The Small Business Administration (“SBA”) has issued an Interim Final Rule that provides further guidance on the Paycheck Protection Program (“PPP”), which will provide up to $349 billion in fully forgivable loans to assist small businesses if they maintain payrolls during the COVID-19 pandemic. The SBA confirms that all SBA-certified lenders will be given delegated authority to issue loans under the PPP. In addition, the Secretary and SBA have identified additional lenders who are authorized to issue loans under the PPP including any federally insured depositary institution or any federally insured credit union (unless they are designated in Troubled Condition by their primary federal regulator).
Notable for lenders, the Interim Final Rule provides that the required underwriting criteria is as follows: (1) the lender must confirm receipt of borrower certifications in the Paycheck Protection Program Application form; (2) a lender will need to verify that a borrower was in operation on February 15, 2020; (3) the lender will need to verify that a borrower had employees for whom the borrower paid salaries and payroll taxes; (4) the lender will need to verify the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing payroll documentation submitted with the borrower’s application; and (5) the lender will need to follow applicable Bank Secrecy Act requirements. The Bank Secrecy Act (“BSA”), in turn, includes obligations for a lender to: (a) establish effective BSA compliance programs; (b) establish effective customer due diligence systems and monitoring programs; (c) screen against Office of Foreign Assets Control and other government lists; (d) establish an effective suspicious activity monitoring and reporting process; and (e) develop risk-based anti-money laundering programs. The Interim Rule notes that federally insured depository institutions and federally insured credit unions should continue to follow their existing BSA protocols when making PPP loans to either new or existing customers.
A lender will not be required to apply the “credit elsewhere test” as part of its underwriting criteria.
Critically, the Interim Rule states that “[e]ach lender’s underwriting obligations under the PPP is limited to the items above [e.g. items 1-5 of the underwriting criteria identified above] and reviewing the ‘Paycheck Protection Application Form.'”
However, lenders will need to ensure that borrowers submit documentation as necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have such documentation, the borrower must provide bank records that are sufficient to demonstrate the qualifying payroll amount.
With respect to loan forgiveness, the Interim Rule explains that a lender will not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs. A lender will be held harmless if it relies on such borrower documents and an attestation from the borrower.
To receive reimbursement of the forgiven amount of the loan, a lender may request that the SBA purchase the expected forgiveness amount of a PPP loan or pool of PPP loans at the end of week seven of the covered period. The expected forgiveness amount is the amount of loan principal the lender reasonably expects the borrower to expend on payroll costs, covered mortgage interest, covered rent, and covered utility payments during the eight week period after loan disbursement. The lender will need to submit a report to the SBA which includes the Paycheck Protection Program Application Form (SBA Form 2483) and any supporting documentation submitted with such application; the Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty (SBA Form 2484) and any supporting documentation; a detailed narrative explaining the assumptions used in determining the expected forgiveness amount, the basis for those assumptions, alternative assumptions considered, and why alternative assumptions were not used; any information obtained from the borrower since the loan was disbursed that the lender used to determine the expected forgiveness amount, which should include the same documentation required to apply for loan forgiveness such as payroll tax filings, cancelled checks, and other payment documentation; and any additional information the Administrator may require to determine whether the expected forgiveness amount is reasonable. The SBA will purchase the expected forgiveness amount within 15 days of the date on which it receives the complete report, which demonstrates that the amount of forgiveness is indeed reasonable.
The Interim Rule also confirms that lenders will be paid processing fees of 1% (for loans greater than $2 million), 3% (for loans greater than $350,000 but less than $2,000,000), or 5% (for loans of $350,000 and under). Of these fees, qualifying agents for the borrower can be paid 0.25% (for loans greater than $2 million), 0.50% (for loans greater than $350,000 but less than $2,000,000), or 1% (for loans $350,000 and under). The reimbursement of the processing fees will be made within 5 days of issuance of the covered loan. The SBA will not charge any guaranty fees, including upfront and annual serving fees.
While the amount of a loan can be for up to two months of average monthly payroll costs from the last year plus an additional 50% of that amount (up to $10 million), an important modification is highlighted by the Interim Rule. Not more than 25% of the loan can be used for non-payroll costs. Indeed, “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.” The Interim Rule explains that the Administrator determined that the forgivable loan amount should be limited to effectuate the “core purpose” of the PPP.
The Interim Rule provides that all loans under the PPP will be fully guaranteed. In addition, the Interim Rule clarifies that the interest rate for all loans will be a 1.00% fixed rate and the loan will be due in two years if not forgiven. Any payments that may become due will be deferred for six months following the date of the loan, although interest will continue to accrue.
For the Interim Rule please click here.
Questions
Kronick attorneys across all of the firm’s practice groups – Public Agencies, Natural Resources, Labor & Employment, and Business/Healthcare – will continue to provide clients and the community with ongoing updates and advice regarding COVID-19 related issues as developments warrant. Please feel free to contact us for assistance with issues arising from the current health crisis.
Bruce Scheidt
bscheidt@kmtg.com | 916.321.4502
Gabriel Herrera
gherrera@kmtg.com | 916.321.4334