This alert has been updated as of Aug. 19, 2020, to reflect, the interim final rule released by the Small Business Administration (SBA) on Aug. 11, addressing the process for appeals of SBA loan review decisions under the Paycheck Protection Program (PPP).
On June 5, the president signed into law the PPP Flexibility Act, which amends key portions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and Small Business Act in order to provide PPP loan recipients with more flexibility and extend the period during which loan proceeds spent on permitted uses will be eligible for forgiveness. The text of the PPP Flexibility Act can be found here. On June 11, the SBA issued an interim final rule, which can be found here, that revises the SBA’s interim final rule released on April 2 to implement certain modifications to the PPP pursuant to the PPP Flexibility Act. On June 22, the SBA issued an interim final rule, which can be found here, that revises the SBA’s interim final rule on loan forgiveness and the SBA’s interim final rule on SBA loan review procedures, both released on May 22, to implement certain additional modifications to the PPP pursuant to the PPP Flexibility Act. On June 16, the SBA released the Revised Forgiveness Application and the EZ Forgiveness Application, each with its own set of instructions, which can be found here. Additionally, on July 4, the president signed into law S.4116 — a bill which, among other things, extends the deadline for new PPP loan origination from June 30 to Aug. 8. On Aug. 11, the SBA released a new interim final rule addressing the process for appeals of certain SBA loan review decisions. This alert sets out a summary of the material changes to the PPP made by the PPP Flexibility Act, the June 11 and June 22 interim final rules, and the Revised Forgiveness Application and the EZ Forgiveness Application. This alert also summarizes the SBA loan review appeals process, as set forth in the Aug. 11 interim final rule, available here. In parallel with this alert, we have updated our infographic tool summarizing the key elements of the PPP loan forgiveness process and components, which can be found here, to reflect the modifications enacted by the PPP Flexibility Act.
Prospective borrowers should continue to consult the SBA and Treasury Department websites regularly to track new content and revisions to previously released guidance.
Our previous alerts issued in connection with the financial assistance programs available under the CARES Act are collected and published in the Kramer Levin COVID-19 Legal Resource Guide found here: COVID-19 Legal Resource Guide.
Overview
The PPP Flexibility Act and New Interim Final Rules
Extension of the PPP
The PPP Flexibility Act extends the general covered period for the PPP from June 30 to Dec. 31. The “Congressional Intent for H.R. 7010,” released in conjunction with the PPP Flexibility Act, provides that the intention of this extension “is to allow borrowers who received PPP loans before June 30 to continue to make expenditures for allowable uses” until Dec. 31. On July 4, the president’s signing into law of S.4116 extended new loan origination under the PPP to Aug. 8. According to media reports, at the time the PPP was set to expire, approximately $130 billion remained in the program for new loan disbursements.
Amendments to PPP Loan Forgiveness Determination
The PPP Flexibility Act provides several amendments to the PPP loan forgiveness section (Section 1106) of the CARES Act, and the June 22 interim final rule and Revised Forgiveness Application provide further clarification.
The PPP Flexibility Act additionally increases from 25 to 40 percent the maximum amount of loan proceeds a borrower may spend on eligible nonpayroll costs (mortgage interest, rent and utilities) and remain eligible for full forgiveness, and correspondingly drops the required amount necessary to be spent on eligible payroll costs from 75 to 60 percent. The June 11 interim final rule clarifies that while the PPP Flexibility Act could be read to suggest that a borrower will be entirely ineligible for any loan forgiveness if it spends less than 60 percent of its loan on payroll costs, in fact a borrower using less than 60 percent of its loan proceeds on payroll costs will have its forgiveness amount reduced to an amount such that its actual amount of loan proceeds spent on payroll costs will be 60 percent of its final forgiveness amount. Additionally, the June 11 interim final rule revises the April 2 interim final rule to make the corresponding change from a 75/25 percent split on payroll and nonpayroll costs in the context of permissible uses of PPP loan proceeds to a 60/40 percent split. This change to a 60/40 percent split in spending on payroll and non-payroll costs has also been reflected in updated borrower certifications included in newly released PPP loan forgiveness applications, further discussed below.
