Update: SBA Clarifies PPP Loan Forgiveness Requirements and Loan Review Procedures

9 min

On Friday, May 22, 2020, the Treasury and SBA released new guidance (here and here) regarding the Paycheck Protection Program (PPP), specifically addressing loan forgiveness, as well as the SBA's loan review procedures and related borrower and lender responsibilities under the PPP. For borrowers who received the earliest PPP loans, the 8-week "covered period" is coming to a conclusion, and the time to apply for loan forgiveness is rapidly approaching. The newest guidance supplements the recently released Loan Forgiveness Application (more on that here) and provides additional clarity about how the SBA intends to validate borrower representations on both the Loan Forgiveness Application and the initial PPP application.

Loan Forgiveness Guidance

Noteworthy aspects of the latest guidance on loan forgiveness include the following.

General Forgiveness Terms
  • Confirms that forgiveness eligibility will be determined based upon the guidance available at the time of the loan application;
  • Reaffirms that if only a portion of the loan is forgiven, or if the forgiveness request is denied, the remaining balance must be repaid on or before the 2-year maturity of the loan.
Payroll Costs
  • Restates that payroll costs must make up 75% of the amount for which a borrower seeks loan forgiveness;
  • Reaffirms that, in general, payroll costs paid or incurred during the 8 weeks following disbursement of the loan (i.e., the "covered period") are eligible for forgiveness, but that borrowers may also use an "alternative payroll covered period" as set forth in the instructions to the Loan Forgiveness Application, in which the borrower may opt to use a covered period beginning on the first day of the borrower's first payroll cycle;
  • Confirms that payroll costs are generally incurred on the day the employee's pay is earned (i.e., the day the employee worked) and clarifies that where employees are not performing work and are still on the borrower's payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day the employee would have performed work);
  • Confirms that employee bonuses and hazard pay are eligible for payroll costs, as long as the employee's total compensation does not exceed the $100,000 annualized cap;
  • Wages paid to furloughed employees during the covered period are eligible for forgiveness;
  • Clarifies that owner-employees and self-employed individuals are limited to "payroll compensation" no greater than the lesser of 8/52 of 2019 compensation or $15,385 per individual, and owner-employees are further capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf. Schedule C filers are capped by the amount of their owner compensation requirement, calculated based on 2019 net profit. And general partners are capped by the amount of their 2019 net earnings from self-employment, subject to certain reductions.
Nonpayroll Costs
  • Reaffirms that "eligible nonpayroll costs cannot exceed 25% of the loan forgiveness amount";
  • Reaffirms that nonpayroll costs must be paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period, but clarifies that if a borrower's nonpayroll expenses straddle the covered and noncovered period and are paid after the covered period (e.g., a borrower's "covered period" ends on July 26 and its electricity expenses for July are not paid until August 10), the borrower may seek partial forgiveness of the expenses incurred during the covered period but paid on the next regular billing date (e.g., electricity expenses for July 1-26 are forgivable);
  • Advance payments of interest on mortgage obligations are not eligible for loan forgiveness.
Forgiveness Reductions
  • Confirms that EIDL advances will be deducted from loan forgiveness amounts;
  • Head Count Reductions:
    • Confirms that borrowers will not be penalized for voluntary resignations and schedule reductions or for-cause terminations;
    • Reaffirms that borrowers will not be penalized if they offer to re-hire an employee "for the same salary and same number of hours" and the employee declines the offer, although the borrower must appropriately document the request and denial in writing and the borrower must inform the applicable state unemployment insurance office within 30 days of the employee's rejection of the offer;
    • Clarifies that a full-time employee is an employee who works 40 hours or more, on average, each week, and that such an employee would be considered a full-time equivalent (FTE) employee with a weight of 1.0;
    • Clarifies that, to calculate full-time equivalent (FTE) employees, borrowers may either add the hours of all part-time employees and divide by 40, or elect, "for administrative convenience . . . to use a full-time equivalency of 0.5 for each part-time employee," as long as the borrower applies the chosen method consistently;
  • Salary/Wage Reductions:
    • Confirms that the 25% salary/wage reduction calculation (for employees who were not paid more than the annualized equivalent of $100,000 during any 2019 pay period) is performed on a per-employee basis and not in the aggregate;
    • Clarifies that borrowers will not be doubly penalized for reductions, such that the salary/wage reduction applies only to the decline in employee salary and wages not attributable to the FTE reduction.
  • Remedies for Reductions in Head Count and Salary/Wage:
    • Appears to confirm that the restoration benefit applies only to eliminating, before June 30, 2020, FTE and salary reductions that occurred between February 15, 2020 and April 26, 2020 (and not reductions that occurred after April 26, 2020).

