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Paycheck Protection Program Loan Forgiveness Update As of June 30, 2020

The following information supplements our prior notes and is provided as a courtesy based on available public information; however, it is not intended nor should it be used as a substitute for appropriate accounting and legal counsel specific to your individual situation. Congress may pass new legislation and the Small Business Administration (SBA) may issue additional guidance that could change the process and calculation of loan “forgiveness.”

On June 5, President Donald Trump signed the Paycheck Protection Program Flexibility Act (“Flexibility Act”). This legislation amends the CARES Act that created the Paycheck Protection Program (PPP) and specifically alters provisions related to loan terms and loan forgiveness. While further guidance and clarification from the Small Business Administration (SBA) and Treasury is ongoing, below is a summary of the provisions that appear in the Flexibility Act.

Specifically, the law:

  • Extends the covered period during which the loan may be used for forgivable expenses from eight weeks following disbursement of the loan to 24 weeks from loan disbursement or December 31, 2020, whichever is earlier. Borrowers who received loans before June 5 may elect to continue using the eight-week covered period.
  • Lowers the amount that must be spent on payroll costs from 75 percent to 60 percent. The new 60 percent threshold is now a cliff, meaning that borrowers must spend at least 60 percent on payroll or none of the loan will be forgiven.
  • Extends the period in which employers may rehire or eliminate a reduction in employment, salary, or wages that would otherwise reduce the forgivable amount of a PPP loan to December 31, 2020. However, the forgivable amount will be determined without regard to a reduction in the number of employees (compared to February 15, 2020) if the recipient is (1) unable to rehire former employees and is unable to hire similarly qualified employees by December 31, or (2) unable by December 31 to return to the same level of business activity that existed before February 15, 2020, due to compliance with federal requirements or guidance related to COVID-19.
  • Replaces the six-month deferral of payments due under PPP loans with deferral until the date SBA pays the lender the amount of loan forgiveness. If a borrower fails to apply for The following information supplements our prior notes and is provided as a courtesy based on available public information; however, it is not intended nor should it be used as a substitute for appropriate accounting and legal counsel specific to your individual situation. Congress may pass new legislation and the Small Business Administration (SBA) may issue additional guidance that could change the process and calculation of loan “forgiveness.” loan forgiveness within 10 months after the last day of the covered period for forgiveness, the borrower must begin to make payments of principal, interest, and fees on its PPP loan.
  • Establishes a minimum maturity of five years for new PPP loans as opposed to the current two year maturity date. The five year maturity takes effect on the date of enactment and will only apply to any PPP loan made on or after June 5. Lenders and borrowers, however, may mutually agree to modify the maturity terms of prior-disbursed PPP loans.
  • Eliminates a provision that makes PPP loan recipients who have PPP debt forgiven ineligible to defer payroll tax payments.

Summary of SBA’s Interim Final Rule

On June 12, the SBA released the first interim final rule (“IFR”) in response to various significant changes created by the Flexibility Act. The IFR is focused on revising the initial interim final rule posted on April 2, 2020, by changing key provisions, including the loan maturity, deferral of loan payments, and forgiveness provisions, to conform to the PPP Flexibility Act. Several of these amendments are retroactive to the date of enactment of the CARES Act, making the interpretation and implementation of these changes burdensome on lenders. The following summarizes the various key changes.

Covered Period

The Flexibility Act amended the definition of “covered period” for the PPP by extending the end date from June 30, 2020, to December 31, 2020. This definition of “covered period” governs loan use, eligibility, and related requirements—it does not alter the meaning of “covered period” with respect to loan forgiveness, which is covered by a different provision of the Flexibility Act. Based on this statutory change to the definition of “covered period” in the CARES Act, the IFR creates a corresponding extension of the covered period in the initial interim final rule to December 31, 2020.