The June 22 interim final rule revised the caps on the amount of compensation to owner-employees and self-employed individuals that is eligible for loan forgiveness. For borrowers that utilize the 24-week covered period, the maximum amount of compensation for owner-employees and self-employed individuals that is eligible for loan forgiveness is the lesser of (i) 2.5 months’ worth (2.5/12 or approximately 20.83 percent) of their 2019 compensation, or (ii) $20,833 aggregate per individual, across all their businesses. For borrowers that received a PPP loan before June 5 and that elect to use the eight-week covered period, the maximum amount of compensation for owner-employees and self-employed individuals that is eligible for loan forgiveness is the lesser of (i) eight-weeks’ worth (8/52 or approximately 15.38 percent) of their 2019 compensation or (ii) $15,385 aggregate per individual, across all of their businesses.
Forgivable compensation for S-corporation owner-employees is capped at the sum of their 2019 cash compensation and employer retirement contributions made on their behalf. S-corporation owner-employees may not include employer health insurance contributions made on their behalf as eligible payroll costs for forgiveness, as those payments are already included in their employee cash compensation. S-corporation owner-employees may include employment retirement contributions made on their behalf as eligible payroll costs. Compensation eligible for forgiveness for C-corporation owner-employees is capped at the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.
Self-employed individuals (including Schedule C or F filers and general partners) are restricted to include retirement and health insurance contributions in their net self-employment income, and thus those may not be separately added to their payroll calculation.
The PPP Flexibility Act adds FTE Reduction Safe Harbor 1 and modifies FTE Reduction Safe Harbor 2, which respectively provide safe harbors to forgiveness amount reductions based on reductions in FTE employee headcount if the borrower is able to in good faith document either (i) an inability to return to the same level of business as such business was operating before Feb. 15, due to the need to directly or indirectly comply with COVID-19 employee and customer safety requirements or guidance issued by the secretary of Health and Human Services (HHS), the director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration (OSHA) during the period beginning on March 1 and ending Dec. 31 or (ii) elimination of any reduction to FTE employee levels between Feb. 15 and April 26 (i.e., restoration to Feb. 15 levels) by the earlier of (a) the date its forgiveness application is submitted or (b) Dec. 31. While the PPP Flexibility Act left unclear whether borrowers could take advantage of new FTE Reduction Safe Harbor 1 if the decrease in business activity was entirely or in part due to a decline in business activity due to state or local COVID-19 health and safety regulations (as opposed to limitations on business activity due solely to federal COVID-19 restrictions), the June 22 interim final rule provides that the new FTE Reduction Safe Harbor 1 applied to a borrower’s reduction in business activity as a result of direct or “indirect compliance with COVID Requirements or Guidance, because a significant amount of the reduction in business activity stemming from COVID Requirements or Guidance is the result of state and local government shutdown orders that are based in part on guidance from the three federal agencies.”
In order to take advantage of FTE Reduction Safe Harbor 1, a borrower must in good faith retain copies of (i) local government shutdown orders that reference any applicable guidance issued between March 1 and Dec. 31 by the secretary of HHS, the director of the CDC or OSHA related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 for each business location and (ii) its relevant financial records showing a reduction in its business activity.
The foregoing safe harbors are in addition to those exceptions to the FTE employee forgiveness reduction previously provided in SBA guidance or modified in the most recent interim final rules, where (i) an employee rejects a borrower’s good-faith, written offer to restore the reduced hours of such employee (at the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the reduction in hours), and the borrower maintains records documenting the offer and its rejection; (ii) (a) a borrower can document an inability to rehire an employee that was employed by the borrower on Feb. 15 (the June 22 interim final rule and the instructions accompanying the Revised Forgiveness Application clarify that such “inability” means that such employee rejects the borrower’s good-faith, written offer to rehire such employee, as opposed to an inability to rehire due to general economic conditions or business activity levels or needs at such time) and (b) the borrower is unable to hire similarly qualified employees on or before Dec. 31 (the June 22 interim final rule clarifies that this new statutory exception provided in the PPP Flexibility Act supersedes the original nearly identical “de minimis exception” for failure to rehire employees who reject an offer to rehire as set forth in the May 22 interim final rule (summarized here), adding the requirement that a borrower demonstrate an attempt to hire a similarly qualified employee in addition to documenting a rejected attempt to rehire); or (iii) any employees, during a borrower’s Forgiveness Covered Period (a) are fired for cause, (b) voluntarily resign, or (c) voluntarily request and receive a reduction of their hours. With respect to exception (ii), the June 22 interim final rule provides that borrowers seeking to take advantage of this exception are required to inform the applicable state unemployment insurance office of any employee who rejects a rehire offer within 30 days of the employee’s rejection of such offer and retain written documentation showing (i) the written offer to rehire the employee, (ii) the written record of the offer’s rejection and (iii) a written record of efforts to hire a similarly qualified employee. Relevant documentation must also be maintained where employees are fired for cause, voluntarily resign, or voluntarily request and receive a reduction of their hours.
