On Wednesday, January 6, the Small Business Administration (SBA) released two interim final rules (IFRs) incorporating changes to the Paycheck Protection Program as directed by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act ("Economic Aid Act") and addressing the new Second Draw loan program. (Our release summarizing the Economic Aid Act can be reviewed here.) In addition, on January 8, 2021, the SBA released a revised First Draw borrower application form and a Second Draw borrower application form, as well as lender application forms (here and here).
- The first IFR, Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act, restates and consolidates the previously issued interim rules and incorporates the changes to PPP requirements captured in December's Economic Aid Act. According to the IFR, SBA also intends to issue additional guidance on changes in the loan forgiveness and review process, as well as requests to reapply for or modify First Draw loans.
- The second IFR, Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans, provides guidance for loans to businesses that have previously received a PPP loan and wish to apply for a Second Draw loan.
Regarding First Draw PPP Loans, the IFR provides the following guidance:
- First Draws: Confirms that borrowers may not receive more than one First Draw PPP loan (subject to certain exceptions related to increases for borrowers that returned PPP funds or did not accept all of the funds for which they were initially approved) but may be eligible for a Second Draw PPP loan.
- Timing: Applications must be submitted by lenders through E-Tran on or before March 31, 2021, and the request is subject to the availability of funds.
- Covered period: Allows borrowers to choose their "covered period," which begins on the date the lender disburses the PPP loan and ends on any date selected by the borrower that is between 8 and 24 weeks after the date of disbursement.
- Base period: Allows new borrowers to choose calendar year 2019 or 2020 as the base period for purposes of calculating their maximum loan amount.
- Partnerships: Confirms that partnerships are eligible for PPP loans, and provides guidance for calculating the maximum loan amount. The partnership is allowed to report the self-employment income of general active partners up to $100,000; however, individual partners may not submit a separate PPP application as self-employed individuals.
- Interest rate: Restates PPP loans will bear a 1% interest rate and adds that the interest rate is to be calculated "on a noncompounding, non-adjustable basis."
- Lobbying activities: Prohibits using PPP proceeds for lobbying activities.
- Additional eligibility for uses of PPP funds: The IFR provides guidance on the eligible and forgivable uses of PPP funds for the following expenses:
- Covered operations expenditures, including "payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses."
- Covered property damage costs, which are "costs related to property damage and vandalism or looting due to public disturbances in 2020 that were not covered by insurance or other compensation."
- Covered supplier costs, including expenditures made by a borrower to a supplier of goods for the goods that were essential when the expenditure was made and was made pursuant to a contract or purchase order.
- Covered worker protection and facility expenditures to account for business modifications to comply with COVID-19-related regulatory guidance and worker personal protective equipment.
- Expansions of eligibility for certain organizations: The IFR provides increased eligibility for:
- Certain businesses that are generally ineligible for 7(a) loans, including nonprofit businesses, businesses deriving more than one-third of gross annual revenue from legal gambling activities, and businesses principally engaged in teaching, instructing, counseling, or indoctrinating with regard to religion or religious beliefs, whether in a religious or secular setting.
- Housing cooperatives that are 501(c)(6) organizations and employ not more than 300 employees, if the organization meets other eligibility requirements.
- Destination marketing organizations with 300 or fewer employees, if the organization meets other eligibility requirements.
- Organizations described in section 501(c)(6) of the Internal Revenue Code (IRC) and that are exempt from taxation under section 501(a), if the organization has 300 or fewer employees and meets other eligibility requirements.
- Nonprofit and tax-exempt news organizations with more than one physical location and 500 or fewer employees per physical location if the organization 1) certifies in good faith that the proceeds will be used by the organization's unit that produces or distributes locally focused or emergency information, and 2) is majority owned or controlled by a business concern with the NAICS code 511110 or 5151. Publicly traded news organizations are permitted to receive loans if the organization certifies that the loan will support locally focused or emergency content.
- Expansions of ineligible businesses: Ineligible businesses now generally include:
- Businesses or organizations not in operation on February 15, 2020;
- Businesses that received or will receive a Shuttered Venue Operator Grant;
- Businesses controlled either directly or indirectly by the president, the vice president, the head of an executive department, or a member of Congress, or the spouse of such person;
- Businesses that have permanently closed; and
- Publicly traded companies and businesses.
- Opportunities to reapply or increase: Borrowers that returned the entirety of their PPP loans may reapply for a PPP loan in an amount the borrower is eligible for under current PPP rules. Borrowers that returned part of a PPP loan are permitted to reapply for the difference between the amount retained and the previously approved amount. Borrowers that did not accept the full amount of a PPP loan for which they were approved may seek an increase up to the previously approved amount. SBA intends to issue additional guidance on the processes for reapplication and increases in loans.
- Expansions of certifications: The IFR requires additional certifications to be made in connection with receiving PPP funds or forgiveness, including certifications that the applicant has not received and will not receive a Shuttered Venue Operator grant, and that the applicant is not publicly traded. Applicants also must complete the economic necessity certification, which requires an applicant to certify in good faith that "the uncertainty of current economic conditions makes necessary the loan request to support the ongoing obligations" of the applicant. The IFR incorporates FAQ 46's safe harbor that the borrower of any loan under "$2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith."
