PPP Loan Relief May Be On The Way!

Bipartisan Agreement on Changes to PPP Gives Businesses Needed Time and Flexibility

Call it the “Miracle on the Potomac.”

Late last week, in a rare show of congressional bipartisanship, the Senate unanimously passed the House version of the Paycheck Protection Program Flexibility Act of 2020 — without amendments. (The bill passed the House on a nearly unanimous vote of 417-1.) The president is expected to sign the bill, which will become effective immediately.

The PFA – as it’s known – makes changes to the implementation of the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. You can find my prior article and updates here. https://www.dhirubhai.net/pulse/covid-19-new-federal-loan-program-can-converted-grant-eric-pritchard/?trackingId=6z6%2BDbIAFuCZusfHRe2Jbg%3D%3D)

Among other things, the PFA gives businesses more time to use funds from their PPP loans and a little more leeway in how they can use the money under the forgiveness provisions of the PPP. The PFA also gives borrowers more time to pay back their loans.

Between the forgiveness provisions and the very low interest rate, a PPP loan is now, more than ever, an extremely attractive source of funds for businesses. Taking advantage of these changes may have important consequences.

Borrowers now have more time to use their PPP funds. 

Under the original provisions of the PPP, borrowers had to use their loan proceeds for payroll and other specific costs within a very short “covered period”— eight weeks from the date of disbursement of the funds—in order to be eligible for forgiveness. The PFA extends that period to the earlier of 24 weeks from the date of disbursement or Dec. 31, 2020. Borrowers with existing loans can choose to keep to the eight-week spending period.

Borrowers have a little bit more flexibility in how they can use funds – but should do so carefully. 

While the CARES Act did not expressly require that borrowers use a certain portion of their loan for payroll-related costs, one of the main goals of the program was to encourage businesses to keep employees on the payroll. Implementing rules by the U.S Department of the Treasury and the SBA provided that borrowers had to use at least 75% of funds for eligible payroll costs (compensation, vacation and sick time, group health benefits, retirement benefits and employment taxes) to qualify for loan forgiveness. According to the Treasury Department, businesses that failed to meet the threshold might still qualify for loan forgiveness but for a proportionally reduced amount.

The good news is that the PFA reduces the forgiveness qualifying percentage from 75% to 60%, and puts that provision right into the CARES Act, overriding the current PPP program guidance and rules. The bill also allows businesses to use up to 40% of the loan to pay mortgage interest, rent obligation or utilities, up from 25% in the CARES Act.

The not-so-good news is that language adding the 60% to the CARES Act may have unintentionally created an all-or-nothing threshold. In other words, a borrower “shall” spend at least 60% on payroll-related costs in order to receive any forgiveness. At least for now, borrowers should be mindful of the 60% threshold, while waiting for Congress to address any fixes to this and other unintended consequences of the PFA.

Borrowers may have more time to pay back their loans.

The Treasury Department and the SBA implemented more stringent rules and guidance than provided for under the CARES Act, effectively shortening the more generous payback provisions. The PFA effectively overrules some of those.

For example, the PFA sets a five year minimum term for payback of the balance of the loan after any forgiveness. (The CARES Act provided for a maximum of 10 years and the SBA chose to implement a two-year loan period for all PPP loans). This provision applies only to loans made after the PFA goes into effect, but borrowers and lenders can mutually agree to modify loan terms for existing loans.

Under the CARES Act, PPP lenders also are required to provide deferrals of loan payments, interest and fees for least six months, and up to a year. The Treasury and SBA set a six-month deferral from the date of disbursement of funds for all loans.

Under the PFA, deferral of principal and interest is now tied to loan forgiveness, potentially giving borrowers more time to repay their loan. PPP lenders must defer principal and interest payments until the lender receives loan forgiveness payments from the SBA—and give the borrower 10 months after the close of the loan forgiveness period to apply for forgiveness. That means the covered period is the earlier of 24 weeks (about six months) from the disbursement of funds or Dec. 31, 2020 and the borrower has another 10 months from that date to apply. If the borrow doesn’t apply for loan forgiveness within that time, loan payments can begin.

Borrowers have more time to get employees back to work—and may still get forgiveness if they can prove they can’t. 

Loan forgiveness under the PPP is also tied to keeping employees working—if a borrower reduces its workforce (measured in terms of full time equivalent employees) or cuts any employee’s wages or salary by greater than 25% in the period between Feb. 15 and April 26, its loan forgiveness will be reduced based on a proportionate formula.

Under the original PPP, the borrower could get back the full amount of forgiveness if it brought its employees or wages back to Feb. 15 levels by June 30. Many businesses, however, are struggling to get back to pre-pandemic staffing for a number of reasons, including a workforce unwilling or unable to return to work, or ongoing government shut-down orders. The PFA gives employers six more months, until December 31, to bring their FTE count or wages beck to Feb. 15 levels. Borrowers can also receive the full amount of loan forgiveness, even if they fail to fully restore their FTE count by that time, if they can document that they can’t rehire the same employees they had on Feb. 15 and can’t hire similarly qualified employees for those positions by Dec. 31.

Borrowers can also receive forgiveness if they document they can’t return to their Feb. 15 level of business because of sanitation, safety or social-distancing guidance or requirements issued by the Department of Health and Human Services, the Centers for Disease Control (CDC) or the Occupational Safety and Health Administration (OSHA).

Borrowers who receive forgiveness can now delay payroll taxes.  

The PFA removed a much-complained-about exclusion in the CARES Act that allowed businesses to defer payment of the employer’s share of Social Security taxes due from March 27 through December 31—unless they received PPP loan forgiveness.

The true miracle of bipartisan consensus aside, the changes brought by the PFA are a welcome relief to many businesses facing hurdles to compliance with the existing PPP requirements. As the PFA is implemented, further clarifications, particularly of the forgiveness mechanism, will be required, whether through Treasury Department rules, SBA guidance or Congressional tweaking. Stay tuned for further updates.