United States: Congress Enacts Additional Modifications To Paycheck Protection Program And Loan Forgiveness; Program Extended To Aug. 8

This alert has been updated as of Aug. 19, 2020, to reflect, the interim final rule released by the Small Business Administration (SBA) on Aug. 11, addressing the process for appeals of SBA loan review decisions under the Paycheck Protection Program (PPP).

On June 5, the president signed into law the PPP Flexibility Act, which amends key portions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and Small Business Act in order to provide PPP loan recipients with more flexibility and extend the period during which loan proceeds spent on permitted uses will be eligible for forgiveness. The text of the PPP Flexibility Act can be found here. On June 11, the SBA issued an interim final rule, which can be found here, that revises the SBA's interim final rule released on April 2 to implement certain modifications to the PPP pursuant to the PPP Flexibility Act. On June 22, the SBA issued an interim final rule, which can be found here, that revises the SBA's interim final rule on loan forgiveness and the SBA's interim final rule on SBA loan review procedures, both released on May 22, to implement certain additional modifications to the PPP pursuant to the PPP Flexibility Act. On June 16, the SBA released the Revised Forgiveness Application and the EZ Forgiveness Application, each with its own set of instructions, which can be found here. Additionally, on July 4, the president signed into law S.4116 — a bill which, among other things, extends the deadline for new PPP loan origination from June 30 to Aug. 8. On Aug. 11, the SBA released a new interim final rule addressing the process for appeals of certain SBA loan review decisions. This alert sets out a summary of the material changes to the PPP made by the PPP Flexibility Act, the June 11 and June 22 interim final rules, and the Revised Forgiveness Application and the EZ Forgiveness Application. This alert also summarizes the SBA loan review appeals process, as set forth in the Aug. 11 interim final rule, available here. In parallel with this alert, we have updated our infographic tool summarizing the key elements of the PPP loan forgiveness process and components, which can be found here, to reflect the modifications enacted by the PPP Flexibility Act.

Prospective borrowers should continue to consult the SBA and Treasury Department websites regularly to track new content and revisions to previously released guidance.

Our previous alerts issued in connection with the financial assistance programs available under the CARES Act are collected and published in the Kramer Levin COVID-19 Legal Resource Guide found here: COVID-19 Legal Resource Guide.

Overview

• PPP Extension: New loan origination under the PPP has been extended from June 30 to Aug. 8. According to media reports, the PPP was set to expire on June 30 with approximately $130 billion remaining for new loan disbursements. The end date of the PPP, during which time borrowers may spend their loan proceeds on allowable uses, has also been extended from June 30 to Dec. 31.
  
  
• Extension of PPP Maturity: The maturity date for PPP loans has been extended from two years to a minimum of five years for all PPP loans assigned an SBA loan number on or after June 5. For PPP loans outstanding as of June 5, the maturity date may be extended from two years to up to five years only upon the mutual agreement of the borrower and lender.
  
  
• Covered Period for Forgiveness: The "covered period" used for purposes of both calculating forgivable payroll costs and nonpayroll costs and determining reductions to loan forgiveness amounts due to reductions in employee salary/wages and/or full-time equivalent (FTE) employee levels (Forgiveness Covered Period) has been extended from the eight-week period following the origination of a borrower's PPP loan to the earlier of (i) 24 weeks from the date of loan origination or (ii) Dec. 31. For PPP loans outstanding as of June 5, the borrower may still choose to use the eight-week period beginning on the date of origination of its PPP loan as its Forgiveness Covered Period. In addition, borrowers with biweekly (or more frequent) payroll cycles may alternatively elect to seek forgiveness for payroll costs for the applicable covered period (whether it is an eight-week covered period or a 24-week covered period) beginning on the first day of the first payroll cycle in their covered period (alternative payroll covered period). The application of an alternative covered period aligns with the SBA's previous guidance, which we discussed in further detail here.
  
  
• Use of Proceeds: The maximum amount of its loan proceeds that a borrower may use on nonpayroll costs (mortgage interest, rent and utilities) and remain eligible for full forgiveness has increased from 25 to 40 percent. The June 22 interim final rule adjusted the caps on the amount of compensation of owner-employees and self-employed individuals that is eligible for loan forgiveness to reflect the new 24-week covered period and to make certain other clarifications. 
  
