On April 2nd, the Small Business Administration (SBA) issued an Interim Final Rule clarifying important elements of the Paycheck Protection Program (PPP) established in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted on March 27th. The PPP’s lending period begins April 3rd and runs through June 30, 2020. The SBA’s Interim Final Rule is effective immediately, and most importantly, it provides guidance to lenders and borrowers regarding PPP loan applications, loan terms, and loan forgiveness under the program.

LENDERS

Eligible Lenders: All SBA 7(a) lenders are automatically approved to make PPP loans immediately. Additionally, all other federally insured depository institutions (along with several other types of lenders) are eligible to make PPP loans, provided they are not subject to a formal enforcement action addressing lending practices and are not designated to be in “Troubled Condition” by their primary federal regulator. Eligible institutions must submit a “CARES Act Section 1102 Lender Agreement” (SBA Form 3506), after which they are “automatically qualified” to make PPP loans once this form has been submitted to [email protected]; in other words, there is no waiting requirement for the SBA’s approval.

Loan Terms: The interest rate for PPP loans will be 1.00%, which is double the initially proposed rate of 0.50% (notwithstanding the CARES Act provides for rates up to 4.00%). The maximum loan amount is the lesser of $10 million or an amount calculated using the SBA’s payroll-based formula, which is outlined in the Interim Final Rule. PPP loan terms will be two years, and no payments will be required for the first six months.

Underwriting Requirements: The underwriting requirements for PPP loans consist of confirming receipt of a borrower’s documents and following Bank Secrecy Act requirements, and the Interim Final Rule clarifies that lenders are not required to verify information provided by a borrower:

“The lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs. The Administrator will hold harmless any lender that relies on such borrower documents and attestation from a borrower.”

Lender Fees: The Interim Final Rule establishes lenders’ processing fees as follows:

“SBA will pay lenders fees for processing PPP loans in the following amounts:

• i. Five (5) percent for loans of not more than $350,000;
• ii. Three (3) percent for loans of more than $350,000 and less than $2,000,000; and
• iii. One (1) percent for loans of at least $2,000,000.”

Additionally, several fees are waived for both the lender and borrower: (1) the up-front guarantee fee paid by the borrower, (2) the lender’s annual service fee (the “on-going guaranty fee”), (3) the subsidy recoupment fee, and (4) any fees paid for guarantees sold on the secondary market.

Application Transmittals: Lenders must submit the “Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty” (SBA Form 2484) electronically to the SBA and maintain the forms and supporting documentation provided by the borrower in its files.

SBA 7(a) Changes: The Interim Final Rule outlines temporary changes being made to the typical SBA 7(a) loan requirements:

“Loans will be guaranteed under the PPP under the same terms, conditions and processes as other 7(a) loans, with certain changes including but not limited to:

• i. The guarantee percentage is 100 percent.
• ii. No collateral will be required.
• iii. No personal guarantees will be required.
• iv. The interest rate will be 100 basis points or one percent.
• v. All loans will be processed by all lenders under delegated authority and lenders will be permitted to rely on certifications of the borrower in order to determine eligibility of the borrower and the use of loan proceeds.”

Secondary Market Sales: The Interim Final Rule clarifies that PPP loans may be sold on the secondary market after they are fully disbursed, either at a premium or a discount. As noted above, the SBA will not charge fees for guarantees sold on the secondary market. Going forward, the SBA “will issue guidance regarding any advance purchase for loans sold in the secondary market.”

Early Purchases by the SBA: The Interim Final Rule creates an early purchase option, under which the SBA will purchase loans from lenders for an “expected forgiveness amount,” meaning “the amount of loan principal the lender reasonably expects the borrower to expend on payroll costs, covered mortgage interest, covered rent, and covered utility payments during the eight week period after loan disbursement.” At least 75% of the expected forgiveness amount must be for payroll costs. The rule sets forth the process for requesting early purchases from the SBA, including all forms that must be submitted. Lenders must wait a minimum of seven weeks after a loan is made before requesting an early purchase, and the SBA will complete the purchase within fifteen days after receiving a complete request.

BORROWERS

Eligible Borrowers: The Interim Final Rule clarifies that PPP borrowers must not be businesses that are ineligible to obtain 7(a) loans under the SBA’s current regulations and policies. Accordingly, per the SBA’s current “Standard Operating Procedure (SOP) 50 10” for SBA 7(a) loans, banks and other lenders are not themselves eligible for PPP loans. In addition, the rule adds other eligibility criteria for borrowers, such as having 500 or fewer employees to whom the business pays salaries and payroll taxes.

However, the Interim Final Rule also adds new categories of businesses that are eligible for PPP loans, including sole proprietorships, independent contractors, certain eligible self-employed individuals, 501(c)(3) tax-exempt nonprofits, 501(c)(19) tax-exempt veterans organizations, and tribal business concerns listed in Section 31(b)(2)(C) of the Small Business Act.

Also, borrowers who received a loan through the SBA’s Economic Injury Disaster Loan (EIDL) program from January 31, 2020, through April 3, 2020, are eligible to apply for a PPP loan, provided that if the EIDL loan was used for payroll costs, the PPP loan must be used to refinance the EIDL loan. Additionally, advances of up to $10,000 on an EIDL loan will not be eligible for forgiveness under the PPP.

Application Process: PPP applicants must submit the “Paycheck Protection Program Application Form” (SBA Form 2483) and supporting payroll documentation described in the Interim Final Rule directly to their lender.

Borrower Affiliations: The Interim Final Rule recognizes that the SBA has complicated rules concerning the affiliations of applicants for SBA 7(a) loans which could disqualify some businesses from eligibility for PPP loans. The SBA “intends to promptly issue additional guidance” on affiliations.

LOAN FORGIVENESS

PPP borrowers will not be responsible for any loan amount (principal or interest) used for “forgiveable purposes,” provided they maintain their current employee compensation levels. Forgiveable purposes are payroll costs, mortgage interest, rent, and utilities — with not more than 25% of the loan forgiveness amount attributable to non-payroll costs.