Extension of PPP Loan Maturity Date
While the original text of the CARES Act only provided that PPP loans have a maximum maturity of up to ten years from the date the borrower applies for loan forgiveness, subsequent SBA guidance, found here, provided that the maturity for PPP loans would be set at two years. The PPP Flexibility Act now provides that the maturity date for PPP loans with a remaining balance after application of loan forgiveness will be extended from two years to a minimum of five years. This new minimum maturity date will apply to all PPP loans assigned an SBA loan number on or after June 5. For PPP loans outstanding prior to June 5, the PPP Flexibility Act provides, and the June 11 interim final rule clarifies, that existing borrowers and lenders may mutually agree to modify the current two-year maturity date, including possibly extending the maturity date to up to five years.
Extension of the Deferral Period for PPP Loan Payment
Under the original text of the CARES Act, borrowers were permitted to defer their debt service payments for six months from receipt of their PPP loan proceeds. The PPP Flexibility Act replaces this six-month deferral period with a period ending on the date that a lender receives the forgiveness amount from the SBA following determination of the particular borrower’s loan forgiveness amount. Once that information is received, the lender must notify the borrower of remittance by the SBA of the loan forgiveness amount (or notify the borrower that the SBA determined that no loan forgiveness is allowed) and of the date that its first loan service payment is due (as the deferral period will be ending). However, if a borrower does not apply for loan forgiveness within ten months of the last day of its Forgiveness Covered Period, then such borrower forfeits its deferral and must begin making payments of loan principal, interest and fees starting on such ten-month anniversary of the last day of its Forgiveness Covered Period.
Deferral of Employer Payroll Taxes
Pursuant to Section 2302(a)(3) of the CARES Act, borrowers that have their PPP loans forgiven are prohibited from also deferring payment of employer payroll taxes for the period beginning on March 27 (the date of the enactment of the CARES Act) and ending before Jan. 1, 2021, until Dec. 31, 2021, for half the amount of such employment taxes, and Dec. 31, 2022, for the remaining amount of such employment taxes, as otherwise generally provided in Section 2302. The PPP Flexibility Act removes this prohibition; as such, PPP borrowers whose loans are forgiven in part or in full will now be eligible to defer their employer payroll taxes in accordance with the general provisions of Section 2302. The PPP Flexibility Act makes this amendment effective as of March 27.
Revised Forgiveness Application and a New EZ Forgiveness Application
On June 16, the SBA replaced the original PPP loan forgiveness form with an updated version that largely reflects modifications implementing the PPP Flexibility Act and new SBA guidance and streamlines the application by providing for separate instructions, but otherwise keeps the form largely unchanged. It is worth noting that the Revised Forgiveness Application provides the clarification that reinstatement of FTE or salary/wage reductions can be made by either Dec. 31 or the date of submission of the Revised Forgiveness Application (if earlier). In addition, the SBA released the EZ Forgiveness Application that provides a shortened and simplified version of the long-form Revised Forgiveness Application for borrowers that can certify they meet one of the following requirements for use of EZ Forgiveness Application:
Since use of the EZ Forgiveness Application is limited to applicants that did not reduce wages or reduce employee headcount, or were otherwise subject to an applicable safe harbor, the complex loan forgiveness reduction formulas included in the Revised Forgiveness Application do not apply and have been removed from the EZ Forgiveness Application. However, borrowers using the EZ Forgiveness Application must retain documentation supporting their certifications, which may be requested by the SBA at any time to the same extent as if using the long-form forgiveness application.
Disclosure of Names of PPP Borrowers
Though not part of the PPP Flexibility Act or included in an SBA interim final rule, the SBA and the Treasury Department issued a press release on July 6 announcing the disclosure of certain limited data about the recipients of PPP loans, which is available here. Specifically, for loans over $150,000, the SBA disclosed the business names, addresses, NAICS codes, ZIP codes, business type, demographic data, nonprofit information, jobs supported, and loan amounts of borrowers, with such loan amounts disclosed in ranges as follows:
$150,000 – $350,000
$350,000 – $1 million
$1 million – $2 million
$2 million – $5 million
$5 million – $10 million
For loans below $150,000, the SBA released only the total number of loans, aggregated by ZIP code, industry, business type and various demographic categories.
