SBA Updates PPP Loan Forgiveness & Loan Review …

SBA Updates PPP Loan Forgiveness & Loan Review Procedures

On June 22, 2020, the U.S. Small Business Administration (SBA) released an interim final rule (IFR) that includes revisions to two previous IFRs by updating loan forgiveness and SBA loan review procedures guidance in light of the amendments under the recently passed Paycheck Protection Program Flexibility Act of 2020 (PPPFA) (see BKD articles Congress Passes Paycheck Protection Program (PPP) Fixes and SBA Announces Changes to Paycheck Protection Program). The IFR conforms previous rules to reflect PPPFA provisions, including the covered period (CP) for forgiveness, nonpayroll costs eligible for forgiveness, reductions in the forgiven amount, and the timing of when borrowers must apply for forgiveness to avoid making payments. It confirms that borrowers may submit forgiveness applications any time on or before the loan matures, including before the end of the CP, provided they have used all of the loan funds for which they wish to apply for forgiveness. The rule also incorporates PPPFA exemptions that preserve loan forgiveness for borrowers that made good-faith attempts to rehire employees or fill vacant positions (and retained a previous exemption for borrowers that have reduced employee hours and offered in good faith to restore them) or whose business could not return to previous levels of business activity because of public health directives. The SBA interpreted the latter exemption to include both direct and indirect compliance with state and local directives that are patterned after directives from the Centers for Disease Control and Prevention (CDC), the U.S. Department of Health and Human Services (HHS), or the Occupational Safety and Health Administration (OSHA).

Other PPP Updates

Loans Made & Available Funds

The SBA also released a PPP status update as of June 20, 2020. Lenders have issued approximately 4.7 million PPP loans totaling $515 billion. Due to loan repayments, the remaining funding available is $128 billion until the application deadline of June 30. Forty-four percent of all PPP loans were made by lenders with less than $10 billion in assets, 19 percent were made by institutions with $10 billion to $50 billion in assets, and 37 percent were made by institutions with more than $50 billion in assets. The overall average loan size was $110,000. The top five PPP lenders were JPMorgan Chase, Bank of America, PNC, Truist, and Wells Fargo.

Borrower Disclosure

The SBA will disclose the business names, addresses, NAICS codes, zip codes, business type, demographic data (if provided), nonprofit information, jobs supported, and loan amount ranges as follows:

$150,000 to 350,000

$350,000 to 1 million

$1 million to 2 million $2 million to 5 million

$5 million to 10 million

These categories account for nearly 75 percent of the loan dollars approved. For loans below $150,000, totals will be released and aggregated by zip code, industry, business type, and various demographic categories but not by individual borrower.

Using PPP Loan Proceeds to Refinance EIDLs

On June 19, 2020, the SBA issued a procedural notice providing guidance on using PPP loan proceeds to refinance an economic injury disaster loan (EIDL), as well as providing instructions for PPP lenders on the procedure for remitting to SBA any PPP loan funds designated for an EIDL refinance.

A PPP loan may not be used to refinance an EIDL if the borrower received the EIDL before January 31, 2020, or after April 3, 2020. EIDLs may be refinanced--but are not required to be refinanced--with PPP loans when the

SBA Updates PPP Loan Forgiveness & Loan Review Procedures

EIDL was received between January 31 and April 3 and the PPP borrower used EIDL proceeds for purposes other than payroll. A PPP loan must be used to refinance the full amount of an EIDL when EIDL funds were received between January 31 and April 3 and the borrower used the EIDL funds to cover payroll costs. The amount of the EIDL loan to be refinanced does not include the amount of any EIDL advance because the EIDL advance does not need to be repaid.

For PPP loan guaranty applications that include an amount for EIDL refinance, the lender must remit the funds directly to SBA. If the PPP lender has already disbursed funds to a borrower, SBA said the lender is responsible for notifying the borrower of the amount of loan proceeds the borrower must remit to SBA.

