Treasury Department Issues Initial Guidance on SBA Paycheck Protection ProgramApril 1, 2020
Update (4/3/20) - Since publishing this alert on 4/1/20, the U.S. Treasury has updated its guidance on the Paycheck Protection Program. Our hyperlinks below have been updated to reflect current guidance.
The Paycheck Protection Program (as discussed in our prior alert here) authorizes up to $349 billion for low-interest loans of up to $10,000,000 to borrowers to fund eligible payroll costs, interest on mortgage payments (which includes mortgages on real property and personal property), rental payments, utilities payments, and for other permitted purposes. The loans made under the Paycheck Protection Program would be eligible for forgiveness for certain payroll and other operating costs, as long as the borrowers maintain their payrolls to fund payroll costs and certain other expenses.
- Paycheck Protection Program Overview
- Paycheck Protection Program (PPP) Information Sheet: Lenders
- Paycheck Protection Program (PPP) Information Sheet: Borrowers
- Paycheck Protection Loan Program Borrower Application Form
While additional guidance and regulations are forthcoming, the initial guidance and application include the following items of note:
- All eligible businesses that are interested in obtaining a loan are encouraged to apply as soon as possible, given the anticipated high demand, the funding cap, and the need for lenders to review and process loan applications.
- Applications will be accepted starting on April 3, 2020 for small businesses, and starting on April 10, 2020 for independent contractors and self-employed individuals.
- To apply, applicants must:
- complete the Paycheck Protection Loan Program application; and
- furnish payroll and tax documentation.
- There is no “credit elsewhere” test (which was waived by the CARES Act), so borrowers are not required to try to obtain or demonstrate they do not have access to funds from other sources.
- Lenders will calculate the eligible loan amount using the payroll and tax documentation submitted by the applicant.
- The applicant and each 20% or greater owner must certify in good faith to the matters set forth in the “Certifications” section of the application, which includes, among other statements, the following:
- “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
- “The funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; I understand that if the funds are used for unauthorized purposes, the federal government may pursue criminal fraud charges.”
- “Documentation verifying the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight week period following this loan will be provided to the lender.”
- “Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. Due to likely high subscription, it is anticipated that not more than twenty-five percent (25%) of the forgiven amount may be for non-payroll costs.”
- "During the period beginning on February 15, 2020 and ending on December 31, 2020, the Applicant has not and will not receive another loan under this program.”
- The application also requires that the applicant (and each 20% or greater owner) represent, among other things, that:
- “All SBA loan proceeds will be used only for business related purposes as specified in the loan application.”
- “To the extent feasible, I will purchase only American-made equipment and products.”
Maximum Loan Amount
- According to the guidance, loans can be for up to two months of the applicant’s monthly payroll costs “from the last year,” plus an additional 25% of that amount.
- It is unclear whether this is intended to clarify or change the calculation set forth in the text of the CARES Act that refers to “payroll costs incurred during the 1-year period before the date on which the loan is made.”
- Based on the instructions included in the application form, it appears that applicants and lenders should base the calculation on the applicant’s average monthly payroll for 2019 (excluding costs over $100,000 on an annualized basis for each employee), and not the 1-year period ending on the date of loan origination (which would pick up part of 2019 and part of 2020).
- Payroll costs are capped at $100,000 on an annualized basis for each employee.
- A different calculation would apply to seasonal employers.
- All loan terms will be the same for every borrower, and will include the following:
- Interest will accrue at a fixed rate of 0.5% per year.
- All payments are deferred for six months; however, interest will continue to accrue over this period.
- A two-year maturity.
- Prepayment without penalty.
- No collateral or personal guarantees are required.
- Neither the government nor lenders will charge small businesses any fees.
- Loan proceeds can be used for the following purposes:
- payroll costs, including benefits;
- interest on mortgage obligations, incurred before February 15, 2020;
- rent, under lease agreements in force before February 15, 2020; and
- utilities, for which service began before February 15, 2020.
- “Payroll costs” include:
- salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
- 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;
- state and local taxes assessed on compensation; and
- 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.
- A borrower will owe money when its loan is due if it uses loan proceeds for anything other than covered payroll costs, mortgage interest, rent, and utilities payments over the eight weeks after getting the loan.
- A borrower may also owe money as a result of a reduction in the amount it is otherwise eligible to have forgiven, if it:
- decreases its full-time employee headcount; or
- decreases salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- However, a borrower can avoid a reduction in the forgiveness amount that would otherwise apply if, by June 30, 2020, it restores its full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
- Due to likely high subscription, it is anticipated that no more than 25% of the forgiven amount may be for non-payroll costs, such as interest on covered mortgages, rent under covered leases, and utility costs.
- To obtain forgiveness, borrowers must submit a request to the lender that is servicing the loan:
- The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations.
- The borrower must certify that the documents are true and that the borrower used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments.
- The lender must make a decision on the forgiveness within 60 days following submission of the request for forgiveness.
Information for Lenders
- Details surrounding the application process to participate for lenders that are not existing SBA-certified lenders have been released by the SBA.
- In underwriting a loan under the Paycheck Protection Program, the lender must:
- verify that the borrower was in operation on February 15, 2020;
- verify that the borrower had employees for whom the borrower paid salaries and payroll taxes;
- verify the dollar amount of average monthly payroll costs; and
- follow applicable Bank Secrecy Act requirements.
Interested businesses should reach out to their lenders and banking relationships now to start the application process. Lewis Rice will continue to monitor these developments and provide updates as needed.
To stay abreast of the emerging legal issues raised by the coronavirus pandemic, Lewis Rice has formed a COVID-19 Task Force, which brings together subject matter authorities from various practice areas within the Firm who stand ready to assist our clients as they navigate these complex challenges. Our attorneys are closely monitoring these developments as they occur and will make regular updates to our resource center. If you have any questions about the federal government programs available, or the implications and disruptions of COVID-19 on your business, please reach out to one of the authors above or another member of the Task Force.