  
• Forgiveness Reduction Safe Harbors: The measurement date before which borrowers must restore a reduction in salary/wages and/or FTE employee levels in order to avoid reductions to their forgiveness amount has been extended from June 30 to Dec. 31.
  
  
• Exception to FTE Employee Reduction to Forgiveness Amount: The PPP Flexibility Act creates and modifies exceptions and safe harbors, and supersedes certain prior guidance, regarding reductions in employee headcount for purposes of reducing a borrower's forgiveness amount. As denoted in the Revised Forgiveness Application, and clarified by the June 22 interim final rule, there are two safe harbors that exempt certain borrowers from loan forgiveness reductions based on a reduction in FTE employee levels: (1) "FTE Reduction Safe Harbor 1" — providing that a borrower will not be penalized if its employee headcount reductions were due to the borrower's inability to operate at the same level of business activity due to both direct and "indirect" compliance with federally mandated COVID-19 employee and customer safety requirements, and (2) "FTE Reduction Safe Harbor 2" — providing that a borrower will not be penalized if it restores reductions in FTE employee headcount that occurred between Feb. 15 and April 26 by the earlier of (a) the date its forgiveness application is submitted or (b) Dec. 31. These revised safe harbors are in addition to the following exceptions to FTE employee reduction, as modified by the latest interim final rules, permitting the borrower to disregard such reductions in headcount for purposes of calculating its forgiveness amount: (1) if an employee rejects a borrower's good-faith, written offer to restore the reduced hours of such employee (at the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the reduction in hours), and the borrower maintains records documenting the offer and its rejection; (2) if (a) a borrower can document an inability to rehire an employee that was employed by the borrower on Feb. 15 and (b) the borrower is unable to hire similarly qualified employees on or before Dec. 31; or (3) any employees who, during a borrower's Forgiveness Covered Period (a) are fired for cause, (b) voluntarily resign, or (c) voluntarily request and receive a reduction of their hours. 
  
  
• Deferral of PPP Loan Payments: The deferral of debt service payments on a PPP loan has been extended from six months to the date that the lender receives the forgiveness amount from the SBA as determined for such loan. If a borrower does not apply for loan forgiveness within ten months of the last day of its Forgiveness Covered Period, then such borrower must begin making payments of loan principal, interest and fees starting on such ten-month anniversary of the last day of its Forgiveness Covered Period. In such event, the lender must notify the borrower of the date that its first debt service payment is due. 
  
  
• Deferral of Employer Payroll Taxes: Borrowers that receive PPP loan forgiveness are no longer prohibited from also deferring payment of their employer payroll taxes for the period beginning on March 27 (the date of the enactment of the CARES Act) and ending before Jan. 1, 2021, as provided in Section 2302 of the CARES Act. 
  
  
• Applying for Forgiveness Prior to End of Covered Period: As clarified by the June 22 interim final rule, PPP borrowers may apply for loan forgiveness at any time prior to loan maturity — including before the end of their Forgiveness Covered Period — as long as the borrower has used all the loan proceeds for which it is requesting forgiveness. However, failure by a PPP borrower to apply for forgiveness within ten months of the end of its Forgiveness Covered Period will result in a loss of debt service deferral as described above. 
  
  
• Revised Forgiveness Application and a New EZ Forgiveness Application: On June 16, the SBA released the Revised Forgiveness Application and corresponding instructions to implement certain changes derived from the PPP Flexibility Act and previous SBA guidance. In addition, the SBA released the simplified EZ Forgiveness Application, with corresponding instructions, that is available only to a specific subset of borrowers that either have no employees or are able to certify that they did not make reductions to salary or employee levels during their Forgiveness Covered Period, thereby eliminating the need for the calculations to determine the extent of such reductions in the long-form forgiveness application.
  
  
• Disclosure of Borrower Names: On July 6, the SBA and the Treasury Department released, among other data points, the names of all borrowers of PPP loans in excess of $150,000.
  
  
• SBA Loan Review Appeals Process: As provided by the Aug. 11 interim final rule, the SBA implemented the process for appealing SBA loan decisions to the Office of Hearings and Appeals (OHA) for borrowers of PPP loans whom the SBA found to be ineligible for PPP loans or PPP loan forgiveness (in whole or in part) or where the SBA determined that the borrower used the PPP loan proceeds for unauthorized uses.

