CARES Act: PPP Loan Update (April 3, 2020)
Last night, the SBA issued guidance to lenders regarding the particulars of the Paycheck Protection Program (“PPP”) loans, which answered some lingering questions (but not all, see below). In addition, a modified application form was issued and, given the ability of banks to just rely on the applications, this should be the form adopted by individual banks.
Listening to Secretary Mnuchin on April 2, 2020, and the reporting on April 3, 2020, the expectation is that most banks should have their PPP loan systems up and running by the early part of the week of April 6, 2020, with loan proceeds being funded immediately upon submission of a complete and compliant application This seems ambitious, but certainly possible.
It is also important to note that many banks, especially the largest banks, are limiting PPP loans to existing customers.
We have updated the detailed CARES Act whitepaper on our COVID-19 Update page but to summarize, our initial read of the SBA updated guidance shows the following changes to the original Act, some of which have been previously announced.
- The annual interest rate increases from 0.5% to 1.0% (but note that in the original Act, the interest rate was said to be up to 4% per year). This interest will only apply on “unforgiven” amounts of the loan, as the update has clarified that accrued interest will in fact be forgiven along with principal.
- The update confirmed previous statements that the maturity of any unforgiven loans will be two years. The original Act had provided that maturities would be up to 10 years.
- The update confirmed previous statements that only 25% of the loan could be forgiven for non-payroll costs. The update also makes clear that at least 75% of the proceeds of the loan (whether forgiven or not) must be applied to payroll costs. In other words, if less than 75% of the PPP loan proceeds are used for payroll costs, not only will the excess not be forgiven, the applicant will have breached the application promises – this makes our previous advice regarding segregating funds and tracking use even more critical.
- Remember that “payroll costs” are defined broadly as: compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employee.
- Also remember that the salary, wages, commission, tips or similar compensation portion of this equation is capped at total annual compensation of $100,000 for each employee.
- The update confirmed our position that employers cannot include compensation paid to independent contractors as part of “payroll costs” because those independent contractors will have the ability to get their own PPP loans. This issue has been confusing due to some ambiguous language in the original Act, but is now clear.
- The update clarified that applicants may add to a PPP loan the amount of any Economic Injury Disaster (EID) loan MADE between 1/31/20-4/3/20; but doing so will require some specialized tracking of use of proceeds to ensure forgiveness. This process is tough to summarize in this format, and requires individual attention. Unfortunately, the update did not clarify if it is permissible to receive both an EID loan and PPP loan that does not fit this limited circumstance (i.e., refinancing a previously-received EID loan into the PPP program). On this issue, my advice has been (i) I am not aware of anything official that expressly prohibits receiving both loans, so long as the proceeds are applied to different permitted uses, (ii) Senate Committee guidance contemplates use of both loan programs, and (iii) PPP applicants should disclose prior EID applications to their lender, just in case the lender is taking the position that it will not allow both. As is clear by now, however, this entire situation is fluid and this particular issue could be clarified either way in the future, so applicants for both loan programs should be certain to discuss it with the PPP lender.
- As a reminder, applicants are required to make a number of certifications in the application, including background check type information of principal owners and a statement that: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Since there is no real guidance on the “uncertainty” statement, and there are penalties for fraud if a regulator determines an applicant’s certifications to be untrue, applicants must read the application carefully and have some good faith basis to have concern over future operations (in particular keeping payrolls up) given this crisis. Given the COVID-19 situation as it currently stands, it seems unlikely that this particular certification could be challenged after the fact, but again, this is all uncharted territory.
- Finally, it remains unclear whether the supporting payroll documentation to be submitted with the application is to be for calendar year 2019, or the 12-month period ending March 31, 2020. Lending banks are seeking guidance on this issue, but for applicants the prudent measure would be to prepare to provide IRS payroll records, retirement plan contributions, health insurance premiums and other payroll costs for both of the possible periods of measurement.
**This information is offered for discussion, marketing and news purposes and is not intended to constitute legal advice.**