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“Paycheck Protection” Loans: Congress Provides Borrowers With More Flexibility

Business Law Alert Melissa McCord

US Congress Building


Editor’s Note: This client alert updates our prior client alert dated June 5, 2020, to reflect updated guidance issued by the SBA on June 11, 2020. Additionally, the SBA provided a new Borrower Application Form on June 12, 2020, which can be found here.

Small businesses that received Paycheck Protection Program loans in the wake of the COVID-19 pandemic now have additional time and flexibility in their loan terms after Congress approved the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”), which the President signed into law on June 5, 2020. The SBA is implementing changes to previously issued rules to reflect the changes mandated by the PPP Flexibility Act. The first wave of updates came in the form of an interim rule (found here) and an updated Borrower Application Form (found here).

The PPP Flexibility Act gives businesses more flexibility to use funds received under the Paycheck Protection Program (“PPP”), which currently makes available low-interest and potentially forgivable loans to businesses that employ fewer than 500 people (generally).

PPP loans are meant to help small businesses pay for certain overhead costs and to encourage small businesses to keep their workers employed through the COVID-19 crisis. The U.S. Small Business Administration (“SBA”) administers the PPP, which was created in March under the Coronavirus Aid, Recovery, and Economic Security Act (“CARES Act”) and expanded in April by the Paycheck Protection Program and Health Care Enhancement Act (the “PPP Enhancement Act”). Find our prior alerts about the program here.

The PPP Flexibility Act provides certain key changes to the PPP:

Use of PPP Proceeds. Under the original SBA rules, a borrower that sought loan forgiveness must have spent the PPP loan proceeds on payroll costs (with some exclusions), mortgage interest, rent, and utilities during the eight weeks after the loan is disbursed. At least 75% of PPP loan proceeds must have been spent on payroll costs and 75% of the forgivable amount must have consisted of payroll costs (the “75% Rule”). The SBA created the 75% Rule, which was not a part of the original CARES Act.

The PPP Flexibility Act abolishes the 75% Rule and requires a borrower to spend just 60% of its PPP loan proceeds on payroll costs, allowing borrowers to spend up to 40% of PPP loan proceeds on mortgage interest, rent, and utilities (the “60% Rule”).

A plain reading of the text of the PPP Flexibility Act led some to conclude that a borrower must spend at least 60% of the loan proceeds on payroll costs in order to qualify for any forgiveness of its PPP loan. In the Interim Rule published on June 11, the SBA clarified this rule and indicated that it 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.

Thus, for example, if a borrower receives a $100,000 PPP loan, and during the Forgiveness Period (defined below) the borrower spends $54,000 (or 54%) of its loan on payroll costs, then because the borrower used less than 60% 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% of the forgiveness amount and $36,000 in mortgage interest, rent, and utilities constituting 40% of the forgiveness amount).

Forgiveness Period Extended. The CARES Act made PPP loans eligible for forgiveness to the extent that the company used the loan proceeds in the eight weeks after loan origination (the “Forgiveness Period”) for permitted purposes. The PPP Flexibility Act expands the Forgiveness Period to up to 24 weeks after loan origination, provided, however, that no Forgiveness Period may extend beyond December 31, 2020. Borrowers that received a loan prior to June 5, 2020, may choose to retain the original eight-week Forgiveness Period.

Relief from Penalties. PPP borrowers are penalized on their forgivable loan amount if they reduce their full-time equivalent (“FTE”) workforce or implement large salary or wage reductions. The SBA issued an application and an interim rule (the “Forgiveness Application and Rule”) that outline how to calculate these forgiveness penalties and provide more detail on applicable safe harbors and exemptions. The PPP Flexibility Act provides certain exemptions from the forgiveness penalties and otherwise limits the scope of the forgiveness penalties.

Re-Hiring, Pay Restoration. Under the CARES Act and subsequent regulations, borrowers will not have their amount of loan forgiveness reduced if they restore FTE levels and wages/salaries by June 30, 2020. The PPP Flexibility Act extends the periods for restoring FTE levels and wages/salaries from June 30, 2020, to December 31, 2020.

Thus, (i) the FTE reduction penalty will not apply if a borrower reduces its FTE levels between February 15, 2020, and April 26, 2020, and subsequently restores its FTE levels by December 31, 2020, and (ii) the salary/wage reduction penalty will not apply if a borrower reduced an employee’s salary/wage levels between February 15, 2020, and April 26, 2020, and subsequently restores the applicable employee’s salary or wages by December 31, 2020.

