SBA Releases Interim Final Rule Implementing Paycheck Protection Program

Updated April 7, 2020

On April 2, the Small Business Administration (SBA) issued an interim final rule on the implementation of the Paycheck Protection Program (PPP), which modifies in part prior Treasury Department guidance and portions of Title I of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In addition on April 2, an updated PPP loan application was uploaded to the SBA website. This alert summarizes certain material information provided in the SBA interim final rule and reflected in the changes to the PPP loan application that was either not previously covered in or serves to update a portion of our March 27 alert following the enactment of the CARES Act, found here — COVID-19 Update: Financial Assistance Programs — and our April 1 alert following the issuance of the Treasury Department guidance, found here — COVID-19 Update: New Treasury Department Guidance on Implementation of Paycheck Protection Program.

The interim final rule was made effective immediately without advance notice or comment in order to expeditiously give applicants a full understanding of PPP loan terms and conditions so that they could immediately apply for PPP loans, as the loan program will be available only until the earlier of June 30 or the date on which the $349 billion appropriated for the PPP is exhausted. Given the limited appropriation, prospective borrowers should consider submitting an application as soon as possible. The full text of the interim final rule can be found here: Small Business Administration – Interim Final Rule. The updated PPP loan application can be found here: Updated PPP Loan Application. The SBA directs all questions regarding the PPP to the eligible borrower’s local SBA district office, a listing of which may be found here: SBA District Offices.

On April 3, the SBA issued an interim final rule, which supplements the SBA’s interim final rule released on April 2, providing additional guidance regarding the application of the affiliation rules to prospective borrowers of PPP loans. In addition to the April 3 interim final rule, on April 3 the SBA released an FAQ regarding the participation of faith-based organizations in the PPP and the Economic Injury Disaster Loan Program (EIDL) and the Treasury Department released a summary of the affiliation rules as they relate to the PPP. The material aspects of these supplemental releases are summarized below as well. The full text of the April 3 interim final rule can be found here: Small Business Administration – April 3 Interim Final Rule. The guidance on affiliation rules can be found here: Small Business Administration – Affiliation Rules for Paycheck Protection Program. The FAQs regarding participation of faith-based organizations in the PPP and EIDL can be found here: Small Business Administration – FAQ Regarding Participation of Faith-Based Organizations in the PPP and EIDL.

PPP loan application and application process

• In addition to a PPP loan application, prospective borrowers must also submit payroll documentation, which the interim final rule clarifies to include payroll processor records, payroll tax filings, Form 1099-MISC for prospective borrowers who are independent contractors, or income and expenses from a sole proprietorship. If prospective borrowers do not have access to such documentation, then they must provide other supporting payroll documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
• The updated PPP loan application no longer requires the signature of owners of 20 percent or more of the equity of the applicant. The PPP loan application can be signed using an e-signature or eConsent.
• The interim final rule explicitly states that no eligible borrower may receive more than one PPP loan and, therefore, a potential borrower should consider applying for the maximum loan amount available.
• The representations, authorizations and certifications a borrower is required to make are set forth on page 2 of the amended PPP loan application (expanding certifications from the SBA’s prior form of application). The applicant now must certify, in addition to the other certifications set forth on page 2 of the application, that:
  • the applicant is eligible to receive a loan under the rules in effect at the time the application is submitted that have been issued by the SBA implementing the PPP under the CARES Act;
  • the applicant (1) is an independent contractor, eligible self-employed individual, or sole proprietor or (2) employs no more than the greater of 500 or [sic] employees or, if applicable, the size standard in number of employees established by the SBA in 13 C.F.R. 121.201 for the applicant’s industry;
  • all SBA loan proceeds will be used only for business-related purposes as specified in the loan application and consistent with the PPP; and
  • to the extent feasible, it will purchase only American-made equipment and products (this remains consistent with prior form of application).
• A representative of the applicant can certify on behalf of the applicant and the business as a whole whether the representative is legally authorized to do so.

