LEGAL CORNER: The PPP Flexibility Act: Update on the PPP Loan Program
John Dolgetta, Esq. | June 2020
On Friday, June 5, 2020, President Trump signed the Paycheck Protection Program (PPP) Flexibility Act of 2020 (the “PPP Flexibility Act”) (see https://bit.ly/3dSbhNx). The PPP Flexibility Act provides additional relief to those businesses that have applied for and received loans under the Paycheck Protection Program instituted under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (see https://bit.ly/2XOhILW), which was signed into law on March 27th. Originally, an amount of $349 billion was allocated toward the PPP Loan and Emergency Injury Disaster Loan (see https://bit.ly/3dRh9qw) programs, however, those funds ran out by April 16th.
The CARES Enhancement Act
On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was signed into law and provided an additional $310 billion in funding to replenish the PPP and EIDL loan programs. This second round of funding also included a provision that earmarked $60 billion for community banks, smaller banks and credit unions that serve businesses in rural and minority areas, and it also allocated an additional $60 billion for the EIDL Loan program. The CARES Enhancement Act also made an additional $10 billion available for grants provided under the EIDL program.
The PPP Flexibility Act
The PPP Flexibility Act passed on June 5th provided critical relief to borrowers under the PPP Loan program by providing the following:
• Extends the period of time for borrowers to use PPP loan proceeds for payroll costs.
• Extends the date for borrowers to rehire employees.
• Reduces the amount of payroll costs required for forgiveness of the loan.
• Modifies and extends the repayment period to repay loans that are not forgiven.
Eight-Week Period Extended to 24 Weeks
One significant change made to the CARES Act by the PPP Flexibility Act is that it extends the period of the time within which borrowers are required to use the loan funds to pay for qualified expenses (e.g., payroll, mortgage or loan interest, rent, and utilities). Originally, under the CARES Act, the borrowers had to use all of the loan proceeds toward qualified expenses within eight weeks of the date of disbursement of the loan proceeds in order to qualify for forgiveness. This period has now been extended to 24 weeks, providing the borrower with breathing room to use the loan proceeds for qualified expenses. This increases a borrower’s eligibility for forgiveness.
Previously, the rules and guidance issued by the Small Business Administration (the “SBA”) required that borrowers pay for qualified expenses within the eight-week period. The PPP Flexibility Act modified Section 1106(a)(3) of the CARES Act and now provides that “…the term ‘covered period’ means, subject to subsection (l), the period beginning on the date of the origination of a covered loan and ending the earlier of (A) the date that is 24 weeks after such date of origination; or (B) December 31, 2020.” It is important to note, however, that the deadline to apply for a loan under the PPP loan program still remains June 30, 2020. As of June 5th, there was still approximately $100 billion left in untapped funds.
Forgiveness Available Even if Unable to Re-Hire
Employees and Some Key Dates Extended to Dec. 31
Previously, in order for a borrower to qualify for forgiveness, the borrower was required to rehire furloughed employees by June 30, 2020. Under the PPP Flexibility Act, the June 30th deadline no longer applies. A borrower is now eligible for forgiveness if the borrower is able to document, in “good faith:”
“(i) an inability to rehire individuals who were employees of the eligible recipient on Feb. 15, 2020; and
(ii) an inability to hire similarly qualified employees for unfilled positions on or before Dec. 31, 2020.”
The borrower may also be eligible for forgiveness under new subsection (d)(7)(B) of Section 1106 of the CARES Act, if the borrower, in good faith, is able to document:
“…an inability to return to the same level of business activity as such business was operating at before Feb. 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending Dec. 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”
Therefore, if a borrower cannot return to pre-COVID-19 employee levels due to the above factors, the loan may be eligible for forgiveness. Eligibility requirements are now much less stringent and will serve to assist businesses and business owners tremendously.
Payroll Threshold Reduced to 60% of Loan Proceeds From 75%
Originally, under the CARES Act, the borrower was required to use at least 75% of the loan proceeds toward payroll expenses. The CARES Act also capped the amount of salary eligible for forgiveness to $100,000 on an annualized basis for each employee; this $100,000 cap has not changed. The PPP Flexibility Act, however, now allows a borrower to be eligible for forgiveness if the borrower uses at least 60% (rather than 75%) of the loan proceeds for payroll costs. Newly added subsection (8) of Section 1106 of the CARES Act, provides as follows:
“(8) LIMITATION ON FORGIVENESS.—To receive loan forgiveness under this section, an eligible recipient shall use at least 60% of the covered loan amount for payroll costs, and may use up to 40% of such amount for any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), any payment on any covered rent obligation, or any covered utility payment.”
This change provides a borrower with greater flexibility as to the use of the loan proceeds to pay for qualified expenses. It is important to note that covered mortgage expenses do not include payments of principal.
Deferral of Payments of Principal, Interest and Fees
And Repayment Term of Loan Under PPP Extended
Under the CARES Act, and the previous regulations and guidance issued by the SBA, any payment of principal, interest and fees under the PPP loan was deferred for six months. The PPP Flexibility Act now extends the deferral period “…until the date on which the amount of forgiveness determined under section 1106 of the CARES Act is remitted to the lender.” The PPP Flexibility Act also provides that “[i]f an eligible recipient fails to apply for forgiveness of a covered loan within 10 months after the last day of the covered period defined in section 1106(a) of the CARES Act, such eligible recipient shall make payments of principal, interest, and fees on such covered loan beginning on the day that is not earlier than the date that is 10 months after the last day of such covered period.” Basically, this means that a borrower is required to apply for forgiveness. If the borrower does not apply within such 10-month period, then the borrower will not be required to begin making payments at any time prior to the expiration of such 10-month period.
Another important change implemented by the PPP Flexibility Act was the increase of the repayment term. Originally, the CARES Act provided that the “maturity date” of any part of a PPP loan amount not forgiven was two years. The PPP Flexibility Act extends the “maturity date” to five years. No changes were made to the interest rate of 1%.
What Do Borrowers Do Now?
Prior to the enactment of the PPP Flexibility Act, the SBA and lenders had already begun distributing loan forgiveness applications and procedures to borrowers. Many borrowers were under significant pressure to comply with the 75% payroll allocation requirements and the eight-week time frame provided under the original CARES Act, especially due to the inability of borrowers to get their employees to come back to work or remain at work. In most instances, many of the businesses that applied for the PPP loan were forced to shut down and were not permitted to operate altogether.
The fixes provided by the PPP Flexibility Act have alleviated significant pressure to comply with the original requirements of the CARES Act. It was one of the few times that Congress acted swiftly, and with little fanfare or controversy, in order to assist the business owners, and it was certainly needed. Lenders have indicated that the SBA will soon be providing updated forgiveness applications and amended procedures. It is important for borrowers to reach out to their lenders.