April 2, 2020, 10:00 pm
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In the evening of April 2, the SBA provided much-needed clarity via an Interim Final Rule regarding the Paycheck Protection Program (“PPP”). The rule is effective immediately and can be relied on by lenders in accepting and processing applications as that process begins on April 3. The rule provided the following answers to critical questions facing the industry.
Underwriting and Reliance on Borrower
Banks are now permitted to rely on borrower documents, as certified by the borrower, in making a loan under the PPP. A draft SBA form 2484 previously created anxiety regarding the amount of underwriting required of the lender. The rule is clear that the lender must comply with its obligations in the rule, but the lender will be held harmless if the borrower does not comply with program requirements. The final form 2484 is consistent with this framework.
Lender requirements in the rule are to:
- Confirm receipt of borrower certifications contained in the PPP application form;
- Confirm receipt of information demonstrating the borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020;
- Confirm the average monthly payroll costs (as defined in the CARES Act) for the preceding calendar year by reviewing payroll documentation submitted with the borrower’s application; and
- Follow normal Bank Secrecy Act requirements, which include the collection of any borrower information that would be required for a loan under the bank’s existing customer information program.
The rule sets forth a range of permitted documentation to establish payroll costs for the borrower. Those include payroll processor records, payroll tax filings, Forms 1099-MISC, or income and expenses from a sole proprietorship. That list eliminates prior concern regarding verification of income of sole proprietors who might not yet have prepared a tax return for 2019. In addition, the rule provides that a borrower may provide bank records if it does not have the enumerated records above to substantiate the qualifying payroll amount.
The rule clarified that the eligible borrower restrictions contained in the SBA’s SOP 50 10 apply to the program, except as applied to 501(c)(3) nonprofits. Incorporation of these restrictions means that banks cannot be borrowers under the PPP. However, it appears that the intent of the rule is to allow churches to participate as borrowers, without regard to the activities they are performing.
The rule clarifies that all banks (among others) are eligible to lend under the PPP, unless the bank is under a formal enforcement action (e.g., a Consent Order) or is deemed to be in “troubled condition.” Lenders without an existing 7(a) approval are approved upon submitting the required Form 3506 to be soon posted to the SBA and Treasury websites.
Maximum Loan Amount
The rule also provides clarity on some frequently asked questions regarding calculation of the maximum loan amount under the program. We read the rule as applying the $100,000 limitation only to an individual’s salary/wage/commission compensation, which is discussed separately from that individual’s other elements of payroll such as employer-paid insurance and other eligible benefits.
On the other hand, the rule closes a potential loophole regarding payments by small businesses to independent contractors. It is clear that those amounts cannot be included in payroll costs for the small business, and instead the independent contractor should apply for his or her own PPP loan.
Consistent with Secretary Mnuchin’s public comments, the rate for the PPP loans has been increased from 0.50% to 1.00%. In addition, the SBA articulated an overview of the early purchase option for PPP loans. Consistent with the CARES Act, lenders can sell the loans to SBA for an “expected forgiveness amount” after the seventh week of the program. We expect more specificity and guidance on this process in the future, but it is clear that banks will not be required to wait for a full forgiveness submission and up to 90 days of delay in having the loan repaid. This clarity should mitigate some banks’ related liquidity concerns.
The rule also solidified the requirement that no more than 25% of the amount forgiven for any borrower can be for non-payroll costs. The rule goes further in requiring that borrowers use no more than 25% of the amount for non-payroll costs in order to preserve funds.
On a somewhat unhelpful note, the SBA did nothing to dissuade borrower anxiety by stating that the PPP is “first-come, first-served.”
More to Come
As of the time of this writing, additional forms are promised to the industry, including Form 3506 for lenders without existing 7(a) approval. We are also hopeful that form legal documents for extending credit are forthcoming. Bankers should be sure to look for updates on a continuous basis.