PPP loan borrower eligibility criteria

• The interim final rule confirms that a business will be eligible for a PPP loan if it has 500 or fewer employees whose principal place of residence is in the United States.
• While the PPP expands borrower eligibility generally, the interim final rule clarifies that the SBA’s exclusion of certain ineligible businesses from its Section 7(a) loan programs will continue to apply to the PPP (other than non-profit organizations, who are expressly permitted to participate in PPP as provided in the CARES Act and faith-based organizations as described below). The list of businesses ineligible for PPP loans includes:
  • Financial businesses primarily engaged in the business of lending, such as banks, finance companies and factors
  • Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds
  • Life insurance companies
  • Businesses located in a foreign country
  • Pyramid sale distribution plans
  • Businesses deriving more than one-third of gross annual revenue from legal gambling activities
  • Businesses engaged in any illegal activity
  • Private clubs and businesses that limit the number of memberships for reasons other than capacity
  • Government-owned entities (except for businesses owned or controlled by a Native American tribe)
  • Loan packagers earning more than one-third of their gross annual revenue from packaging SBA loans
  • Businesses with an owner of 20 percent or more of the equity of the applicant who is incarcerated, on probation or on parole, or has been indicted for a felony or a crime of moral turpitude
  • Businesses in which the proposed lender or any of its affiliates owns an equity interest
  • Businesses that (x) present live sexual performances or (y) derive directly or indirectly more than de minimis gross revenue through the sale of sex products or services or the presentation of any sex depictions or displays
  • Unless waived by the SBA for good cause, businesses that have previously defaulted on a federal loan or federally assisted financing
  • Businesses primarily engaged in political or lobbying activities
  • Speculative businesses (such as oil wildcatting)

Please note that exceptions and further clarifications to the above list of ineligible businesses can be found here: SBA Loans — Ineligible Businesses. A more detailed analysis of ineligibility criteria for prospective borrowers can be found on page 104 of the SBA guidance document, found here: SBA Loans — Further Analysis of Ineligible Businesses.

• The interim final rule provides no further guidance with respect to additional waivers of the affiliation rules for purposes of determining whether a loan applicant has less than the maximum number of employees permitted for participation in the PPP (500 or specific industry standard), and these rules continue to apply unless specifically waived in the CARES Act. The interim final rule indicates that the SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules to PPP loans.

PPP loan terms

• The interim final rule includes a formula for the calculation of the maximum loan amount available to a prospective borrower and provides examples of the application of the provided formula. In order to calculate the maximum amount of a PPP loan that a prospective borrower may receive:
  1. Calculate aggregate payroll costs (as defined in the CARES Act and interim final rule) from the past 12 months for employees whose principal place of residence is the United States.
  2. Subtract any compensation paid to an employee in excess of $100,000 on an annualized basis and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 on an annualized basis.
  3. Calculate average monthly payroll costs by dividing the calculated aggregate payroll costs by 12.
  4. Multiply the average monthly payroll costs by 2.5.
  5. Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) received by the prospective borrower between Jan. 31 and April 3, less the amount of any advance (up to $10,000) under an EIDL (because such advance does not have to be repaid, even if the EIDL application is not accepted) (as the PPP loan proceeds must be used to refinance an EIDL loan used for payroll costs).
• While the interim final rule utilizes the average payroll costs for the 12 months preceding the loan, the updated PPP loan application requests that applicants provide payroll information for calendar year 2019. Therefore, subject to lender confirmation, it would be prudent for prospective borrowers to supply lenders with payroll information for both periods along with their completed applications.
• The interim final rule clarifies that independent contractors do not count as employees for purposes of calculating the maximum loan amount available to a prospective borrower, since independent contractors have the ability to apply for a PPP loan on their own.
• The interest rate on PPP loans was raised in the interim final rule to 1 percent from the previously announced rate of 0.5 percent.
• PPP loans have a two-year maturity, down from the maximum 10-year term provided in the CARES Act, since the SBA and the Treasury Department together determined that a two-year loan term is sufficient in light of the temporary economic dislocations caused by COVID-19.
• Borrowers must use at least 75 percent of the PPP loan proceeds for payroll costs. Additionally, the interim final rule does not separate employee compensation from payroll costs as distinct permitted uses, which suggests that PPP loans may not be used for employee compensation in excess of $100,000 on an annualized basis (the text of the CARES Act suggests loan proceeds could be used to pay employees’ salaries in excess of $100,000 on an annualized basis by listing employees’ salaries, commissions or other similar compensation as a permitted use separate from payroll costs). Accordingly, borrowers with employees making in excess of $100,000 will need to have demonstrable sources of cash other than the PPP loan proceeds to pay compensation in excess of $100,000.
  • We note that during the eight week period following loan origination, subject to applicable labor laws, borrowers may reduce the salaries of employees earning greater than $100,000 on an annualized basis (to $100,000 on an annualized basis) without resulting in a reduction to their forgiveness amount on account of reduction in salary (as reduction to forgiveness amount is based on a reduction in salary by more than 25% for any employee who earned less than $100,000 in 2019 on an annualized basis).
• A borrower that receives an EIDL from Jan. 31 to April 3 may still apply for a PPP loan. If the EIDL is not used for payroll costs, it does not affect a borrower’s eligibility for a PPP loan. If an EIDL is used for payroll costs, a borrower must use the PPP loan to refinance the EIDL. However, for purposes of determining the percentage of loan proceeds used for payroll costs, the amount of a refinanced EIDL will be included in the 75 percent of the loan proceeds that must be used for payroll costs.
• Loan forgiveness is determined by the amount spent by a borrower on payroll costs, mortgage payments, rent and utility payments during the eight-week period following the loan. Not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs, in order to effectuate the core purpose of the CARES Act and ensure finite program resources are devoted primarily to payroll.
• Borrowers need not make any principal or interest payments for six months following loan origination. The CARES Act authorizes the SBA to defer loan payments for up to one year, but following consultation with the Treasury secretary, the SBA determined that a six-month deferment period is appropriate in light of the modest 1 percent interest rate on PPP loans and the opportunity for loan forgiveness. Interest will continue to accrue on PPP loans during the six-month deferment period.
• Borrowers must repay loan proceeds used for unauthorized purposes. If a borrower knowingly uses the loan proceeds for unauthorized purposes, the borrower will be subject to additional liability, such as charges for fraud. If a borrower’s shareholders, members or partners use the loan proceeds for unauthorized purposes, the SBA will have recourse against the shareholder, member or partner for the unauthorized use.
• The interim final rule notes that the SBA will issue additional guidance on loan forgiveness.

