On June 4, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) into law. The U.S. Senate unanimously passed the bill on June 3, 2020, following passage by the House of Representatives. The PPPFA amends the Small Business Act and the CARES Act with the goal of providing flexibility and increased benefits to Paycheck Protection Program (PPP) borrowers, including by:
- Amending the PPP's loan maturity provision: The CARES Act institutes a maximum loan maturity date of 10 years from the date on which the borrower applies for loan forgiveness. Although the CARES Act prescribed a maximum 10-year term of maturity, SBA guidance subsequently provided by the Small Business Association (SBA) and the Department of Treasury provided that the loan maturity date would be two years. Now the PPPFA amends the CARES Act to require a minimum term of maturity of five years. This provision applies only to any PPP loans made after the PPPFA is enacted, but it allows lenders and borrowers to mutually agree to modify existing loan terms (but does not require them to do so).
- Extending the PPP's "covered period": Under the CARES Act, the PPP's covered period ends on June 30, 2020. The PPPFA extends that date to December 31, 2020. A follow-on letter authored by five members of the House and Senate, including Senator Marco Rubio, stated that the "intention of the extension of the covered period … is to allow borrowers who received PPP loans before June 30, 2020 to continue to make expenditures for allowable uses until December 31, 2020," but that "[t]he extension of the covered period does not authorize the Small Business Administration (SBA) to issue any new PPP loans after June 30, 2020, as this date remains fixed by section 1102(b) of the CARES Act."
- Enlarging the forgiveness period: The CARES Act requires PPP funds to be spent in the 8 weeks following the loan origination in order to be eligible for forgiveness. The PPPFA amends the CARES Act to replace the 8-week loan forgiveness period with the earlier of 24 weeks after the disbursement of the loan or December 31, 2020. Borrowers who received loans before the PPPFA was enacted may retain the original 8-week loan forgiveness period.
- Expanding the exemption for re-hires: The CARES Act reduces a borrower's eligibility for loan forgiveness if the borrower reduces the number of full-time equivalent employees (FTEs) or reduces the compensation of one or more employees between February 15, 2020 and April 26, 2020, but allows employers to avoid reductions to the forgiveness amount if they restore the number of FTEs or compensation by June 30, 2020. The PPPFA extends the deadline in which to rehire employees or restore compensation levels to December 31, 2020.
- Adds additional exemptions to the loan forgiveness reduction: The PPPFA also allows borrowers to avoid a reduction in forgiveness amounts if the borrower can (1) document an inability to rehire the individuals employed on February 15, 2020 and an inability to hire "similarly qualified" employees for unfilled positions on or before December 31, 2020, or (2) document an inability to "return to the same level of business activity" that the business experienced before February 15, 2020 "due to compliance with the requirements established or guidance issued" by certain federal agencies from March 1, 2020 to December 31, 2020 "related to the standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19."
- Revises the Interim Final Rule's 75/25 requirements: The April 3 Interim Final Rule stated that 75% of forgivable funds must be used for payroll costs, although the CARES Act does not include any such restriction. The PPPFA now appears to mandate that at least 60% of the PPP funds must be used for payroll costs for the borrower to be eligible for any loan forgiveness. The remaining 40% may be used for other allowable uses (qualified payments for mortgage interest, rent, or utilities). If a borrower does not use at least 60% for payroll costs, the borrower is not eligible for any loan forgiveness. (This provision may be subject to additional clarification through subsequent legislation or guidance.)
- Amends the deferral provision: The CARES Act requires lenders to defer payment (including principal, interest, and fees) on PPP loans for at least six months and up to one year. The April 3 Interim Final Rule established the deferral period to be six months. The PPPFA amends that provision to require lenders to defer payments (including principal, interest, and fees) until the date on which the amount of loan forgiveness is remitted to the lender, including for PPP loans which are sold on the secondary market.
- Imposes a deadline for borrowers to seek forgiveness or begin making payments: The PPPFA requires borrowers to apply for forgiveness within 10 months after the last day of the Section 1106(a) forgiveness covered period; otherwise the borrower must begin making payments on the loan.
- Expands payroll tax deferment eligibility to PPP borrowers: The CARES Act excluded borrowers who received loan forgiveness under the PPP from being able to defer employer payroll taxes. The PPPFA eliminates this exclusion.
These changes to the loan forgiveness program will likely require changes to the current loan forgiveness application. Venable will continue to monitor the enactment of the PPPFA and any additional guidance issued by the SBA or Treasury.