SBA Loan Review Appeals Process
The Aug.11 interim final rule enacts the new rules for appealing to the OHA a final SBA loan review decision relating to the PPP after the SBA has completed a review of a PPP loan and has found that a borrower:
This OHA appeals process is limited only to final SBA loan review decisions, and does not apply to any decision made by a lender or SBA determinations with respect to the size of the borrower determined using NAICS code designations for purposes of satisfying the size of borrower test; a borrower can request that the SBA review a lender decision to deny loan forgiveness on the basis of the borrower’s not satisfying the SBA size test but cannot submit an OHA appeal on that basis. Additionally, any decision made by the SBA’s Office of Inspector General related to a PPP loan is not appealable to the OHA.
Only the borrower of a PPP loan for which a final SBA loan review decision has been issued may appeal such decision to the OHA. Individual owners of a borrower and lenders of a PPP loan do not have standing to appeal an SBA loan review decision to the OHA.
An appeal of an SBA loan review decision will not extend the general loan service deferral period. A borrower who appeals an SBA loan review decision must begin making payments of principal and interest on the remaining balance of the PPP loan at the end of the loan payment deferral period or when the SBA remits the forgiveness amount to the PPP lender.
In order to commence an appeal, the borrower must file an appeal petition with the OHA within 30 calendar days after the earliest of (i) the borrower’s receipt of the final SBA loan review decision, or (ii) notification by the lender of the final SBA loan review decision.
An appeal petition must include the following information:
A copy of the appeal petition (with all attachments) must be served upon the Associate General Counsel for Litigation along with a signed certificate of service pursuant to 13 CFR 134.204(d). An incomplete petition may be dismissed (with or without prejudice) by the Judge or upon a motion of the SBA.
The OHA will assign each appeal petition to an Administrative Law Judge or an Administrative Judge, who will issue a notice and order establishing a deadline for the production of the administrative record and the close of the administrative record. The administrative record will contain documents that the SBA used in making its final loan review decision (or that were before the SBA at the time of the decision) but it will not necessarily contain all documents relating to the borrower. Discovery will be permitted only if the Judge determines that the SBA has, upon written submission, made a showing of good cause for discovery. The administrative record will be due 20 calendar days after the issuance of the notice and order (unless additional time is requested and granted) and the record will close 45 calendar days from the date of the OHA’s receipt of the appeal (unless additional time is requested and granted). Appeals will be decided based on a review of the written administrative record, the appeal petition, any responses (only the SBA may respond to an appeal), any admitted evidence, and the oral hearing (if one is held).
During the pendency of an appeal, the parties may submit a joint motion requesting that the Judge allow the use of alternative dispute resolution. If the motion is granted, the proceedings before the OHA will be stayed (in whole or in part) pending the outcome of the alternative dispute resolution.
The decision of the Judge will be issued within 45 days after the close of record, as practicable. In the appeal, the borrower will have the burden of proof, by a preponderance of the evidence, that the SBA loan review decision was “based on a clear error of fact or law.” The Judge’s decision on appeal is considered an initial decision and after 30 calendar days, such initial decision will become the final decision of the SBA unless a request for review or a request for reconsideration is filed. A Judge sua sponte may reconsider a decision within 20 calendar days after service of the written decision.
The OHA may affirm, reverse or remand an SBA loan decision. A borrower who prevails on an SBA loan decision appeal is not entitled to recover attorney’s fees.
OHA decisions are posted without redactions to the OHA’s website unless a party requests a redacted public decision or obtains a protective order. OHA decisions may otherwise contain confidential business and financial information and personally identifiable information where such information is relevant to the decision or necessary to provide a clear and understandable decision.
The IFR further provides that determinations of the Judge are subject to appeal submitted to the SBA administrator. The final decision of the administrator is deemed a final decision of the SBA, appealable to the federal district court. Any party or the SBA’s Office of General Counsel may, within 30 days after the service of an initial decision or a reconsidered decision, file and serve a request for review by the administrator.
Certain information contained in filings or submissions related to an OHA appeal will not be available to the public pursuant to the Freedom of Information Act, including: confidential business and financial information; personally identifiable information; source selection sensitive information; income tax returns; documents and information covered under 13 CFR 120.1060; or any other exempt information. Additionally, the SBA or the borrower filing the appeal may request a protective order over any document or information exchanged in discovery or filed pursuant to the appeal.