PPP lender information

• The PPP Lender Application Form is now available here: SBA — Paycheck Protection Program Lender Application Form.
• All previously approved SBA 7(a) lenders are automatically approved to make PPP loans on a delegated basis. The following institutions will be automatically qualified under delegated authority by the SBA once they submit to the SBA a CARES Act Section 1102 Lender Agreement (SBA Form 3506), unless they currently are designated in 'troubled condition' by their primary federal regulator or are subject to a formal enforcement action by their primary federal regulator that addresses unsafe or unsound lending practices:
  • Any federally insured depository institution or any federally insured credit union
  • Any Farm Credit System institution (other than the Federal Agricultural Mortgage Corp.) that applies the requirements under the Bank Secrecy Act (BSA) or functionally equivalent requirements
  • Any depository or nondepository financing provider that originates, maintains and services business loans or other commercial financial receivables and participation interests; has a formalized compliance program; applies the requirements under the BSA as a federally regulated financial institution or the BSA requirements of an equivalent federally regulated financial institution; has been operating since at least Feb. 15, 2019, and has originated, maintained and serviced more than $50 million in business loans or other commercial financial receivables during consecutive 12-month periods in the past 36 months; or is a service provider to any insured depository institution that has a contract to support such institution’s lending activities in accordance with 12 U.S.C. 1867(c) and is in good standing with the appropriate federal banking agency.
• Lenders must submit SBA Form 2484 (Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty) electronically to the SBA in accordance with program requirements.
• The borrower must provide documentation to the lender supporting how the loan amount was calculated in accordance with the PPP rule and the CARES Act.
• Lenders must follow all applicable SBA requirements; review each borrower’s PPP loan application form; and confirm (x) receipt of borrower certifications on the application form, (y) receipt of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll taxes on or around Feb. 15, and (z) the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application.
• Lenders can rely on borrower certifications and supplied documentation in determining borrower eligibility, PPP loan amount, proper use of loan proceeds and eligibility for loan forgiveness. Lenders must comply with the applicable lender obligations set forth in the interim final rule but will be held harmless for borrowers’ failure to comply with program criteria.
• Lender fee amounts remain consistent with previous guidance.
• Various fees in connection with making PPP loans are waived, including:
  • No upfront guarantee fee payable to the SBA by borrowers
  • No lender’s annual service fee payable to the SBA
  • No subsidy recoupment fee
  • No fee payable to the SBA for any guarantee sold into the secondary market
• Agent fees are to be paid by the lender out of the fees the lender receives from the SBA. Such agent fees may not exceed:
  • 1 percent for loans of not more than $350,000
  • 5 percent for loans of more than $350,000 and less than $2 million
  • 25 percent for loans of at least $2 million
• A PPP loan may be sold on the secondary market after the loan is fully disbursed at a premium or a discount-to-par value. The SBA will issue guidance regarding any advance purchase for loans sold on the secondary market.
• A lender may request that the SBA purchase the expected forgiveness amount of a PPP loan or pool of PPP loans from seven weeks after the receipt of loan proceeds, which amount will be based on the amount of loan principal the lender reasonably expects the borrower to expend on permissible uses.