Loan Forgiveness

Timing Flexibility for Filing Form 3508 or 3508EZ

Form 3508 is the loan forgiveness application form and Form 3508EZ is the newly created and simpler one-page forgiveness form available if certain criteria are met. A borrower may submit the Form 3508 or 3508EZ at any time on or before the loan's maturity date, including before the end of the CP as long as the borrower has used all of the loan proceeds for which forgiveness is requested. While the CPs are still eight weeks and 24 weeks, a borrower is no longer required to wait to the end of the CP to file. However, if a borrower has a more than 25 percent reduction in compensation that reduced the loan forgiveness amount for any one employee, the reduction must be calculated for the entire CP or alternative payroll covered period (APCP) elected. The IFR includes the following example:

Example

A borrower that received a PPP loan before June 5, 2020, has elected to use an eight-week CP. This borrower reduced a full-time employee's weekly salary from $1,000 per week during the reference period to $700 per week during the CP. The employee continued to work on a full-time basis during the covered period, with a fulltime equivalent (FTE) of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $400 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by eight weeks).

While the ability to effectively name a covered period is very welcomed flexibility, borrowers are cautioned not to cut off the CP or APCP too quickly to get the forgiveness process started. The actual mechanics of the forgiveness calculation will reward you for erring on the side of extending the CP or APCP and can penalize you for cutting it too closely.

Cap on Payroll of Owner-Employees & Self-Employed Individuals During CP

There was confusion about the limitation amount during the 24-week CP or APCP for C corporation and S corporation owner-employees. Even after the issuance of the IFR, there is still not total clarity on the limitation. However, we believe the limits for various categories of owner-employees can be summarized as follows:

C Corp Owner-Employee ? $20,833 cash compensation, employer contribution to retirement plan and health insurance premiums paid on their behalf or if less, 2.5/12ths of the 2019 amounts for these items

S Corp Owner-Employee ? $20,833 cash compensation and employer contribution to retirement plan on their behalf (cannot include medical insurance premiums) or if less, 2.5/12ths of the 2019 amounts for these items

Schedule C and Schedule F Filers ? These self-employed individuals are capped at their owner compensation replacement based on the net profit on the 2019 Schedule C or F. This amount is 2.5/12ths of the net profit on the 2019 Schedule C or F, limited to $20,833 (100,000 / 12 * 2.5). This cannot include any health insurance or retirement contributions 2

SBA Updates PPP Loan Forgiveness & Loan Review Procedures

Partners ? Very similar to Schedule C and F filers, general partners are capped at the amount of their selfemployment income from the partnership or LLC as reported in Box 14(A) of their 2019 K-1 form, reduced by Section 179 depreciation, unreimbursed partnership expenses, and certain oil and gas depletion, the net of which is multiplied by 92.35 percent. This annual amount cannot exceed $100,000 and for the 24week CP is limited to 2.5 months or $20,833 and cannot include any retirement or health insurance premiums

Each owner-employee and self-employed individual gets only one $20,833 limit regardless of the number of businesses they have interests in and that obtained PPP loans.

Ultimately, the use of a 24-week CP or APCP should make any limitation on the amount includible in the forgiveness calculation for an owner-employee a non-factor except in a limited number of situations.

FTE Reduction Safe Harbors ? Documentation

The PPPFA added two safe harbors to avoid reduction in loan forgiveness due to a reduction in FTEs during the CP or APCP to the reference period that borrowers selected. The first is if a borrower can document an inability to rehire employees that were employed on February 15, 2020, or an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020. The second is if a borrower is able to document the inability to return to the same level of business activity as it was operating at on February 15, 2020, due to compliance with requirements of CDC, HHS, or OSHA generally regarding COVID-mandated practices. This includes sanitation, social distancing, or any other employee or customer safety requirements.

The IFR clarifies a borrower's documentation requirements for the safe harbors. For the first safe harbor, the IFR is very general, simply stating the borrower must maintain the written offer to rehire, the written record of the rejection, and a record of the efforts the borrower took to hire a similarly qualified worker. The borrower also must notify the applicable state unemployment office of the rejected rehire within 30 days of the rejection. The SBA has stated it will post instructions on this notification to its website at a later date.

The documentation requirements for meeting the decline in activity safe harbor were even more general. To show a decline in activity, the documentation must include "copies of applicable COVID requirements or guidance for each business location and relevant borrower financial records."

The IFR will accept a business's direct or indirect compliance with CDC, HHS, or OSHA requirements. Most businesses that were forced to close or scale back were under requirements of state or local governments; the IFR acknowledges underlying mandates were from the three federal entities regardless of the enforcement agency issuing the edict.

