Initial regulatory interpretation of the Flexibility Act changes to the PPP
June 11, 2020
By: Mark A. Mangano
The Small Business Administration (SBA) began its interpretation of the Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act) with the issuance of its seventeenth interim final rule related to the Paycheck Protection Program (PPP). The Flexibility Act includes significant changes to the PPP and loan forgiveness provisions of the CARES Act. On June 10, 2020 the SBA published “Business Loans Program Temporary Changes; Paycheck Protection Program-Revisions to First Interim Final Rule” (IFR)1.
In the IFR, the SBA changes the first interim final rule2 implementing the PPP. The IFR:
- Provides that for PPP loans made based upon applications processed on or after June 5, 2020, the term of the loan is set at 5 years;
- Replaces the eight-week loan forgiveness covered period with a 24-week period;
- Changes the loan deferment period for all PPP loans;
- Changes the portion of PPP loan proceeds that must be spent on payroll costs to qualify for full loan forgiveness from 75 percent to 60 percent.
- Makes the forgiveness requirement that 60 percent of PPP loan proceeds be spent on payroll costs a proportional requirement.
- Modifies borrower certifications regarding the intended use of PPP loan funds to reflect the changes in proportion of payroll costs and the applicable period in which they will be spent.
- Extends the period that federal employment taxes are excluded from the definition of payroll costs under the CARES Act from June 30, 2020 to December 31, 2020.
The SBA determined that for PPP loans that had been applied for on or after June 5, 2020 the loan term would be 5 years. The Flexibility Act provided that 5 years would be the minimum allowable term and the CARES Act permitted terms as long as 10 years after application for forgiveness.
The two-year maturity for PPP loans made prior to June 5, 2020 is unaffected. Although lenders are permitted to extend the terms of such loans to 5 years.
Loan forgiveness covered period
The IFR confirms the Flexibility Act extension of a longer coverage period for calculating loan forgiveness. Under prior regulations a borrower had eight weeks from the funding of the PPP loan or alternatively eight weeks from the first payroll period following the funding of the loan to expend PPP loan proceeds and calculate forgiveness. For loans based upon applications made on or after June 5, 2020 the 24-week period is mandatory. Borrowers that applied before June 5, 2020 have the option to use the eight-week or alternative eight-week periods. Opting for the eight-week option is of somewhat limited benefit given the enhanced deferment period discussed below.
Loan deferment period
The loan deferment period is extended substantially. The IFR provides: “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 previous deferment period was six months.
Due to the processing time limits expressed in other SBA guidance, the loan deferment period could be nearly 18 months. The repayment terms of a PPP loan are now contingent on the decision of the borrower regarding its forgiveness application, the qualification for forgiveness, and the forgiveness application processing of the bank and the SBA.
Payroll expense portion of forgiveness
The SBA confirmed the Flexibility Act requirement that the portion of the PPP forgiveness amount be reduced from 75 percent to 60 percent. The SBA made a significant interpretation of the Flexibility Act in determining that the employment costs portion of PPP forgiveness will continue to be proportional. The Flexibility Act language suggested that failure to meet the 60 percent requirement would preclude forgiveness altogether. Under the IFR interpretation, failure to meet the 60 percent requirement will reduce but not eliminate forgiveness.
The IFR provides critical guidance on implementing the Flexibility Act. Unfortunately, questions related to loan forgiveness remain unanswered. The SBA has promised additional revisions to its interim final rules to ensure consistency with the Flexibility Act.