For Lenders:

  • Confirms that lenders have 60 days from receipt of a complete forgiveness application to issue a decision to the SBA, and that the lender must request payment from the SBA at the time it issues its decision to the SBA;
  • Confirms that, within 90 days, the SBA will remit the appropriate forgiveness amount to the lender, plus any interest that accrued during that period, subject to "any SBA review of the loan or loan application."

Loan Review Guidance

Rules for Borrowers

The SBA also issued guidance clarifying various components of its loan review process. Among other things, the latest guidance clarifies that the SBA may review "any PPP loans," at any time in its discretion, and that the SBA may consider in that review whether a borrower correctly calculated the loan amount, properly used the loan proceeds, and/or is entitled to the loan forgiveness amount sought. This presumably includes loans smaller than $2 million, notwithstanding the SBA's previous suggestion in FAQ 46 that audits will be focused on loans of $2 million or more. Borrowers must retain PPP documentation for at least 6 years after the date the loan is forgiven or paid in full, and the SBA and SBA Inspector General must be granted these files upon request.

If the SBA believes a borrower may be ineligible for the loan or for some forgiveness amount, it will require that the lender make a written request for additional information from the borrower, and it may also request information directly from the borrower. All information provided by the borrower in response (either directly to the SBA or through the lender) will be considered in the SBA's review. Failure to respond to the SBA's request for information may result in a determination that the borrower is ineligible for forgiveness or for the loan itself. Notably, the SBA emphasized that the shareholders, members, or partners of a borrower that is deemed ineligible to have received a PPP loan will not be protected by "the CARES Act's nonrecourse provision … which limits SBA's recourse against individual shareholders, members, or partners of a PPP borrower for nonpayment of a PPP loan only if the borrower is an eligible recipient of the loan" (emphasis added).

Borrowers will be given the opportunity to seek reconsideration and appeal of review decisions. The SBA intends to issue a separate interim final rule on this process.

Rules for Lenders

Lenders must follow the record retention requirements of their regulators, and they must confirm receipt of required documentation to verify payroll and nonpayroll costs. Moreover, lenders must confirm the loan forgiveness calculations performed by borrowers, although the calculation's accuracy remains the borrower's responsibility, and lenders are only expected to provide a "good faith review, in a reasonable time, of the borrower's calculations and supporting documents." The level of scrutiny applied varies based upon the reliability of the payroll records (e.g., payroll reported by a recognized payroll provider requires "minimal review," as compared to the "more extensive review" required for payroll from an unrecognized source).

Lenders must issue a loan forgiveness decision to the SBA within 60 days after receiving a complete Loan Forgiveness Application. Such a decision may take the form of an approval (in whole or in part), a denial, or a denial without prejudice (if directed by the SBA) due to a pending SBA review of a loan for which forgiveness is sought.

If a lender issues a decision approving the application (in whole or in part), it must submit to the SBA the borrower’s PPP Loan Forgiveness Calculation form, PPP Schedule A, and the PPP Borrower Demographic Information Form (if submitted by the borrower). If the lender determines the borrower is not entitled to forgiveness in any amount, the lender must provide the same forms to the SBA, along with the reason for the denial. Moreover, the lender must notify the borrower in writing that the denial has been issued to the SBA.

Within 30 days after notice of a lender’s denial decision, the borrower may request that the SBA review the lender’s decision. For an SBA-directed denial without prejudice, the borrower may also subsequently request that the lender reconsider the borrower’s Loan Forgiveness Application, unless the SBA has determined the borrower is ineligible for a loan in general. The rule does not include a provision allowing borrowers to seek the SBA’s review of a lender’s partial approval of a borrower’s loan forgiveness request.

If the SBA chooses to review a PPP loan, it will notify the lender in writing, and the lender must notify the borrower within 5 business days of receipt. Within 5 days of receiving notice from the SBA, the lender must submit to the SBA (1) the Borrower Application Form and supporting documents, (2) the Loan Forgiveness Application and supporting documents, (3) a signed and certified transcript of account, (4) a copy of the executed PPP loan note, and (5) any other documents requested by the SBA. Once a review has begun, the lender must not approve the application for loan forgiveness until the SBA has completed its review.

Lender Fees

If the SBA determines a borrower was not eligible for the PPP loan, the lender is not eligible to receive a processing fee for that loan. If the SBA reaches this determination within one year after the loan was disbursed, the SBA will seek repayment of the processing fee from the lender, although such a determination will not affect the SBA's guaranty of the loan. Furthermore, lenders would be subject to a processing fee clawback if they fail to otherwise fulfill their obligations for document collection and retention, as described in the lender application form (SBA Form 2484) and previous guidance.