Inclusion of Non-Profits and Faith-Based Organizations in the PPP

• The April 3 interim final rule and accompanying FAQs provide that faith-based organizations, including houses of worship, integrated auxiliaries of churches and conventions or associations of churches qualify for PPP and EIDL loans (and SBA loans generally) as long as they meet the requirements of Section 501(c)(3) of the Internal Revenue Code and the other requirements of PPP and EIDL, as applicable, regardless of whether they have received IRS tax-exempt status.
  • We note that by this express exclusion, the SBA confirms that the ineligible business standards which apply to Section 7(a) loans generally pursuant to 13 C.F.R. 120.110 (as discussed above) will continue to apply to PPP.
• Faith-based organizations will be subject to the same use limitations on PPP loan proceeds as other borrowers. Participation by a faith-based organization in the PPP will not sacrifice its autonomy or First Amendment or other statutory rights.
• The April 3 interim final rule reiterates that the CARES Act made tax-exempt nonprofit organizations described in Section 501(c)(3) of the Internal Revenue Code (IRC) and tax-exempt veterans organizations described in Section 501(c)(19) of the IRC eligible for the PPP, despite previously being ineligible for Section 7(a) loan programs.

Affiliation Rules

• The April 3 interim final rule reiterates that the affiliation rules under 13 C.F.R. 121.301(f) apply to the PPP as an SBA Business Loan Program. While non-profit organizations are expressly permitted to participate in the PPP, the affiliation rules will apply to non-profits.
  • For purposes of the PPP, a borrower will be considered together with its affiliates for purposes of determining whether it has less than the maximum number of employees permitted for participation (500 or specific industry standard), other than as waived for any business concern (1) with up to 500 employees that, as of the date on which the loan is disbursed, is assigned a NAICS code beginning with 72; (2) operating as a franchise that is assigned a franchise identifier code by the SBA; or (3) that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958 (15 U.S.C. 681) (such as SBIC loans).
  • We note that for purposes of calculating a prospective borrower’s employees to determine if the borrower is below the maximum number of employees permitted for participation in the PPP (500 or specific industry standard), both the interim final rules of April 2 and April 3 refer to a threshold of “…500 or fewer employees whose principal place of residence is in the United States or is a business that operates in a certain industry and meets applicable SBA employee-based size standards for that industry…” (emphasis added). Such reference to United States residents was not included in the text of the CARES Act and appears to create ambiguity as to whether the 500 employee test is based on U.S. employees only rather than all U.S. and foreign employees of the prospective borrower and its affiliates. We also note that such reference was not included when referring to the industry specific employee-based size standards. The SBA may determine to further clarify this in subsequent guidance.
  • Additionally, we note that unlike the current affiliation rules applicable to financial assistance programs found at 13 C.F.R. 121.301(f) (available here) the Treasury Department’s summary of the affiliation rules applicable to the PPP excludes (i) affiliation based on identity of interest arising (a) as a result of individuals or firms with common investments or (b) firms that are economically dependent through contractual or other relationships, (ii) affiliations that may arise as result of the “newly organized concern rule” applicable to concerns actively operating for two years or less, (iii) the totality of the circumstances test and (iv) affiliation through franchise agreements. It is unclear whether the Treasury Department intended these exclusions to be express modifications to the SBA’s affiliation rules as specifically applied to the PPP or simply chose not to restate 13 C.F.R. 121.301(f) in its entirety.
• The April 3 interim final rule and its related guidance explicitly exclude from the affiliation rules the relationships of faith-based organizations to other organizations if such relationships are based on a religious teaching or belief or otherwise constitute a part of the exercise of religion, including any relationship to a parent or subsidiary and other applicable aspects of organizational structure or form. According to the SBA, the basis for this waiver from the affiliation rules is to avoid burdening religious exercise of faith-based organizations which would possibly run afoul of the Religious Freedom Restoration Act (RFRA) (P.L. 103-141).
• The April 3 interim final rule allows for a faith-based organization applying for a PPP loan to make a “…reasonable, good faith interpretation in determining whether its relationship to any other person, group, organization, or entity is exempt from the affiliation rules…” and explains that a faith-based organization may rely on a reasonable good faith interpretation in determining whether the exemption from the affiliation rules applies to such organization. The SBA will not assess, nor require any PPP lender to assess, the reasonableness of such interpretation by a faith-based organization. The SBA has provided a sample statement of exemption for a faith-based organization who believes it qualifies for the exemption to the affiliation rules to be with its PPP loan application.