Maturity Date

The Flexibility Act provides that the five year maturity period starts on the date that the SBA remits loan forgiveness to the lender or that it starts ten months after the last day of the forgiveness covered period if the Borrower did not file for forgiveness. However, the SBA has modified the maturity date for loans made on or after June 5, 2020. The IFR provides that the maturity date is five years from the date that the SBA assigns a loan number to the PPP loan. For loans made before June 5, 2020, the loan term is still two years. The IFR clarifies that borrowers and lenders may mutually agree to extend the maturity of such loans to five years— lenders are not required to extend loans made prior to June 5, 2020. To justify the five year maturity start date, the SBA states in the IFR it “determined that the date the SBA assigns a loan number to the PPP loan provides an efficient, transparent, and auditable means of determining when a PPP loan is “made” that provides certainty to lenders.” As discussed more below, this change in determining when the loan term starts creates some issues with respect to pledging PPP loans to the Federal Reserve’s PPP Liquidity Facility.

Loan Forgiveness Period

The period when borrowers must expend PPP loan funds in order to be eligible for forgiveness is extended from 8-weeks to 24-weeks, but borrowers whose loan was made before June 5, 2020 may elect to apply the original 8-week forgiveness period. The “loan forgiveness covered period” begins on the date the PPP loan funds are disbursed.

The revised Standard Forgiveness Application provides information for borrowers that elect to use the 8- week period for loan forgiveness for Borrowers whose loans were made before June 5, 2020. This is a positive development considering many borrowers who obtained loans during the first round of funding will be reaching the end of the 8-week period and may not be able to maintain payroll levels for an additional 16 weeks.

Deferral Period

The IFR also changed the deferral period on PPP loans in light of the extension created by the Flexibility Act. If the forgiveness application is submitted within 10 months after the end of the loan forgiveness covered period, the borrower does not have to make any payments of principal or interest before the date on which the SBA remits the loan forgiveness amount on the loan to the lender or notifies the lender that no forgiveness is allowed. If the forgiveness application is not submitted within 10 months after the end of the covered period, payments of principal and interest begin after that period ends (e.g., if the 24-week forgiveness period ends on 12/10/2020 and the borrower does not submit a loan forgiveness application by 10/10/2021, then the borrower must begin making payments on or after October 10, 2021). Interest continues to accrue during the deferment period. Lenders are required to notify borrowers of remittance by the SBA of the loan forgiveness amount or that the SBA has determined no forgiveness is allowed. At that time, lenders must also inform the borrower when the first payment is due. This new deferral period calculation leaves both the borrower and lender in the dark in terms of when it will end if the borrower chooses to seek forgiveness, which is the driving feature of this program. Both parties will have to wait until the loan forgiveness application is completed by the borrower, reviewed by the lender, and ultimately approved or denied by the SBA before the deferral period ends. It is unclear how long the SBA will take to process each forgiveness application. It is possible the SBA will provide clarity in the future to provide greater certainty for all parties.

Loan Forgiveness & New Safe Harbor

The Flexibility Act reduced the amount of proceeds that must be used for eligible payroll expenses from 75% to 60%. While the Flexibility Act had the unintended consequence of eliminating the sliding scale of forgiveness for borrowers that did not meet the 60% threshold, the IFR clarifies that the sliding scale does still apply. The SBA, in consultation with Treasury, determined that the 60% in the Flexibility Act should be interpreted as “a proportional limit on non-payroll costs as a share of the borrower’s loan forgiveness amount, rather than a threshold for receiving any loan forgiveness.” The IFR creates a new safe harbor for borrowers who are unable to rehire previously employed individuals or similarly qualified employees. In these situations, the borrower would not have its loan forgiveness amount reduced based on the reduction in full-time equivalent employees. The SBA stated that interpreting the Flexibility Act’s 60% requirement as a threshold would be in direct conflict with the flexibility provided by this new safe harbor. The SBA provided the following example in the IFR to explain how loans may be forgiven in whole or in part using the sliding scale: If a borrower received a $100,000 PPP loan, and during the covered period spends $54,000 (54%) of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60% of the forgiveness amount and the additional $36,000 in nonpayroll costs constituting 40% of the forgiveness amount). In a more recent IFR, the FTE safe harbor required a borrower to use June 30, 2020, as

In a more recent IFR, the FTE safe harbor required a borrower to use June 30, 2020, as the reference period to determine whether the safe harbor was met. The Flexibility Act changed the June date to the year-end 2020. The Standard Forgiveness Application instructions now provides two separate safe harbors exempting borrowers from any reduction of loan forgiveness based on a reduction in FTE employee levels:

The borrower is exempt from the loan forgiveness based on a reduction in FTE employees if the borrower, in good faith, is able to document that it was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with certain federal requirements or guidance related to COVID-19.

The borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees if both of the following conditions are met: (a) the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (b) the borrower then restored its FTE employee levels by no later than December 31, 2020 to its FTE employee levels in the borrower’s pay period that included February 15, 2020.

Use of PPP Loan Proceeds

The IFR reiterates that proceeds of a PPP loan can be used for the following items: payroll costs, costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums, mortgage interest payments (but not prepayments or principal payments), rent payments; utility payments; interest payments on any other debt obligations incurred before February 15, 2020; and/or Refinancing an SBA Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020.

The IFR also clarifies that borrowers can receive both an EIDL loan and PPP loan. If the EIDL loan was not used for payroll costs, it does not affect a borrower’s eligibility for a PPP loan. If the EILD loan was used for payroll costs, the PPP loan must be used to refinance the EIDL loan. The amount of any EIDL refinanced in the PPP loan will be included for purposes of determining the percentage of use of proceeds for payroll costs. Proceeds from any advance up to $10,000 on an EIDL loan will be deducted from the loan forgiveness amount of a PPP loan. For purposes of loan forgiveness, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness.

Borrower Certifications

The IFR revises the borrower certifications to provide that “not more than 40% of loan proceeds may be used for non-payroll costs” and “not more than 40% of the forgiven amount may be used for non-payroll costs.” It also adds an additional requirement that was recently revealed in the forgiveness application and forgiveness rules requiring a borrower to certify that they will provide lenders with documentation to verify the number of full-time equivalent employees on payroll, as well as, the dollar amounts of payroll costs, and documentation for forgivable nonpayroll expenses, including covered mortgage interest, rent payments, and utilities.

Other Updates

The IFR also seeks to close a windfall that the SBA and Secretary of Treasury determined Congress did not intend. Specifically, the new IFR limits forgiveness of owner compensation replacement for individuals with self-employment income who file a Schedule C or F to either eight weeks’ worth of 2019 net profit for an eight-week covered period or 2.5 months’ worth of 2019 net profits for a 24-week covered period in total across all businesses. This limitation avoids a potential loophole for borrowers that only have one other employee who could receive a maximum loan amount equal to five months of payroll (2.5 months of payroll for the owner plus 2.5 months of payroll for the employee).

If the owner in that situation laid off the employee and availed itself of the safe harbor in the Flexibility Act from reductions in loan forgiveness, the owner could treat the entire amount of the PPP loan as payroll, with the whole loan being forgiven. The SBA determined that this would provide a windfall for the owner by providing the owner with five months of payroll instead of 2.5 months and would also defeat the purpose of the CARES Act of protecting the paycheck of the fired employee.

The IFR made only a minor change to the April 28th IFR on disbursements by striking references to the “eight-week covered period” and replacing the references with “covered period.” This change serves to ensure that the rule is applicable to either an 8-week or 24-week covered period, as elected by the borrower. The provisions of the New IFR relating to loan forgiveness are effective March 27, 2020 (the date the CARES Act was signed into law) and the provision relating to the maturity date of PPP loans is effective June 5, 2020 (the date of the Flexibility Act was signed into law).

The SBA also released updated application forms for borrowers and lenders to use for loans made on or after June 5, 2020. In addition to the expected changes to the borrower application form to account for the new forgiveness period and payroll expense percentage, the SBA revised the borrower felony certification requiring applicants to certify that they have not “been placed on pretrial diversion.” The new borrower application form also clarifies that the application form should not be sent to lenders directly by mail. Additional revisions to the SBA’s interim final rules on loan forgiveness and loan review procedures are forthcoming. In light of the extended forgiveness period, the SBA also stated that it will be issuing updated guidance on advance purchases of PPP loans, which will include any effect the Flexibility Act’s amendments made to the loan forgiveness requirements.

Most Recent Loan Forgiveness Application and Instructions

EZ Loan Forgiveness Application

On June 18, the SBA finally released a “simplified” PPP loan forgiveness application for borrowers who meet certain requirements. This is a welcome development as lenders, borrowers, and lawmakers have urged the SBA and the Treasury to simplify the forgiveness process. At the same time, the SBA also released a new interim final rule (the “New IFR”) and revised the standard forgiveness application to account for changes from the Flexibility Act

Despite the request of a majority of senators and many others, the new application form does not provide for a dollar threshold below which loans would be deemed forgiven.

