Congress Revises Paycheck Protection Program to Assist Borrowers

Update: Late on June 10, Treasury and SBA issued Interim Final Rule on Revisions to First Interim Final Rule (6/10/2020). This guidance updates earlier guidance to reflect the basics of the Paycheck Protection Program Flexibility Act. On June 8, Treasury and SBA  issued a statement saying, "If a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs." Guidance should be forthcoming.

Update: The President signed this bill into law on June 5, 2020.

On the evening of June 3, 2020, the Senate passed, via unanimous consent, the Paycheck Protection Program Flexibility Act of 2020, H.R. 7010. The bill had passed the House by a vote of 417-1 on May 28, 2020. Once signed by the President, this Act will modify the Paycheck Protection Program (PPP) to make it more borrower friendly.

• Extending the minimum maturity date for loans that are not forgiven to a term of five years (up from two years set by regulation).
  • Note: This provision applies only to loans made on or after the date the Act is enacted, but lenders and borrowers can mutually agree to modify the terms of any loans.

• Extending the end of the “covered period” for PPP loans from June 30, 2020, to December 31, 2020.
  • Note: This language could be interpreted to allow PPP loans to be issued through December 31, 2020. It appears that before he would give consent, Senator Johnson requested a letter be placed into the record stating that Congress created the extension to allow borrowers to spend PPP loan proceeds through December 31, 2020, not to reauthorize the program through the end of the year.

• Extending the loan forgiveness “covered period” from 8 weeks to 24 weeks, with the end of the covered period expiring, at the latest, by December 31, 2020 (instead of June 30, 2020).
  • Note: Although this provision applies to all borrowers, a borrower who received a loan prior to the date of enactment of this Act can choose to have the 8-week forgiveness period apply. It is unclear how SBA and Treasury will modify its owner compensation guidance in response to this new law. Also in question is the current employee compensation cap set at $15,385 per employee.

• Extending the rehire and salary restoration safe harbor date (so loan forgiveness will not be reduced) from June 30, 2020, to December 31, 2020.  

• Exempting employers from a reduction in forgiveness due to a reduction in their full-time equivalent workforce if the following requirements are met:
  • The employer is able to document:
    • an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and
      • an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; OR
  • The employer is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or federal guidance 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.

• Requiring that borrowers use 60 percent of the covered loan amount for payroll expenses to qualify for forgiveness. Forty percent of the loan amount may be used for interest on covered mortgage obligations, covered rent obligations, or covered utility obligations.
  • Note: The CARES Act did not include a requirement that a certain percentage of loan proceeds be spent on payroll. Treasury and SBA, however, issued guidance setting the requirement that borrowers use 75 percent of the loan amount for payroll costs. The Act makes it easier to receive forgiveness on one hand by allowing up to 40 percent of the loan amount to be used for non-payroll expenses. This requirement, as written, however, appears to be a cliff. If the recipient does not use at least 60 percent of the loan amount for payroll, there will be no forgiveness at all. (Note: Treasury has issued a statement that they will allow proportional forgiveness, even if payroll expenses are less than 60 percent)

• Revising the deferral period for PPP loans, allowing recipients to defer payments until the lender receives compensation for the forgiven amounts. Recipients who do not apply for forgiveness will have 10 months from the end of the forgiveness covered period to begin making payments.

• Allowing recipients who receive PPP loan forgiveness to also defer their payroll taxes (6.2 percent employer portion of social security payroll taxes) under section 2302 of the CARES Act. The CARES Act had restricted PPP borrowers from deferring these taxes once they received PPP loan forgiveness.

Except for the five-year loan term provision, all changes apply as though they were part of the original CARES Act.

What’s Next?

Once this law is enacted, the SBA and Treasury will revise the forgiveness application and guidance to incorporate these new provisions. We also expect a number of additional Frequently Asked Questions to further explain these provisions, as well as other still unresolved questions relating to forgiveness. As of May 30, just under $149 billion in PPP funding remained available.

Many Senators were concerned that this law will have unintended consequences. Even so, they agreed to support the bill, realizing it was the only way to quickly enact important changes in time to be of use to borrowers. It appears that Congress may address unresolved issues in the weeks ahead. The provision of greatest concern is the 60 percent “cliff” addressed above. A number of lawmakers also want expenses paid with PPP proceeds to be deductible, and bankers and business groups have argued for blanket forgiveness for loans under a certain dollar amount.

Stay tuned for further guidance and legislative developments.