Legislative Solution for PPP Loan Forgiveness Issues | Hinshaw & Culbertson LLP


The Small Business Administration (SBA) and the United States Department of the Treasury have released an Interim Final Rule on Paycheck Protection Program (PPP) Loan Forgiveness and Applying for PPP Loan Forgiveness.

While this rule and application has provided additional clarity on several issues raised in the agencies’ previously released guidance, others still remain unanswered.

In particular, some borrowers are concerned about the 75/25 split of authorized salary and non-salary costs that can be waived. This 75/25 split was not mandated by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act); instead, it was included in the rules by the agencies. Similarly, there are concerns about the eight-week period during which borrowers must spend PPP loan proceeds on authorized costs (the “covered period”).

The House and Senate have approved legislation designed to address these issues, which we discussed in this May 27 alert. The legislation (HR 7010) has been sent to the President for his signature.

Eight-week period covered

HR 7010 would extend the period covered from eight weeks to 24 weeks after disbursement of loan funds, which is December 31, 2020. Additionally, a borrower who received a PPP loan prior to the enactment of HR 7010 may choose to use all eight existing weeks Covered Period rather than the Extended Covered Period.

Split 75/25

This legislation also eliminates the requirement that at least 75% of the loan proceeds must be spent on authorized salary costs and establishes the split at 60/40.

However, there is a problem with this fix. The current 75/25 split allows for partial forgiveness of a loan if less than 75% of the loan proceeds is spent on allowable payroll costs.

To qualify for loan forgiveness under this new provision, an eligible beneficiary must use at less 60% of PPP loan proceeds for payroll costs, and can use up to 40% for the payment of interest on any covered mortgage bond – which does not include prepayment or principal payment of a mortgage bond covered – any payment on any covered rent obligation or any covered utility payment.

As written, the legislation appears to create a “cliff” that would require the borrower to spend at least 60% of the loan proceeds on payroll costs. This creates the implication that if a borrower does not spend 60% on payroll expenses, no portion of the loan will be forgiven.

Advice has been sought from the Treasury and the SBA on whether said cliff can be managed by regulations passed by the agencies. The Trump administration has assured that the law will be interpreted to avoid the cliff.

Two-year loan term extended to a minimum of five years

Although the CARES Act provides that the term of a PPP loan can be up to ten years, the SBA and the Treasury had agreed to a two-year term for the repayment of any unforgiven loan balance.

Under HR 7010, a PPP loan must have a minimum term of at least five years, which gives borrowers additional time to repay the unforgiven portion of the loan. It also allows the lender and borrower to modify the terms of existing PPP loans to extend the maturity date from two years to five years.

Deferred payment of the employer’s share of social security contributions

Under rules set by the IRS, beginning March 27, 2020, a PPP borrower could delay paying the employer’s share of Social Security taxes, but that deferral ends when the PPP loan is forgiven.

HR 7010 allows a PPP borrower to delay paying the employer’s share of social security contributions after the loan is canceled for the remainder of 2020.

Rehire employees

Forgiveness rules include an employee requirement that can reduce the amount of loan forgiveness if the number of employees is reduced. However, this reduction can be avoided if the borrower has the same number of employees on June 30, 2020.

HR 7010 amends this provision by: (1) applying the new 24-week Covered Period instead of the eight-week Covered Period; and (2) extend the rehire date to December 31, 2020.

To further assist employers, HR 7010 also eliminates employee testing in the circumstances described below:

“During the period beginning on February 15, 2020 and ending on December 31, 2020, the amount of loan forgiveness under this section shall be determined without regard to a proportional reduction in the number of full-time equivalent employees if a beneficiary permissible, in good faith:

(A) is able to document

1° an inability to rehire persons who were employees of the eligible beneficiary on February 15, 2020; and

(2) an inability to hire similarly qualified employees for vacant positions on or before December 31, 2020; Where

(B) is able to document an inability to return to the same level of business activity at which this business was operating prior to February 15, 2020, due to compliance with requirements established or directives issued by the Secretary of Health and Human Social Services, the director of the Centers for Disease Control and Prevention or the Occupational Safety and Health Administration during the period beginning March 1, 2020 and ending December 31, 2020 related to maintaining standards of sanitation, distancing social or any other worker or customer safety requirement related to COVID-19.”

Loan deferral period

The CARES Act provides that a borrower is permitted to defer interest payments for the first six months after receipt of the loan proceeds and is not required to repay the principal until the loan maturity date.

However, HR 7010 provides that a borrower would not be required to make payments of principal, interest, or fees until the date on which the forgiveness amount determined under Section 1106 of the Act CARES is delivered to the lender by the SBA. Because the borrower can determine when to request forgiveness, the bank has 60 days to act on a request for forgiveness and the SBA must forward payment to the lender within 90 days of its receipt of the lender’s decision; the adjournment period can be lengthened considerably.

To discourage this approach to some extent, the legislation provides that if a borrower does not apply for PPP loan forgiveness within ten months of the last day of the period covered, the borrower will be required to make payments of principal, interest and fees on the loan. , commencing on the day not earlier than the date ten months after the last day of the Covered Period.

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