The PPP Flexibility Act and New Interim Final Rules

Extension of the PPP

The PPP Flexibility Act extends the general covered period for the PPP from June 30 to Dec. 31. The "Congressional Intent for H.R. 7010," released in conjunction with the PPP Flexibility Act, provides that the intention of this extension "is to allow borrowers who received PPP loans before June 30 to continue to make expenditures for allowable uses" until Dec. 31. On July 4, the president's signing into law of S.4116 extended new loan origination under the PPP to Aug. 8. According to media reports, at the time the PPP was set to expire, approximately $130 billion remained in the program for new loan disbursements.

Amendments to PPP Loan Forgiveness Determination

The PPP Flexibility Act provides several amendments to the PPP loan forgiveness section (Section 1106) of the CARES Act, and the June 22 interim final rule and Revised Forgiveness Application provide further clarification.

• Use of Proceeds: A borrower's Forgiveness Covered Period, during which time loan proceeds spent on eligible payroll and nonpayroll costs are eligible for forgiveness, has been extended from the eight weeks following the origination of a borrower's PPP loan to the period from the loan origination date until the earlier of (i) 24 weeks from the date of loan origination or (ii) Dec. 31. However, borrowers that received their PPP loan prior to June 5 may still elect to use as their Forgiveness Covered Period the original eight-week period beginning on the date of disbursement of their PPP loan by applying for forgiveness and indicating an eight-week covered period on their loan forgiveness application. The June 22 interim final rule and the Revised Forgiveness Application clarify that, in addition to those PPP borrowers electing to use an eight-week Forgiveness Covered Period, PPP borrowers that utilize a 24-week Forgiveness Covered Period and have a biweekly (or more frequent) payroll schedule may opt to use an "alternative payroll covered period" and calculate eligible payroll costs beginning on the first day of their first pay period following disbursement of their PPP loan (the alternative payroll covered period).

• PPP Loan Forgiveness Reductions and Related Safe Harbors: With the general extension of the Forgiveness Covered Period from the loan origination date until the date which is the earlier of (i) 24 weeks from the date of loan origination or (ii) Dec. 31, such extended period will also apply for purposes of determining any reductions to a borrower's forgiveness amount for reductions in average FTE employee headcount against the prior "baseline" period and reductions in salaries or wages. In addition, for purposes of determining eligibility for the applicable safe harbors preventing reductions to a borrower's forgiveness amount due to such salary/hourly wage and FTE employee reductions, the time period during which borrowers can restore salaries/hourly wages and/or FTE employee levels in order to avoid reductions in their forgiveness amount has been extended from June 30 to Dec. 31. As a result of this extension, regardless of when a borrower's eight-week or 24-week Forgiveness Covered Period takes place, such borrower will have until Dec. 31 to restore to Feb. 15 levels its FTE employee headcount or individual employee salary/wage levels in order to avoid a reduction to its forgiveness amount. As such, it may be prudent for borrowers to consider plans to reestablish such levels prior to Dec. 31, if practicable, and wait to apply for forgiveness until after such date (keeping in mind that the PPP Flexibility Act sets a general outside date of ten months to apply for forgiveness without losing the benefit of debt service deferral).

