Congress “Fixes” Paycheck Protection Program, Allowing More Time to Spend Loan Proceeds and Reducing Required Spend on Payroll Costs

Today, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (Act). 

The Act is intended to fix problems with the Paycheck Protection Program (PPP), the keystone of the Coronavirus Aid, Relief, and Economic Security (CARES) Act adopted on March 27, 2020, which has since been criticized for being too restrictive on borrowers. The Act brings some change and clarity, but raises new questions and leaves some old questions unanswered. We expect additional guidance and rule-making from the Small Business Administration (SBA).

The Act amends Section 7(a)(36) of the Small Business Act, which is the sub-section added by the CARES Act that created the PPP and provides for the SBA’s guaranty authority for PPP loans, and Section 1106 of the CARES Act, which specifies how PPP loans may be forgiven. The Act also permits employers that have PPP loans forgiven to defer payroll taxes between March 27, 2020 and December 31, 2020. We summarize and comment on the Act below. 

Amendments to Section 7(a)(36) of the Small Business Act:

• Extend the “covered period” from June 30, 2020 to December 31, 2020;

Recall that this “covered period” definition is not the same one used in Section 1106 of the CARES Act, which is the period during which loan proceeds must be spent to be eligible for forgiveness. Here, the obvious effect would seem to be that PPP loans may be made until December 31, 2020. (However, press reports suggest that Wisconsin Senator Johnson had delayed unanimous consent action on the Act until he obtained a letter from Majority Leader McConnell’s office that the extension until December 31 would apply only to spending and not extend the application deadline. The letter was not published.) To the extent that paragraph (F)(i) of Section 7(a)(36) permits the use of loan proceeds only during the covered period, this means loan proceeds may be used through December 31, 2020. Nothing in the revisions addresses whether the use of loan proceeds outside the covered period is permissible, and this is still not clear in our view – the better textual argument is that a borrower may spend loan proceeds in the covered period only; however, to the extent a borrower is unable to spend the money in that period (for example, if its operations are still curtailed), it makes little sense to prohibit spending, acknowledging that it will no longer be eligible for forgiveness.

• Make the minimum loan period five years; and

All existing PPP loans have a two-year term. Loans made on or after the date of the Act must have at least a five-year term. The Act states that prior loans may be amended by mutual agreement between the bank and the lender to extend their maturity, but they are not automatically extended. Presumably, the SBA will issue additional guidance on an acceptable interest rate change with respect to any extensions.

• Change the date on which payments are deferred until the date the forgiveness amount is determined, except that if the borrower hasn’t applied for loan forgiveness within 10 months after the last day of the covered period (as defined in Section 1106(a) of the CARES Act), the first payment is due then.

We assume a borrower that elects to stay with the eight-week covered period, as permitted, and requests early loan forgiveness will nonetheless continue to benefit from at least the six-month deferred payment date.

Amendments to Section 1106 of the CARES Act, the loan forgiveness provisions:

• Define the “covered period” in which forgivable loan proceeds must be spent from eight weeks to 24 weeks, except that a borrower who already has a loan may elect to stick with the eight-week period;

Because the maximum loan is 2.5x payroll, and because the forgiveness reductions based on the FTE quotient and salary reductions were not modified by the Act and are measured as averages over the covered period, on its face the changes appear to make it less likely borrowers will be able to maintain average FTE and salary levels over the 24-week period. A borrower that received a PPP loan and spent all of it on payroll at historical rates, for example, would run out of PPP money in week 10, which leaves 14 weeks to maintain FTEs and salaries at pre-COVID-19 levels or lose forgiveness for much of the PPP loan, unless it qualifies for the re-hire exemption or the FTE exclusions described below.

• Extend the “re-hire” provisions from June 30, 2020 to December 31, 2020;

The Act does not clarify what “eliminated the reduction” means in Section 1106(d)(5), and does not clarify whether a one-day restoration of historical employment levels is sufficient, whether an average period that includes a day prior to December 31, 2020 is required, or whether some other method applies.

• Provide that the FTE reductions to loan forgiveness amounts don’t apply if the borrower in good faith is able to document either—
   
  • An inability to re-hire an individual who was an employee of the eligible recipient on February 15, 2020 and an inability to hire similarly qualified employees on or before December 31, 2020;

The first part of this provision dovetails with Section III.5 of the SBA’s existing interim rules, which requires a bona fide written offer for the same salary and wages, documentation of rejection of the offer, and that the borrower report the offer and rejection to the state unemployment office.

The latter part of the provision is new, and its existence gives more weight to the idea that a borrower can hire new employees, at lower salary levels, to replace old employees and maintain FTEs. To qualify for the exclusion from FTE reductions, however, a borrower has an affirmative obligation to attempt to re-hire prior employees before attempting to hire replacement employees.

• • OR an inability to return to the same level of business activity as such business was operating at prior to February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

This concept is new, and presumably this provision was designed for restaurants and retailers that have not been allowed to open or to open at full capacity. We do not anticipate SBA rule-making on this provision to be smooth and its final rules may satisfy few. Among the questions raised: How must a borrower determine that its decreased business activity relates to federal guidance, and how closely must business activity and guidance be tied? Should the SBA extend the exception to state and local COVID-19 requirements, which may vary widely among borrowers? What measurement periods must be compared?

• For a loan to be forgiven, at least 60% of the loan must be used for payroll and up to 40% may be used for other allowed uses.

This provision is good news, assuming the SBA guides around poorly drafted statutory language. Clearly, the provision is intended to reduce the SBA “75% payroll” requirement to a “60% payroll” requirement. Unfortunately, “covered loan” means the entire PPP loan, not just the portion eligible for forgiveness, and literally this provision states that if a borrower does not spend at least 60% of the loan on payroll, none of the loan is forgivable. (Under pre-Act SBA treatment, a borrower that used $50 of its $100 loan for payroll and $50 for other expenses would have been eligible to have $66.67 forgiven; under the revised language, $0 would be forgiven because the borrower did not spend $60 on payroll.) We assume the SBA will find a way to guide around this drafting error.

Amendments to Section 2302(a) of the CARES Act:

The CARES Act allows employers to defer payment of payroll taxes, but excluded employers who had PPP loans forgiven. The Act deletes the exclusion by eliminating Section 2302(a)(3) from the CARES Act.