1
January 14, 2021
UPDATE TO PPP LOAN AND SBA EIDL PROGRAMS BY THE
SBA’S INTERIM FINAL RULES ON JANUARY 6 & 8, 2021
On January 6, 2021 the Small Business Administration (SBA) released two interim final rules (IFRs) incorporating changes to the Paycheck Protection Program as di-rected by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act ("Economic Aid Act") and addressing the new Second Draw loan program. In addition, on January 8, 2021, the SBA released a revised First Draw application, https://home.treasury.gov/system/files/136/PPP-Borrower-Application-Form.pdf, and a Second Draw borrower application form, https://home.treasury.gov/sys-tem/files/136/PPP-Second-Draw-Borrower-Application-Form.pdf .
First Draw PPP Loans
• First Draws: Confirms that borrowers may not receive more than one First Draw PPP loan (subject to certain exceptions related to increases for borrow-ers that returned PPP funds or did not accept all of the funds for which they were initially approved) but may be eligible for a Second Draw PPP loan. • Timing: Applications must be submitted by lenders through E-Tran on or
be-fore March 31, 2021, and the request is subject to the availability of funds. • Covered period: Allows borrowers to choose their "covered period," which
begins on the date the lender disburses the PPP loan and ends on any date selected by the borrower that is between 8 and 24 weeks after the date of dis-bursement.
• Loan amount: The loans are based on 2.5 times the borrower’s average monthly payroll costs for the one-year period prior to the loan, or calendar-year 2019, with a maximum of $2 million. Schedule C borrowers include their 2019 net schedule C income, up to $100,000, in their annual payroll costs. Partnerships may include in their annual payroll costs the amount of
2
2019 self-employment income reported to their partners, multiplied by .9235 and limited to $100,000 per partner.
• Base period: Allows new borrowers to choose calendar year 2019 or 2020 as the base period for purposes of calculating their maximum loan amount. • Partnerships: Confirms that partnerships are eligible for PPP loans, and
pro-vides guidance for calculating the maximum loan amount. The partnership is allowed to report the self-employment income of general active partners up to $100,000; however, individual partners may not submit a separate PPP appli-cation as self-employed individuals.
• Interest rate: Restates PPP loans will bear a 1% interest.
• Additional eligibility for uses of PPP funds: The IFR provides guidance on the eligible and forgivable uses of PPP funds for the following expenses:
o Covered operations expenditures, including "payments for any business
software or cloud computing service that facilitates business opera-tions, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses."
o Covered property damage costs, which are "costs related to property
damage and vandalism or looting due to public disturbances in 2020 that were not covered by insurance or other compensation."
o Covered supplier costs, including expenditures made by a borrower to
a supplier of goods for the goods that were essential when the expendi-ture was made and was made pursuant to a contract or purchase order.
o Covered worker protection and facility expenditures to account for
business modifications to comply with COVID-19-related regulatory guidance and worker personal protective equipment.
• Expansions of eligibility for certain organizations: The IFR provides in-creased eligibility for:
o Certain businesses that are generally ineligible for 7(a) loans, including
nonprofit businesses, businesses deriving more than one-third of gross annual revenue from legal gambling activities, and businesses princi-pally engaged in teaching, instructing, counseling, or indoctrinating
3
with regard to religion or religious beliefs, whether in a religious or secular setting.
o Housing cooperatives that are 501(c)(6) organizations and employ not
more than 300 employees, if the organization meets other eligibility re-quirements.
o Destination marketing organizations with 300 or fewer employees, if
the organization meets other eligibility requirements.
o Organizations described in section 501(c)(6) of the Internal Revenue
Code (IRC) and that are exempt from taxation under section 501(a), if the organization has 300 or fewer employees and meets other eligibility requirements.
o Nonprofit and tax-exempt news organizations with more than one
phys-ical location and 500 or fewer employees per physphys-ical location if the organization 1) certifies in good faith that the proceeds will be used by the organization's unit that produces or distributes locally focused or emergency information, and 2) is majority owned or controlled by a business concern with the NAICS code 511110 or 5151. Publicly traded news organizations are permitted to receive loans if the organization certifies that the loan will support locally focused or emergency con-tent.
• Expansions of ineligible businesses: Ineligible businesses now generally in-clude:
o Businesses or organizations not in operation on February 15, 2020;
o Businesses that received or will receive a Shuttered Venue Operator
Grant;
o Businesses controlled either directly or indirectly by the president, the
vice president, the head of an executive department, or a member of Congress, or the spouse of such person;
o Businesses that have permanently closed; and
o Publicly traded companies and businesses.
• Opportunities to reapply or increase: Borrowers that returned the entirety of their PPP loans may reapply for a PPP loan in an amount the borrower is eligible for under current PPP rules. Borrowers that returned part of a PPP loan are permitted to reapply for the difference between the amount retained and the previously approved amount. Borrowers that did not accept the full amount of a PPP loan for which they were approved may seek an increase up
4
to the previously approved amount. SBA intends to issue additional guidance on the processes for reapplication and increases in loans.
• Expansions of certifications: The IFR requires additional certifications to be made in connection with receiving PPP funds or forgiveness, including certi-fications that the applicant has not received and will not receive a Shuttered Venue Operator grant, and that the applicant is not publicly traded. Applicants also must complete the economic necessity certification, which requires an applicant to certify in good faith that "the uncertainty of current economic conditions makes necessary the loan request to support the ongoing obliga-tions" of the applicant. The IFR incorporates FAQ 46's safe harbor that the borrower of any loan under "$2 million will be deemed to have made the re-quired certification concerning the necessity of the loan request in good faith." • Lender requirements to underwrite loans: The IFR notifies lenders of their responsibility to confirm certain information submitted by the borrower and "follow their existing BSA protocols" or "establish an anti-money laundering compliance program equivalent to that of a comparable federally regulated institution." The IFR reiterates that lenders' underwriting obligations under the PPP are limited to:
o Confirming receipt of borrower certifications contained in the PPP
Bor-rower Application Form;
o Confirming receipt of employee information;
o Confirming the dollar amount of average monthly payroll costs for
2019 or 2020 by reviewing the payroll documentation submitted with the borrower's application; and
o Following the applicable BSA requirements discussed above.
In addition to these items, the IFR notes that lenders must review the PPP Applica-tion Form. In their underwriting and review, lenders are not required to inde-pendently verify the borrower's reported information if the borrower submits sup-porting documentation and attests that it accurately verified the payments for eligible costs. Lenders that rely on a certification or documentation and satisfy all "other relevant Federal, State, local, and other statutory and regulatory requirements appli-cable to the lender" will not face an enforcement action and are not "subject to any penalties relating to loan origination or forgiveness of the PPP loan."
5 Second Draw PPP Loans
• Terms: The IFR specifies that Second Draw PPP Loans "are generally subject to the same terms, conditions and requirements as First Draw PPP Loans." As with First Draw loans, lenders are permitted to rely on certifications of the borrower to determine the borrower's eligibility and use of loan proceeds. • Eligibility: The IFR confirms that certain borrowers that previously received
PPP loans may reapply or request an increase in their PPP loan amount. Eli-gible borrowers include borrowers with fewer than 300 employees, that used or will use the full amount of their first PPP loan on or before the date when the second PPP loan is expected to be disbursed, and have experienced a gross revenue reduction of "25% or greater in 2020 relative to 2019." Borrowers may show a 25% reduction by comparing gross receipts in any 2020 quarter compared with the same quarter in 2019 or by submitting copies of their an-nual tax forms that show a reduction in anan-nual receipts of 25% or more in 2020 compared with 2019. The IFR excludes from gross receipts the for-giveness amount of a First Draw PPP loan received in calendar year 2020 and specifies that for borrowers with affiliates, the calculation of gross receipts should include affiliate receipts. For those borrowers, gross receipts are cal-culated "by adding the gross receipts of the business concern with the gross receipts of each affiliate."
• Timing: Applications must be submitted by lenders through E-Tran on or be-fore March 31, 2021, and the request is subject to the availability of funds. • Number of Second Draw Loans: An eligible borrower may only receive one
Second Draw Loan.
• Second Draw PPP Amounts: The IFR provides guidance that borrowers are limited to one Second Draw PPP Loan. The loans are based on 2.5 times (3.5 for restaurants and hotels) the borrower’s average monthly payroll costs for the one-year period prior to the loan, or calendar-year 2019, with a maximum of $2 million. Schedule C borrowers include their 2019 net schedule C in-come, up to $100,000, in their annual payroll costs. Partnerships may include in their annual payroll costs the amount of 2019 self-employment income re-ported to their partners, multiplied by .9235 and limited to $100,000 per part-ner.
6
• Payroll Time Period: The IFR provides that borrowers may use calendar year 2019 or 2020. Second Draw borrowers that are not self-employed, sole pro-prietorships, or independent contractors may use the "precise 1-year period before the date on which the loan is made to calculate payroll costs."
• Ineligible Entities: Entities that were ineligible to receive a First Draw PPP Loan under the CARES Act or Consolidated First Draw PPP IFR are also ineligible for a Second Draw PPP Loan. Additionally, permanently closed businesses, businesses involved in political or lobbying activities, Chinese en-tities or enen-tities affiliated with Chinese enen-tities, and any person required to submit a registration statement under section 2 of the Foreign Agents Regis-tration Act of 1938 are prohibited from taking a Second Draw Loan.
• Forgiveness: Forgiveness rules for Second Draw loans are generally the same.
• Documentation: The IFR explains that generally, the same documentation as required for First Draw PPP loans is required to substantiate a Second Draw applicant's payroll cost calculations. However, if the applicant uses the same lender and uses calendar year 2019 figures to determine both its First Draw and Second Draw PPP loans, then no additional documentation is required. However, the lender may independently request additional documentation if the lender concludes that the documentation would be useful in conducting the lender's good-faith review of the borrower's loan amount calculation. For loans with a principal amount of $150,000 or more, the applicant must also submit documentation adequate to establish that the applicant experienced a revenue reduction of 25% or more in 2020 relative to 2019. For loans with a principal amount of $150,000 or less, documentation is not required at the time of application and can be provided with the forgiveness application. • First Draw PPP Loan under SBA review: The IFR notes that if the
bor-rower's First Draw PPP Loan is under review, the lender will receive notifica-tion from SBA when the lender submits an applicanotifica-tion for a guaranty of a Second Draw PPP Loan. The lender will not receive an SBA loan number until the issue is resolved, and according to the IFR the SBA will resolve these issues "expeditiously."
7
If you have any questions about the matters covered in this memo, please do not hesitate to reach out to us for assistance. We will continue to provide guidance as the SBA and Treasury Department provides updates.