Example

A PPP borrower is in the business of selling beauty products both online and at its physical store. During the CP, the local government where the borrower's store is located orders all nonessential businesses, including the borrower's business, to shut down their stores, based in part on COVID-19 guidance issued by the CDC in March 2020. Because the borrower's business activity during the covered period was reduced compared to its activity before February 15, 2020, due to compliance with COVID requirements or guidance, the borrower satisfies the Flexibility Act's exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the CP, if the borrower in good faith maintains records regarding the reduction in business activity and the local government's shutdown orders that reference a COVID requirement or guidance.

Lender's Loan Review Rules

The IFR updates the loan review requirements to incorporate the addition of Form 3058EZ. A lender's review requirements are very similar for the 3508 and the 3508EZ.

The borrower is responsible for providing an accurate calculation of the loan forgiveness amount, and the borrower attests to the accuracy of its reported information and calculations on the Loan Forgiveness Application

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SBA Updates PPP Loan Forgiveness & Loan Review Procedures

Form. Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower's calculations and supporting documents concerning amounts eligible for loan forgiveness. For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. By contrast, if payroll costs are not documented with such recognized sources, more extensive review of calculations and data would be appropriate. The borrower is not entitled to forgiveness without submitting all required documentation to the lender.

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. The lender does not need to independently verify the borrower's reported information if the borrower submits documentation supporting its request for loan forgiveness and attests that it accurately verified the payments for eligible costs.

Once a borrower has submitted a completed loan forgiveness application, the lender must issue a decision to the SBA on a loan forgiveness application within 60 days. That decision may be:

An approval (in whole or in part)

Denial

Denial without prejudice due to a pending SBA loan review. The borrower may subsequently request that the lender reconsider its loan forgiveness application, unless the SBA has determined that the borrower is ineligible for a PPP loan

Approvals

When the lender issues its decision to the SBA approving the application (in whole or in part), it must include the PPP Loan Forgiveness Calculation Form and the optional PPP Borrower Demographic Information Form. Form 3508 submissions also must include PPP Schedule A.

The lender must confirm that the information provided by the lender to the SBA accurately reflects the lender's records for the loan, and that the lender has made its decision in accordance with the requirements. If the lender determines the borrower is entitled to forgiveness of some or all of the amount applied for under the statute and applicable regulations, the lender must request payment from the SBA at the time the lender issues its decision to the SBA. The SBA will--subject to any SBA review of the loan or loan application--remit the appropriate forgiveness amount to the lender, plus any interest accrued through the payment date, not later than 90 days after the lender issues its decision to the SBA. If applicable, the SBA will deduct EIDL advance amounts from the forgiveness amount remitted to the lender. The lender is responsible for notifying the borrower of remittance by the SBA of the loan forgiveness amount (or that the SBA determined that no amount of the loan is eligible for forgiveness) and the date on which the borrower's first payment is due, if applicable.

Denials

When the lender issues its decision to the SBA determining the borrower is not entitled to forgiveness in any amount, the lender must provide the SBA with the same documentation noted above along with the reason for its denial.

The lender must confirm that the information provided by the lender to the SBA accurately reflects the lender's records for the loan, and that the lender has made its decision in accordance with the requirements. The lender also must notify the borrower in writing that the lender has issued a decision to the SBA denying the loan forgiveness application. The SBA reserves the right to review the lender's decision in its sole discretion. Within 30 days of notice from the lender, a borrower may notify the lender that it is requesting that the SBA review the lender's decision by reviewing the loan.

Within five days of receipt, the lender must notify the SBA of the borrower's request for review. The SBA will notify the lender if the SBA declines a request for review. If the borrower does not request an SBA review or the SBA declines the request for review, the lender is responsible for notifying the borrower of the date on which the borrower's first payment is due. If the SBA accepts a borrower's request for review, the SBA will notify the

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SBA Updates PPP Loan Forgiveness & Loan Review Procedures

borrower and the lender of the results of the review. If the SBA denies forgiveness in whole or in part, the lender is responsible for notifying the borrower of the date on which the borrower's first payment is due.

Conclusion

BKD will continue to follow this developing situation. As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. Visit BKD's COVID-19 Resource Center to learn more. If you have questions about these changes, contact your BKD Trusted AdvisorTM today.

Contributor

Anne Coughlan Director 317.383.4000 acoughlan@

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