SBA releases Interim Final Rule for Payment Protection Program

Authors: Eli Han, Matthew Dickerson, Min Hong and Yi He, King and Wood Mallesons

INTRODUCTION

In response to the COVID-19 pandemic, on March 27, 2020, President Trump signed the “Coronavirus Aid, Relief, and Economic Security Act” (the “CARES Act”) into law, in what was the largest single economic rescue and stimulus package in the history of the United States. A significant component of the CARES Act was the Paycheck Protection Program (the “PPP”), a $349 billion program to assist small businesses, non-profits, the self-employed and others,[1] negatively impacted by COVID-19, to obtain loans. The Small Business Administration (the “SBA”) has been tasked with administering the PPP, and has created a dedicated section on its website[2] to provide relevant information, such as supplemental guidance, application forms, and Q&A. On April 2, 2020, the SBA issued an interim final rule (the “Interim Rule”), effective immediately upon publication on the Federal Register, announcing the implementation of sections 1102 and 1106 of the CARES Act, and updating the public with further details on borrower eligibility, borrowing procedures, etc., with respect to loans made under the PPP.

This client memo provides a summary of the Interim Rule and the SBA and Treasury online guidance provided to date, with respect to, amongst other things, borrower and lender eligibility and other requirements, and forgiveness of the PPP loans. Readers need to note that, as the PPP is a new program, the guidance and rules for the program may be subject to change.  In fact, certain borrower eligibility requirements have been changed over the course of the last few days.[3]

OVERVIEW OF THE INTERIM RULE

The Interim Rule, together with the supplemental guidance on the SBA and Treasury Department websites, provide additional detail as to the implementation and procedural requirements of the PPP.  We discussed the statutory requirements contained in the CARES Act in a prior client memo.[4]  The Interim Rule provides the following additional information, clarifications or elaborations on the statutory requirements:

A.Loan Terms

• All loans will be guaranteed under the PPP under the same terms and conditions. PPP loans are “first-come, first-served.”
• The maximum amount of each loan is the lesser of $10 million or 2.5 times the average monthly “payroll costs”,[5] plus the value of any existing Economic Injury Disaster Loans received after January 31, 2020. Determining the accuracy of payroll costs is the responsibility of the borrower, and the borrower must attest to the accuracy of those calculations.
• Interest Rate: 1 percent fixed rate.
• Maturity date: 2 years, with no prepayment penalties or early repayment fees.
• The use of the PPP loans for mortgage interest, rent and utilities, must be with respect to obligations incurred, leases in force, or service started, in each case, before February 15, 2020.
• The borrower must certify that, to the extent feasible, it will purchase only “American-made equipment and products.”
• Loans will be forgiven unless they are used for ineligible purposes.
• The Treasury Department has made clear that, if proceeds of any PPP loans are used for fraudulent purposes, criminal charges may be pursued against the borrower. In this regard, the borrower must acknowledge in the loan application that the lender may share information disclosed by the borrower with relevant federal government agencies for purposes of ensuring compliance.

B. Borrower Requirements

• All U.S.-based solvent businesses in operation on February 15, 2020, with 500 or fewer employees (determined subject to the SBA’s affiliation rules) can apply, including nonprofits, veterans’ organizations, tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors,.[6] Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.
• The borrower will need to provide identifying information and documentation proof to the lender in its loan applications. Identifying information includes: (i) business legal name, (ii) business address, (iii) tax identification number, (iv) primary contact, (v) average monthly payroll amount, (vi) number of employees, and (vii) purposes of the loan. Because the PPP loans may only be used for qualifying purposes, to prove that the intended purposes for borrowing the loan are qualify purposes, the borrower is required to compile and submit documentation proof in connection with its loan applications, including: (i) recent tax returns, (ii) documents evidencing the number of employees, (iii) payroll costs, (iv) mortgage interest payments, (v) rent payments, and (vi) utilities payments, in each case of (ii)-(vi), for the eight-week period following loan disbursement.
• The borrower must also disclose its ownership information,[7] including owner name, title, ownership percentage, tax identification number, and address.
• If any of the following applies to the borrower, the PPP loan will not be approved:
  • The borrower or any owner of the borrower is presently suspended, debarred, proposed for debarment, declared ineligible, voluntarily excluded from participation in this transaction by any federal department or agency, or presently involved in any bankruptcy.
  • The borrower, any owner of the borrower, or any business owned or controlled by any of them, has ever obtained a direct or guaranteed loan from SBA or any other federal agency that is currently delinquent or has defaulted in the last 7 years and caused a loss to the government.
  • The borrower (if an individual) or any individual owning 20% or more of the equity of the borrower is subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction, or presently incarcerated, or on probation or parole.
  • Within the last 5 years, for any felony, the borrower (if an individual) or any owner of the borrower has: (1) been convicted; (2) pleaded guilty; (3) pleaded nolo contendere; (4) been placed on pretrial diversion; or (5) been placed on any form of parole or probation (including probation before judgment).

C. Forgiveness

• The entire principal amount of a borrower’s loan can be forgiven if the borrower uses all of the loan proceeds for qualifying purposes and maintains the requisite employee and compensation levels.
• However, due to likely high subscription, not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.