- Agent fees: The IFR states that agent fees may not be paid out of the proceeds of a PPP loan, and borrowers that retain an agent must pay the agent fees themselves. Lenders are responsible for paying agent fees for services that the lender directly contracts for with the agent.
- Lender registration in SAM.gov: The IFR notifies lenders of the requirement to complete System of Award Management (SAM) registration and provide SBA with the lender's unique entity identifier within thirty days from the date of the first PPP loan disbursement made by the lender after December 27, 2020.
- Lender requirements to underwrite loans: The IFR notifies lenders of their responsibility to confirm certain information submitted by the borrower and "follow their existing BSA protocols" or "establish an anti-money laundering compliance program equivalent to that of a comparable federally regulated institution." The IFR reiterates that lenders' underwriting obligations under the PPP are limited to:
- Confirming receipt of borrower certifications contained in the PPP Borrower Application Form;
- Confirming receipt of employee information;
- Confirming the dollar amount of average monthly payroll costs for 2019 or 2020 by reviewing the payroll documentation submitted with the borrower's application; and
- Following the applicable BSA requirements discussed above.
In addition to these items, the IFR notes that lenders must review the PPP Application Form. In their underwriting and review, lenders are not required to independently verify the borrower's reported information if the borrower submits supporting documentation and attests that it accurately verified the payments for eligible costs. Lenders that rely on a certification or documentation and satisfy all "other relevant Federal, State, local, and other statutory and regulatory requirements applicable to the lender" will not face an enforcement action and are not "subject to any penalties relating to loan origination or forgiveness of the PPP loan."
Regarding Second Draw PPP Loans, the IFR provides the following guidance:
- Terms: The IFR specifies that Second Draw PPP Loans "are generally subject to the same terms, conditions and requirements as First Draw PPP Loans." As with First Draw loans, lenders are permitted to rely on certifications of the borrower to determine the borrower's eligibility and use of loan proceeds.
- Eligibility: The IFR confirms that certain borrowers that previously received PPP loans may reapply or request an increase in their PPP loan amount. Eligible borrowers include borrowers with fewer than 300 employees, that used or will use the full amount of their first PPP loan on or before the date when the second PPP loan is expected to be disbursed, and have experienced a gross revenue reduction of "25% or greater in 2020 relative to 2019." Borrowers may show a 25% reduction by comparing gross receipts in any 2020 quarter compared with the same quarter in 2019 or by submitting copies of their annual tax forms that show a reduction in annual receipts of 25% or more in 2020 compared with 2019. The IFR excludes from gross receipts the forgiveness amount of a First Draw PPP loan received in calendar year 2020 and specifies that for borrowers with affiliates, the calculation of gross receipts should include affiliate receipts. For those borrowers, gross receipts are calculated "by adding the gross receipts of the business concern with the gross receipts of each affiliate."
- Timing: Applications must be submitted by lenders through E-Tran on or before March 31, 2021, and the request is subject to the availability of funds.
- Second Draw PPP Amounts: The IFR provides guidance that borrowers are limited to one Second Draw PPP Loan, no greater than $2 million.
- Payroll Time Period: The IFR provides that borrowers may use calendar year 2019 or 2020. Second Draw borrowers that are not self-employed, sole proprietorships, or independent contractors may use the "precise 1-year period before the date on which the loan is made to calculate payroll costs."
- Ineligible Entities: Entities that were ineligible to receive a First Draw PPP Loan under the CARES Act or Consolidated First Draw PPP IFR are also ineligible for a Second Draw PPP Loan. Additionally, permanently closed businesses, businesses involved in political or lobbying activities, Chinese entities or entities affiliated with Chinese entities, and any person required to submit a registration statement under section 2 of the Foreign Agents Registration Act of 1938 are prohibited from taking a Second Draw Loan.
- Corporate Group Rule: The IFR provides that businesses that are part of a single corporate group shall in no event receive more than $4,000,000 of Second Draw PPP Loans in the aggregate. (Note that the SBA's affiliation rules apply in conjunction with this limitation even if the applicants are "eligible for the waiver-of-affiliation provision under the CARES Act or are otherwise not considered to be affiliates under SBA's affiliation rules.")
- Forgiveness: Forgiveness rules for Second Draw loans are generally the same.
- Documentation: The IFR explains that generally, the same documentation as required for First Draw PPP loans is required to substantiate a Second Draw applicant's payroll cost calculations. However, if the applicant uses the same lender and uses calendar year 2019 figures to determine both its First Draw and Second Draw PPP loans, then no additional documentation is required. However, the lender may independently request additional documentation if the lender concludes that the documentation would be useful in conducting the lender's good-faith review of the borrower's loan amount calculation. For loans with a principal amount of $150,000 or more, the applicant must also submit documentation adequate to establish that the applicant experienced a revenue reduction of 25% or more in 2020 relative to 2019. For loans with a principal amount of $150,000 or less, documentation is not required at the time of application and can be provided with the forgiveness application.
- First Draw PPP Loan under SBA review: The IFR notes that if the borrower's First Draw PPP Loan is under review, the lender will receive notification from SBA when the lender submits an application for a guaranty of a Second Draw PPP Loan. The lender will not receive an SBA loan number until the issue is resolved, and according to the IFR the SBA will resolve these issues "expeditiously."
Venable will continue to provide updates on guidance relevant to First Draw Loans and Second Draw Loans issued by the SBA or Treasury.