Form 3508EZ Forgiveness Application Eligibility to Use Application

The instructions for the new PPP Loan Forgiveness Application Form 3508EZ (the “EZ Forgiveness Application”) provide that borrowers can apply for forgiveness of PPP loans if they meet at least one of three tests.

Test One: The first test is exclusively for self-employed individuals, independent contractors, or sole proprietors who had no employees at the time of their initial PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBA Form 2483). Unlike the first test, the other two are a bit more nuanced and involve a two-part analysis.

Test Two: The second eligibility test has the threshold requirement that: “The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount of more than $100,000).” The instructions do not provide information on how to calculate whether this initial requirement is met, but the reference to “any employee” shows that the potential for disqualification based on this point is significant.

The additional prong of the second test requires the borrower to certify that it did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period. This second part appears to be the most burdensome of the three tests, particularly for borrowers that are not electing to use the original 8-week forgiveness period as the Covered Period.

Borrowers using the 24-week Covered Period would essentially have to maintain overall employment levels and “average paid hours” for the entirety of 2020. Neither the instructions nor the EZ Forgiveness Application provides a formula for the “average paid hours” calculation. Borrowers that elect to qualify under the second test must submit documentation of the average number of full-time equivalent (“FTE”) employees employed on January 1, 2020 and at the end of the Covered Period. The EZ Forgiveness Application instructions state that the borrower should not submit the checklist. The EZ Forgiveness Application also does not include any field asking the borrower to indicate which test is selected—this information is captured in the borrower certifications of the EZ Forgiveness Application.

Test Three: The third test is by far the broadest category for determining borrower eligibility to use the EZ Forgiveness Application. The third test has the same initial requirement as the second test, i.e., no reduction of employee salary or hours by more than twenty-five percent. The second part of the third test provides that the borrower “was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020, and December 31, 2020 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, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.”

By referencing COVID-19 safety guidance, borrowers have broad discretion for determining whether they qualify based on this prong of the third test of eligibility. A borrower can submit the EZ Forgiveness Application provided it can, in good faith, certify that it could not operate at the same level of business activity during the Covered Period as before February 15, 2020. The instructions clarify that the EZ Forgiveness Application can be completed and submitted electronically, which presumably includes the required supporting documentation. One thing that is certainly not “EZ” about the EZ Forgiveness Application is the amount of documentation that borrowers must submit to lenders and the lender’s burden of review.

The only documentation that borrowers submitting the EZ Forgiveness Application do not have to provide compared to the original Forgiveness Application is documentation showing the average number of FTE employees. Borrowers are still required to submit significant documentation verifying eligible payroll and non-payroll expenses. The documentation requirements are detailed on page four of the instructions and also outline the substantial amount of documentation that borrowers must maintain, but are not required to submit.

As has been the case with the previous forgiveness application requirements, borrowers must retain all documentation related to the PPP loan and the borrower certifications for a period of six years after the date the loan is forgiven or repaid in full and permit authorized representatives of the SBA to access such files upon request. The application did not reduce the burden on lenders, and lenders must still review all supporting documentation in good faith.

The “Covered Period” is either: (1) the 24-week (168-day) period beginning on the PPP loan disbursement date, or (2) if the borrower received its PPP loan before June 5, 2020, the borrower may elect to use an 8-week (56-day) Covered Period. Maintaining the safe harbors from the June 2, 2020, interim final rule on forgiveness, borrowers can ignore reductions that arose from an inability to rehire individuals if the borrower was unable to hire similarly qualified individuals for unfilled positions on or before December 31, 2020, and can also ignore reductions in an employee’s hours that the borrower offered to restore and the employee refused.

Major Components of the EZ Forgiveness Application

The EZ Forgiveness Application itself contains only one page on which the borrower has to enter any specific information. The second page consists of the borrower certifications and the third page is the optional borrower demographic information form. Borrowers have to include the number of employees at the time of loan application, as well as, the number of employees at the time of the forgiveness application and are required to submit supporting documentation along with the application. The EZ Forgiveness Application also asks borrowers to enter any EIDL Advance Amounts received, as well as, the EIDL Application Number, which can be left blank if not applicable.