• Timing of Application for Forgiveness: The June 22 interim final rule clarifies that a borrower may apply for loan forgiveness at any time before the maturity of its loan — including before the end of its Forgiveness Covered Period — if the borrower has used all the loan proceeds for which it is requesting forgiveness, regardless of whether the borrower utilizes an eight-week covered period or a 24-week covered period, subject to the loss of debt service deferral if such forgiveness application is not filed within ten months of the end of the Forgiveness Covered Period. It is worth noting that the June 22 interim final rule's flexibility on applying for forgiveness prior to the end of a borrower's Forgiveness Covered Period is not contained in the PPP Flexibility Act, which explicitly included that the Forgiveness Covered Period is either 24 weeks or eight weeks, and that the June 22 interim final rule only partially addresses the wrinkles that applying for early forgiveness presents. With respect to salary reductions during a borrower's Forgiveness Covered Period, the June 22 interim final rule provides that a borrower that applies for forgiveness before the end of its Forgiveness Covered Period and has previously reduced any employee's salaries or wages in excess of 25 percent during the Forgiveness Covered Period must account for the salary reduction for its full Forgiveness Covered Period, not just for the portion of its Forgiveness Covered Period that occurred prior to the time that it applied for forgiveness. Borrowers that anticipate future pay cuts may take advantage of this rule by filing for forgiveness early to "lock in" its current pay levels; conversely, if a borrower foresees raises in the near future, it can delay filing for forgiveness so that such raises can be taken into account during the full Forgiveness Covered Period and reduce its penalty due to any current pay reductions. However, the June 22 interim final rule does not expressly state whether the calculation of FTE employees for the purpose of reduction to forgiveness amount ends as of the earlier application for forgiveness as opposed to continuing for the remainder of the Forgiveness Covered Period notwithstanding an earlier application for forgiveness; however, the Revised Forgiveness Application does not suggest an ability to update the FTE employee calculations following submission of the application to the lender, suggesting that the calculation of FTE employee headcount is made with respect to the Forgiveness Covered Period ending at the time the borrower submits its application for forgiveness. By electing to apply for loan forgiveness prior to the end of its Forgiveness Covered Period, a borrower essentially waives its ability to take full advance of the FTE Reduction Safe Harbor 2 extension to Dec. 31.

Extension of PPP Loan Maturity Date

While the original text of the CARES Act only provided that PPP loans have a maximum maturity of up to ten years from the date the borrower applies for loan forgiveness, subsequent SBA guidance, found here, provided that the maturity for PPP loans would be set at two years. The PPP Flexibility Act now provides that the maturity date for PPP loans with a remaining balance after application of loan forgiveness will be extended from two years to a minimum of five years. This new minimum maturity date will apply to all PPP loans assigned an SBA loan number on or after June 5. For PPP loans outstanding prior to June 5, the PPP Flexibility Act provides, and the June 11 interim final rule clarifies, that existing borrowers and lenders may mutually agree to modify the current two-year maturity date, including possibly extending the maturity date to up to five years. 

Extension of the Deferral Period for PPP Loan Payment

Under the original text of the CARES Act, borrowers were permitted to defer their debt service payments for six months from receipt of their PPP loan proceeds. The PPP Flexibility Act replaces this six-month deferral period with a period ending on the date that a lender receives the forgiveness amount from the SBA following determination of the particular borrower's loan forgiveness amount. Once that information is received, the lender must notify the borrower of remittance by the SBA of the loan forgiveness amount (or notify the borrower that the SBA determined that no loan forgiveness is allowed) and of the date that its first loan service payment is due (as the deferral period will be ending). However, if a borrower does not apply for loan forgiveness within ten months of the last day of its Forgiveness Covered Period, then such borrower forfeits its deferral and must begin making payments of loan principal, interest and fees starting on such ten-month anniversary of the last day of its Forgiveness Covered Period.

Deferral of Employer Payroll Taxes

Pursuant to Section 2302(a)(3) of the CARES Act, borrowers that have their PPP loans forgiven are prohibited from also deferring payment of employer payroll taxes for the period beginning on March 27 (the date of the enactment of the CARES Act) and ending before Jan. 1, 2021, until Dec. 31, 2021, for half the amount of such employment taxes, and Dec. 31, 2022, for the remaining amount of such employment taxes, as otherwise generally provided in Section 2302. The PPP Flexibility Act removes this prohibition; as such, PPP borrowers whose loans are forgiven in part or in full will now be eligible to defer their employer payroll taxes in accordance with the general provisions of Section 2302. The PPP Flexibility Act makes this amendment effective as of March 27. 

Revised Forgiveness Application and a New EZ Forgiveness Application

On June 16, the SBA replaced the original PPP loan forgiveness form with an updated version that largely reflects modifications implementing the PPP Flexibility Act and new SBA guidance and streamlines the application by providing for separate instructions, but otherwise keeps the form largely unchanged. It is worth noting that the Revised Forgiveness Application provides the clarification that reinstatement of FTE or salary/wage reductions can be made by either Dec. 31 or the date of submission of the Revised Forgiveness Application (if earlier). In addition, the SBA released the EZ Forgiveness Application that provides a shortened and simplified version of the long-form Revised Forgiveness Application for borrowers that can certify they meet one of the following requirements for use of EZ Forgiveness Application:

1. Such borrower is a self-employed individual, independent contractor or sole proprietor who had no employees at the time of its PPP loan application and did not include any employee salaries in the computation of its average monthly payroll in its PPP loan application.
   
   
2. Such borrower did not reduce annual salary or hourly wages of any employee (who earned less than $100,000 on an annualized basis in 2019) by more than 25 percent during its Forgiveness Covered Period as compared to the period between Jan. 1 and March 31 and did not make any FTE employee or salary reductions between Jan. 1 and the end of its Forgiveness Covered Period, subject to the FTE employee exceptions noted above.
   
   
3. Such borrower did not reduce annual salary or hourly wages of any employee (who earned less than $100,000 on an annualized basis in 2019) by more than 25 percent during its Forgiveness Covered Period as compared to the period between Jan. 1 and March 31 and was unable to operate during its Forgiveness Covered Period at the same level of business activity as before Feb. 15 due to compliance with requirements established or guidance issued between March 1 and Dec. 31 by the secretary of HHS, the director of the CDC or OSHA related to both direct and indirect compliance with federal, state or local COVID-19 requirements or guidance.

Since use of the EZ Forgiveness Application is limited to applicants that did not reduce wages or reduce employee headcount, or were otherwise subject to an applicable safe harbor, the complex loan forgiveness reduction formulas included in the Revised Forgiveness Application do not apply and have been removed from the EZ Forgiveness Application. However, borrowers using the EZ Forgiveness Application must retain documentation supporting their certifications, which may be requested by the SBA at any time to the same extent as if using the long-form forgiveness application.

Disclosure of Names of PPP Borrowers

Though not part of the PPP Flexibility Act or included in an SBA interim final rule, the SBA and the Treasury Department issued a press release on July 6 announcing the disclosure of certain limited data about the recipients of PPP loans, which is available here. Specifically, for loans over $150,000, the SBA disclosed the business names, addresses, NAICS codes, ZIP codes, business type, demographic data, nonprofit information, jobs supported, and loan amounts of borrowers, with such loan amounts disclosed in ranges as follows: 

$150,000 – $350,000
$350,000 – $1 million
$1 million – $2 million
$2 million – $5 million
$5 million – $10 million 

For loans below $150,000, the SBA released only the total number of loans, aggregated by ZIP code, industry, business type and various demographic categories.

SBA Loan Review Appeals Process

The Aug.11 interim final rule enacts the new rules for appealing to the OHA a final SBA loan review decision relating to the PPP after the SBA has completed a review of a PPP loan and has found that a borrower:

1. Was ineligible for a PPP loan
   
   
2. Was ineligible for the PPP loan amount received or used the PPP loan proceeds for unauthorized uses
   
   
3. Is ineligible for PPP loan forgiveness in the amount determined by the lender in its full or partial approval decision issued to SBA (except for the deduction of any Economic Injury Disaster Loan advance in accordance with section 1110(e)(6) of the CARES Act); and/or
   
   
4. Is ineligible for PPP loan forgiveness in any amount when the lender has issued a full denial decision to SBA

This OHA appeals process is limited only to final SBA loan review decisions, and does not apply to any decision made by a lender or SBA determinations with respect to the size of the borrower determined using NAICS code designations for purposes of satisfying the size of borrower test; a borrower can request that the SBA review a lender decision to deny loan forgiveness on the basis of the borrower's not satisfying the SBA size test but cannot submit an OHA appeal on that basis. Additionally, any decision made by the SBA's Office of Inspector General related to a PPP loan is not appealable to the OHA.

Only the borrower of a PPP loan for which a final SBA loan review decision has been issued may appeal such decision to the OHA. Individual owners of a borrower and lenders of a PPP loan do not have standing to appeal an SBA loan review decision to the OHA.

An appeal of an SBA loan review decision will not extend the general loan service deferral period. A borrower who appeals an SBA loan review decision must begin making payments of principal and interest on the remaining balance of the PPP loan at the end of the loan payment deferral period or when the SBA remits the forgiveness amount to the PPP lender.

In order to commence an appeal, the borrower must file an appeal petition with the OHA within 30 calendar days after the earliest of (i) the borrower's receipt of the final SBA loan review decision, or (ii) notification by the lender of the final SBA loan review decision.

An appeal petition must include the following information:

1. The basis for OHA's jurisdiction, including, but not limited to, evidence that the appeal is timely filed in accordance with 13 CFR 134.1204
   
   
2. A copy of the SBA loan review decision that is being appealed, or a description of that decision if a copy is unavailable
   
   
3. A full and specific statement as to why the SBA loan review decision is alleged to be erroneous, together with all factual information and legal arguments supporting the allegations
   
   
4. The relief being sought
   
   
5. Signed copies of payroll tax filings actually reported to the Internal Revenue Service (IRS), and state quarterly business and individual employee wage reporting and unemployment insurance tax filings actually reported to the relevant state, for the relevant periods of time, if not provided with the PPP Loan Forgiveness Application (SBA Form 3508, SBA Form 3508EZ, or lender's equivalent), or an explanation as to why they are not relevant or not available
   
   
6. Signed copies of applicable federal tax returns actually filed with the IRS with appropriate schedules (e.g., IRS Form 1040 with Schedule C/F) documenting income for self-employed individuals or partners in a partnership, if not provided with the PPP Borrower Application Form (SBA Form 2483 or lender's equivalent), or an explanation as to why they are not relevant or not available; and
   
   
7. The name, address, telephone number, email address and signature of the appellant or its attorney

A copy of the appeal petition (with all attachments) must be served upon the Associate General Counsel for Litigation along with a signed certificate of service pursuant to 13 CFR 134.204(d). An incomplete petition may be dismissed (with or without prejudice) by the Judge or upon a motion of the SBA.

The OHA will assign each appeal petition to an Administrative Law Judge or an Administrative Judge, who will issue a notice and order establishing a deadline for the production of the administrative record and the close of the administrative record. The administrative record will contain documents that the SBA used in making its final loan review decision (or that were before the SBA at the time of the decision) but it will not necessarily contain all documents relating to the borrower. Discovery will be permitted only if the Judge determines that the SBA has, upon written submission, made a showing of good cause for discovery. The administrative record will be due 20 calendar days after the issuance of the notice and order (unless additional time is requested and granted) and the record will close 45 calendar days from the date of the OHA's receipt of the appeal (unless additional time is requested and granted). Appeals will be decided based on a review of the written administrative record, the appeal petition, any responses (only the SBA may respond to an appeal), any admitted evidence, and the oral hearing (if one is held).

During the pendency of an appeal, the parties may submit a joint motion requesting that the Judge allow the use of alternative dispute resolution. If the motion is granted, the proceedings before the OHA will be stayed (in whole or in part) pending the outcome of the alternative dispute resolution.

The decision of the Judge will be issued within 45 days after the close of record, as practicable. In the appeal, the borrower will have the burden of proof, by a preponderance of the evidence, that the SBA loan review decision was "based on a clear error of fact or law." The Judge's decision on appeal is considered an initial decision and after 30 calendar days, such initial decision will become the final decision of the SBA unless a request for review or a request for reconsideration is filed. A Judge sua sponte may reconsider a decision within 20 calendar days after service of the written decision.

The OHA may affirm, reverse or remand an SBA loan decision. A borrower who prevails on an SBA loan decision appeal is not entitled to recover attorney's fees.

OHA decisions are posted without redactions to the OHA's website unless a party requests a redacted public decision or obtains a protective order. OHA decisions may otherwise contain confidential business and financial information and personally identifiable information where such information is relevant to the decision or necessary to provide a clear and understandable decision.

The IFR further provides that determinations of the Judge are subject to appeal submitted to the SBA administrator. The final decision of the administrator is deemed a final decision of the SBA, appealable to the federal district court. Any party or the SBA's Office of General Counsel may, within 30 days after the service of an initial decision or a reconsidered decision, file and serve a request for review by the administrator.

Certain information contained in filings or submissions related to an OHA appeal will not be available to the public pursuant to the Freedom of Information Act, including: confidential business and financial information; personally identifiable information; source selection sensitive information; income tax returns; documents and information covered under 13 CFR 120.1060; or any other exempt information. Additionally, the SBA or the borrower filing the appeal may request a protective order over any document or information exchanged in discovery or filed pursuant to the appeal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.