Inability to Rehire. For various reasons, some employers have struggled to bring employees back to work, despite their good faith effort to do so. The Forgiveness Application and Rule provided exemptions to the FTE reduction penalty if a borrower made a good-faith, written offer to rehire an employee, if the employee was fired for cause, the employee voluntarily resigned, or the employee voluntarily requested and received a reduction of hours. These exemptions are addressed in greater detail here.

The PPP Flexibility Act includes additional exemptions for employers that are unable to restore FTE levels, providing that the FTE reduction will not apply if a borrower, in good faith, can document (i) an inability to rehire existing employees, (ii) an inability to rehire similarly qualified employees for unfilled positions, or (iii) an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements or guidance related to COVID-19 issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 21, 2020, and ending December 31, 2020.

It is unclear how the exemptions to the FTE reduction penalty provided in the PPP Flexibility Act will interact with the exemptions previously issued by the SBA.

Five-Year Term. The CARES Act permitted PPP loans to have a maximum maturity of ten years from the date the borrower applies for loan forgiveness. However, the SBA issued regulations requiring that all PPP loans have a maturity of just two years, determining that the shorter period provides sufficient time to repay the PPP loan in light of the “temporary economic dislocations caused by the Coronavirus.” The PPP Flexibility Act overrides the SBA regulations and extends the maturity of PPP loans to at least five years (but still no more than ten years).

The minimum five-year term applies only to loans made after June 4, 2020. Borrowers and lenders that have already entered into PPP loans may mutually agree to extend the maturity from two years to five years.

Interest Deferral. The PPP Flexibility Act modified the deferment period for payment of principal and interest accrued under PPP Loans. The CARES Act and subsequent regulations automatically deferred payments of principal and interest for six months from the date the loan was disbursed. Under the PPP Flexibility Act, the deferment period is extended as follows:

  • If the borrower submits the Forgiveness Application to the lender within 10 months of the date on which the borrower’s Forgiveness Period ends, the deferment period will run until the date on which the SBA remits the loan forgiveness amount to the lender (thus, borrowers that achieve full forgiveness will not be required to make any payments on their PPP loan).
  • If a borrower does not apply for forgiveness within ten months of the last day of the borrower’s Forgiveness Period, the deferment period will end on the date that is ten months after the date on which the borrower’s Forgiveness Period ends.

Extended Availability Period? The CARES Act made PPP loans available until June 30, 2020. The PPP Flexibility Act appeared to extend the availability period to December 31, 2020, but in subsequent guidance, the SBA indicated that Borrowers only have until June 30 to apply for a PPP loan. While borrowers could challenge the June 30 deadline as in direct conflict with the statute, if funds run out prior to June 30, it may ultimately be a moot point. Congress has allocated $669 billion of funding to the PPP, and as of June 6, 2020, participating lending institutions have disbursed approximately $511 billion of that funding to borrowers.

Payroll Tax Deferral. The CARES Act provides employers with the ability to defer payment and deposit of the employer’s share of the social security tax for deposits that are due to be made beginning on March 27, 2020 and ending before January 1, 2021. The first 50% of deferred payroll taxes will be due December 31, 2021, and the remaining amounts will be due December 31, 2022. Employers that defer payment of applicable payroll taxes under this provision are treated as having timely made required deposits if all such deposits are made not later than the applicable due dates.

Originally, the CARES Act indicated that an entity that receives debt forgiveness of a PPP Loan would be ineligible to defer payroll taxes as described above. The PPP Flexibility Act eliminated this restriction.

Other Implications. The SBA has issued significant guidance to implement the PPP loan program, consisting of application forms, forgiveness application forms, interim and final rules, a Frequently Asked Questions (FAQs) summary, and other materials and guidance. The PPP Flexibility Act significantly alters the PPP, and it is unclear to what extent, and how quickly, the SBA will update its existing guidance.

Additionally, under the new rules, borrowers will have until December 31, 2020, to restore FTE levels and salaries/wages. While this is generally beneficial to borrowers, as it gives borrowers more time to restore wages, salaries, and employment levels, it also introduces more uncertainty, as borrowers that wish to take advantage of this provision may have trouble forecasting what their operations will look like at the end of this extremely turbulent year.

Additional Information. We expect the SBA to issue more guidance on this topic in the future. The complete text of (i) the CARES Act is here, (ii) the supplementary PPP Enhancement Act is here and the PPP Flexibility Act is here.

For more information, please contact your Quarles & Brady attorney or:

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