If the borrower, together with its affiliates, received PPP loans in excess of $2 million, they must check the box above the forgiveness amount calculation. This will presumably filter certain applications into a separate category for the SBA to audit. Borrowers should take steps designed to ensure that they are aware of the complex affiliation rules that apply even though the SBA has provided very little guidance on the affiliation rules in an easy to understand format. Borrowers must enter the total eligible payroll costs incurred or paid during the Covered Period, as well as, employee benefits and owner compensation.

Borrowers will also enter the total amount of eligible business mortgage interest paid or incurred for any business mortgage obligation on real or personal property, rent or lease payments paid or incurred for real or personal property, and the amount of business utility payments paid or incurred during the Covered Period—all of which must have been for obligations that existed before February 15, 2020. The instructions clarify that a borrower does not have to report any non-payroll expenses that the borrower does not want to include in the forgiveness amount.

As established by the PPP Flexibility Act and clarified by the SBA in the interim final rule last week, borrowers are expected to spend 60% of the PPP loan amount on eligible payroll costs and will receive reduced forgiveness for falling below the 60% threshold. The ultimate forgiveness amount is the smaller of: (1) eligible payroll expenses, mortgage interest expenses, business rent or lease payments, and business utility payments; (2) the PPP loan amount; or (3) payroll costs divided by 60%.

The second page of the EZ Forgiveness Application contains a long list of borrower representations and certifications. Borrowers are required to certify that they have provided accurate information, the funds were used for authorized purposes, they did not reduce salaries or hourly wages by more than 25% during the covered period, they have accurately verified the payment information, they have submitted all required documentation to the lender, all information is true and correct in all material respects, and that they understand the SBA may request additional information (among various additional certifications that include acknowledging the significant penalties for knowingly making false statements).

Ultimately, the failure to provide the SBA with additional requested information may result in a determination that the borrower was ineligible for the PPP loan or a denial of the forgiveness request. Borrowers have to certify that they either did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period (subject to the safe harbors) or were unable to operate between February 15, 2020 and the end of the Covered Period due to compliance with federal requirements or guidance related to COVID-19 in order to be eligible to use the EZ Forgiveness Application.

The third page of the EZ Forgiveness Application is the optional demographic information form that asks for information of the “Principal” with respect to veteran status, gender, race, and ethnicity.

Other Notable Items

As referenced above, one meaningful piece of relief that the EZ Forgiveness Application fails to provide is related to documentation. Regardless of the forgiveness application borrowers submit, they are still formally required to submit significant supporting documentation verifying the eligible payroll and non-payroll expenses. This will not only be burdensome on borrowers but also on the lenders that have to review this information in good faith and submit this information electronically to the SBA.

Lawmakers, industry trade groups, lenders and borrowers are still urging the SBA and Treasury to issue blanket forgiveness for loans under a certain dollar amount. So far, the SBA and Treasury have not hinted that this is a viable possibility, but it should be noted that such an action is within their authority without the need for additional Congressional action.

Most Recent EZ Loan Forgiveness Application and Instructions

Next Steps

We are designing a system internally based upon the current guidance described in this document to support and streamline the processing of Forgiveness Applications at Freedom Bank. We will largely rely on our talented team to work with you during this process, but we will be rolling out a worksheet and secure portal to facilitate the process.

While we certainly appreciate your desire to obtain forgiveness as soon as practicable, you should carefully follow the available guidance and only submit your Forgiveness Application when it is complete and you have assembled and organized all of the necessary supporting information. Submitting an incomplete application with unsupported entries will only delay the decision process which would be counterproductive for all involved. Again, we anticipate rolling out the secure portal shortly to each of the bank’s PPP borrowers. This will facilitate the orderly processing of your application. Therefore, in the interim, we encourage you to prepare for the forgiveness process by gathering all of the required information associated with requirements outlined above and in the links provided.

We will continue to monitor official SBA guidance and provide you with any material updates to help you during this evolving government process. If you have any questions in the interim, please contact your Relationship Manager at Freedom Bank.

Please Note: E-mail is not a secure form of communication. Please do not send any confidential information using this form. This includes account numbers, social security numbers and password or PIN information.

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