D. Lender Requirements

• Existing SBA lenders, and certain other additional lenders,[8] are pre-approved to process PPP loans under delegated authority from the SBA. New lenders may apply to the SBA for authorization.[9] Authority may be terminated by either the lender or the SBA on 10 days written notice to the other, without affecting any PPP loans already made (although the lender may be required to transfer such loans to another entity approved under the PPP).
• If a lender presently not subject to the requirements of the Bank Secrecy Act, it must establish an appropriate anti-money laundering compliance program equivalent to that of a comparable federally regulated institution.
• As part of its obligations to ensure borrowers are permitted to participate in the PPP, lenders will be required to follow applicable Bank Secrecy Act requirements, obtain and review all required documentation from the borrower, and also verify:
  • that the borrower was in operation on February 15, 2020;
  • that the borrower had employees for whom the borrower paid salaries and payroll taxes; and
  • the dollar amount of average monthly payroll costs.[10]
• Lenders can rely on borrower documentation for loan forgiveness. Lenders do not need to conduct any verification themselves. The SBA will hold harmless any lender that relies on appropriate borrower documentation and attestation.
• Lenders will be paid a fee by the SBA, depending on the size of the loan. Any agent fees will be paid out of lender fees, and must not be passed on to, or offset by loan proceeds paid to, the borrower. Agent fees collected from the lender may not exceed 1% for loans of $350,000 or less, 0.5% for loans more than $350,000 but less than $2 million, and 0.25% for loans greater than $2 million.
• Fee waivers:
  • No up-front guarantee fee payable to SBA by borrowers;
  • No lender’s annual service fee (no ongoing guaranty fee);
  • No subsidy recoupment fee; and
  • No fee payable to SBA for any guarantees sold into the secondary market.
• PPP loans can be sold on the secondary market, at a premium or a discount to par value.

Disclaimer:  This article provides general information only, which may or may not reflect the most current legal developments and does not constitute legal or other professional advice.  Readers should seek appropriate legal advice from counsel in their relevant jurisdiction(s) before taking or refraining from taking any action in reliance on any information contained in this article.  Nothing in this article shall create an attorney/client relationship with King & Wood Mallesons LLP or with any lawyer at King & Wood Mallesons LLP.  

[1] Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and certain other expenses through existing SBA lenders. Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and certain other expenses through existing SBA lenders

[2] See here, and also see the Treasury website here

[3] We note that, on a prior version of the borrower application form, the borrower was required to certify that it and all its 20% shareholders were either US citizens or lawful permanent residents (“green card” holders). This requirement has since been removed.

[4] Available at https://www.kwm.com/en/us/knowledge/insights/the-governments-23trillionresponse-to-covid-19-20200401.

[5] “payroll costs” include: (i) salary, wages, commissions, or tips of employees whose principal place of residence is the United States (capped at $100,000 on an annualized basis for each employee), using “average monthly payroll for 2019”; (ii) employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit (excluding qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (FFCRA)); (iii) State and local taxes assessed on compensation (excluding Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees); and (iv) For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee. For seasonal businesses, the Borrower may elect to instead use average monthly payroll for the time period between February 15, 2019 and June 30, 2019, excluding costs over $100,000 on an annualized basis for each employee. For new businesses, average monthly payroll may be calculated using the time period from January 1, 2020 to February 29, 2020, excluding costs over $100,000 on an annualized basis for each employee.

[6] In most cases, a borrower will be considered together with its affiliates for purposes of determining eligibility for the PPP. Under SBA rules, entities may be considered affiliates based on factors including stock ownership, overlapping management, and identity of interest. This is a facts-based inquiry based on a totality of the circumstances (and a minority stockholder may be considered an “affiliate” if it holds the ability to control the company). The SBA’s affiliation standards are waived for small businesses: (1) in the hotel and food services industries; (2) that are franchises in the SBA Franchise Directory; or (3) that receive financial assistance from small business investment companies licensed by the SBA.

[7] An “owner” of the Borrower is defined as: (i) for a sole proprietorship, the sole proprietor; (ii) for a partnership, all general partners, and all limited partners owning 20% or more of the equity of the firm; (iii) for a corporation, all owners of 20% or more of the corporation; (iv) for limited liability companies, all members owning 20% or more of the company; and (v) any Trustor (if the Applicant is owned by a trust).

[8] Including: (i) federally insured depository institutions or any federally insured credit unions; (ii) Farm Credit System institutions as defined in 12 U.S.C. 2002(a); and (iii) any other depository or non-depository financing provider that, among other criteria, has been operating since at least February 15, 2019, and has originated, maintained, and serviced more than $50 million in business loans or other commercial financial receivables during a consecutive 12-month period in the past 36 months.

[9] Note that lenders who are currently designated in “Troubled Condition”, or who are subject to formal enforcement action by their primary federal regulator, may not be eligible.

[10] Lenders are expected to perform a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning average monthly payroll cost. For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. In addition, lenders may rely on borrower representations, including with respect to amounts required to be excluded from payroll costs. If the lender identifies errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue.