SBA Updates to Payroll Protection Program Rules

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By: Michael L. Iannitti

The SBA has continued to issue additional guidance for borrowers and lenders on the Payroll Protection Program (PPP). Since publishing its initial rules in early April, further clarification has slowly trickled out on the often vague provisions of the CARES Act.

Perhaps most significantly, the SBA has clarified the circumstances in which a borrower may apply for a PPP loan. The CARES Act required borrowers to make a good faith certification that the PPP loan is necessary to support ongoing business operations due to current economic conditions. The CARES Act also waives the SBA’s requirement that a borrower be unable to obtain credit elsewhere. This led to much confusion as to what constituted “necessary.”

Seemingly in response to large public companies obtaining PPP loans, the SBA issued additional guidance on this topic on April 23rd. The SBA advised borrowers to “assess their economic need for a PPP loan under the standard established by the CARES Act and PPP regulations at the time of the loan application,” taking into account their ability to access other sources of capital sufficient to support their operations in a manner not significantly detrimental to their business.

Public companies with substantial market value were specifically identified as unlikely to be able to make the necessary certifications to obtain a PPP loan. Borrowers that received loans prior to this date were given until May 7, 2020 (later extended to May 14th, then May 18th) to return PPP funds if they could not make the necessary certifications. On April 29th, the SBA declared that all PPP loans in excess of $2 million would be subject to review.

On May 13, 2020, the SBA issued more concrete guidance. Any borrower that receives a PPP loan of less than $2 million will be presumed to have made a good faith certification that the loan was necessary. This safe harbor provides greater certainty to small business borrowers for whom the PPP was intended to primarily benefit. Additionally, if borrowers receiving loans in excess of $2 million are deemed to have been unable to make the required certifications, the SBA will not pursue administrative enforcement or referral for prosecution if the borrower repays the loan upon notification from the SBA.

The SBA has also responded to inquiries on numerous other PPP topics, including the following:

  • The 8 week loan forgiveness period begins on the date funds are first disbursed, which must be within 10 days of the loan application.
  • In determining eligibility under the 500 employee standard, borrowers generally must include all US and foreign employees of the borrower and its US and foreign affiliates.
  • A borrower’s loan forgiveness amount will not be reduced if the borrower laid off an employee and the employee later rejects a good faith, written offer to rehire.
  • Businesses in operation as of 2/15/20 that have undergone a change in ownership may still apply for a PPP loan

Some uncertainty still remains with respect to the PPP, particularly regarding the mechanics of loan forgiveness. The SBA has recently reaffirmed its commitment to issue additional regulations on loan forgiveness. Borrowers and lenders may also rely on all laws, rules and guidance issued at the time of their loan application. However, any applications in processing should be revised based on any additional clarification issued by the SBA.