Month: May 2020

The Small Business Administration Updates Frequently Asked Questions Concerning the Paycheck Protection Program Related to the Review of Loans Under $2 Million and Extension of Time for Amnesty Repayments

On May 13, 2020 the SBA issued FAQs 46 and 47. These revisions, and all previously issued FAQs, are made in consultation with the US Treasury Department. Lenders and borrowers may rely on the guidance issued by the SBA as an interpretation of the CARES Act.

FAQ 46: This FAQ provides a safe harbor for any borrower, together with its affiliates, that received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. As a result, borrowers of PPP loans that are below $2 million will not need to prove to the SBA that their request for the loan was necessary based on their specific circumstances related to ongoing business operations.

However, borrowers with controlled entities that received more than $2 million of PPP loans are not covered by this safe harbor and will still be subject to an SBA good faith certification audit and will be required to demonstrate an adequate basis of need.

The SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher audit results.

In addition, if the SBA determines that a borrower lacked an adequate basis for the necessity of the PPP loan request, the SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from the SBA, the SBA will not pursue administrative enforcement or referrals to other agencies based on its determination concerning the necessity of the loan request. The SBA’s determination concerning the necessity of the loan request will not affect SBA’s loan guarantee to the lender.

Based upon this FAQ it appears that if a borrower repays a PPP loan that did not meet the economic necessity certification, the SBA will not pursue administrative enforcement which may include criminal penalties and imprisonment.

FAQ 47: This FAQ provides that the amnesty date for repaying a PPP loan has been extended from May 14, 2020 to May 18, 2020. Based on the guidance issued by these FAQs it appears that a borrower that does not meet the certification criteria can repay their loan after May 18, 2020 if the SBA deems after review that the borrower did not meet the necessity criteria. However, it is not clear if the loan would be payable immediately or during the term of the loan.

The SBA has released the PPP Loan Forgiveness Application and Instructions – Form 3508. The form and detailed instructions inform borrowers on how to apply for forgiveness of their PPP loans. The form provides a format to calculate the amount of loan forgiveness and the instructions provide additional guidance to borrowers. According to the US Treasury Department Press Release on May 15, 2020, the form and instructions include measures that are intended to assist borrowers as they complete their applications and to provide lenders with guidance on their responsibilities.

The Treasury Department’s press release points out that the SBA will soon issue additional regulations and guidance to assist borrowers and lenders as they initiate the loan forgiveness process.

The form and instructions include several measures to reduce compliance burdens and simplify the process for borrowers, including:

• Options for borrowers to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles. This provision helps eligible businesses seek forgiveness at the conclusion of the eight-week (56-day) “covered period” that begins on the first day of their first pay period following with disbursement of their PPP loans.
• Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan.
• Step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness.
• Borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30.
• The addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that were declined.

We recommend that PPP loan borrowers should organize their documentation to support the Loan Forgiveness Application. Document payments of PPP loan amounts, to payroll costs and other qualifying expenses. In addition, loan recipients should continue to become familiar with the SBA’s interim final rules and frequently asked questions, especially concerning forgiveness, as released. As noted above, the SBA will be issuing additional guidance and regulations regarding PPP forgiveness and we expect the application process to evolve.

If you need help or assistance regarding PPP forgiveness, please contact one of our professions at RVG & Company.

The first IFR (RIN 1505-AC69) provides guidance on obtaining PPP loan forgiveness and clarifies the instructions for the Forgiveness Application (Form 3508). The most significant provisions of the IFR are that the SBA permits the use of bonuses and hazard pay and allows the use of PPP loan proceeds for costs paid or incurred during the covered period. Other items contained in the IFR are described below. The second IFR (RIN 3245-AH47) involves lender requirements if the SBA reviews a loan or Forgiveness Application and that lenders will not be entitled to loan processing fees for any PPP loan where the borrower is found to be ineligible by the SBA – the lender will be required to repay the SBA any fees previously paid. Other details of the IFR are noted below.

The SBA released two new Interim Final Rules (IFRs) on May 22, 2020. The first IFR addresses loan forgiveness requirements and the second IFR outlines SBA review procedures and lender responsibilities.

First IFR – Loan Forgiveness Requirements

1. Loan Forgiveness Process

• The borrower must complete SBA Form 3508 or a lender’s equivalent form.
• The lender has 60 days from the receipt of a completed form to issue a decision to the SBA regarding loan forgiveness.
• The SBA will remit the forgiveness amount to the lender within 90 days after the lender issues its decision – subject to SBA review.

2. Payroll Cost Eligible for Forgiveness

• A borrower may pay furloughed employees their salary, wages, commissions, or similar compensation during the Covered Period of 8-weeks – even if these employees did not perform their day to day duties.
• The SBA determined that hazard pay, and bonuses are eligible for loan forgiveness. These payments are subject to the $100,000 limitation on PPP payroll costs per employee.

3. Paid or Incurred Qualifying Expenses – Payroll and Non-Payroll Costs

• The SBA clarified that borrowers could seek forgiveness for eligible qualifying expenses paid or incurred during the Covered Period.
• Payroll costs and other qualifying expenses incurred but not paid during the Covered Period are eligible for forgiveness if paid by the next regularly scheduled payroll date or non-payroll costs are paid by the next billing date.
• The IFR reiterates that no advance payments of interest on mortgage obligations will be eligible for loan forgiveness.

4. Forgiveness Amount Reductions

• A borrower’s loan forgiveness will not be reduced if the borrower laid-off or reduced the hours of an employee and then offered to rehire the same employee for the same hours and salary, but the employee declined the offer. The borrower must have documentation and notify the state unemployment insurance office.
• Other items clarified by the SBA are reductions based on full time equivalents, and reductions based on salary.

Second IFR – SBA Review Procedures and Lender and Borrower Responsibilities

1. The SBA reaffirms the right to review any PPP loan and Forgiveness Application at its discretion.

• This should not be confused with the SBA’s safe harbor announcement regarding the necessity of loans under $2 million.
• Borrowers must retain documents related to loan forgiveness for 6 years after the loan is forgiven or repaid.

2. Borrowers are ultimately responsible for the loan forgiveness calculation; however, the lender must perform a good faith review of the application and documentation.

3. If a lender denies loan forgiveness the borrower may appeal this to the SBA. The SBA will issue a future IFR on the appeal process.

4. If a borrower received PPP but is found to be ineligible, the lender must inform the borrower and the lender is not entitled to loan processing fees. Any fees previously paid to the lender for that loan are subject to be recovered by the SBA.