
afershtman@kmklaw.com 

James C. Kezele
Partner
513.579.6598
jkezele@kmklaw.com 

Kelley Brandstetter Tracy
Partner
513.579.6458
ktracy@kmklaw.com 

Zachary T. Gubser
Associate
513.579.6474
zgubser@kmklaw.com 

Nicholas D. Kereiakes
Associate
513.579.6467
nkereiakes@kmklaw.com