June Paycheck Protection Program Guidance Implements Flexibility Act
This article reports out on updated rulemaking from the Small Business Administration and the Department of Treasury following enactment of the Paycheck Protection Program Flexibility Act.
The Flexibility Act’s key provisions include extending the time to use loan funds from 8 weeks to 24 weeks, reducing the amount of loan dollars to be used for payroll costs from 75% to 60% and extending deferral periods for repayment and, for new loans, maturity. The sections that follow summarize the new SBA/Treasury rulemaking.
Based on language in this rulemaking, we anticipate further revised rulemaking to reflect the Flexibility Act, namely with regards to loan review and forgiveness procedures. LeadingAge will update member as those become available.
For those interested in borrowing from the Paycheck Protection Program, SBA issued an updated application form, which is largely the same as the original form but is updated to reflect the reduction of the payroll cost threshold from 75% to 60%. As of June 6, more than $120 billion remain available.
Amendment to Covered Period
Following the Flexibility Act, SBA and Treasury updated its rule to extend the covered period for PPP loans from June 30 to December 31 of this year. This time period controls how long borrowers have to use loan funds, not how long prospective borrowers have to apply for the PPP. The application deadline for new borrowers remains June 30.
Maturity Date
The Flexibility Act extended the maturity period for any unforgiven PPP loan principal to five years for new loans only. That is, loans originated after the bill became law. To that end, the new rule states that loans made before June 5 have a maturity period of two years, as previously was the case, and sets the maturity period for loans made on or after June 5 at five years.
Deferral Period
The new rule sets forth how borrowers should approach the deferral period for loan repayment since the Flexibility Act’s extension of deferral from six months to 10 months. Specifically, the rulemaking tells borrowers “if you submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you will not have to make any payments of principal or interest on your loan before the date on which SBA remits the loan forgiveness amount on your loan to your lender (or notifies your lender that no loan forgiveness is allowed).”
The rulemaking notes that interest accrues during the deferment period.
If borrowers do not submit a loan forgiveness application within 10 months of their 24 week period, they must begin paying principal after the 10 month deferment.
Here is a case example the rule provides:
If a borrower’s PPP loan is disbursed on June 25, 2020, the 24-week period ends on December 10, 2020. If the borrower does not submit a loan forgiveness application to its lender by October 10, 2021, the borrower must begin making payments on or after October 10, 2021.
Loan Forgiveness
The rule implements the Flexibility Act’s reduction of the 75% payroll threshold to 60%. Under the Act and this rulemaking, borrowers must use at least 60% of their loan funds for payroll costs to be fully forgiven.
It also makes clear that partial forgiveness is still available. There was some concern that the Flexibility Act’s language created an “all or nothing” scenario with respect to forgiveness, but that is not the case.
If less than 60% of a PPP loan is used for payroll costs, the amount of forgiveness granted will be reduced until the portion used for payroll costs reaches the 60% threshold.
The rule provides this case example:
If a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54 percent) of its loan on payroll costs, then because the borrower used less than 60 percent 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 percent of the forgiveness amount and $36,000 in non-payroll costs constituting 40 percent of the forgiveness amount).
Borrower Certification
This part of the rulemaking is most relevant to those that are applying for a PPP loan. The rule updates the certification PPP borrowers must make to get their loans. Specifically, borrowers must now certify that they understand that 60% of the loan must be used for payroll costs to be fully forgiven. Previously, this certification reflected the 75% payroll threshold. Borrowers still must certify an economic need for loan funds- that did not change in this rulemaking.