CARES Act Update: Small Business Administration Releases Paycheck Protection Program Regulations


On April 2, 2020, six days after the CARES Act was enacted, the Small Business Administration (“SBA”) released an interim final rule (the “Interim Final Rule”) implementing the Paycheck Protection Program (“PPP”). For an overview of the PPP sections of the CARES Act, see our previous alert, which is available here. Key provisions of the Interim Final Rule are discussed below, along with a brief discussion of the revised Borrower Application Form and related guidance from the Treasury Department and the SBA. Significantly, the Interim Final Rule states that the SBA also intends to promptly issue additional guidance regarding the applicability of its affiliation rules to PPP loans.[1]

The Interim Final Rule includes a number of substantive provisions that clarify or augment various sections of the CARES Act statute. Those key substantive provisions are outlined below. It appears that the Interim Final Rule was intended to be user-friendly and accessible to lay readers. A large portion of the document is organized into the following three sections: “What Do Borrowers Need to Know and Do?”; “What Do Lenders Need to Know and Do?”; and “What do Both Borrowers and Lenders Need to Know and Do?” The Interim Final Rule in those sections provides straightforward illustrations and explanations of various concepts and formulas set forth in the CARES Act statute. Although the Interim Final Rule will become effective immediately upon publication in the Federal Register, the SBA nevertheless is soliciting public comments on all aspects of the rule.

Key substantive provisions in the Interim Final Rule include the following:

500 Employee Limit. The Interim Final Rule provides that the 500 employee limit for PPP loan eligibility only counts employees “whose principal place of residence is in the United States.” This residency condition was not stated in the CARES Act statute.

Ineligibility Criteria. The Interim Final Rule lists certain factors that disqualify an otherwise eligible applicant from obtaining a PPP loan. These include, for example: (i) where an owner of at least 20 percent of the equity of the applicant is incarcerated, on probation, or on parole; is presently subject to certain criminal proceedings; or has been convicted of a felony within the past five years; or (ii) where the PPP loan applicant, or any business owned or controlled by the applicant or any of the applicant’s owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the previous seven years and caused a loss to the government.

Additionally, the Interim Final Rule clarifies that the types of ineligible businesses listed in 13 C.F.R. §120.110 apply in the context of PPP loans (except for the inclusion of nonprofits as a type of ineligible business).[2]

Independent Contractors for Purposes of PPP Loan Calculations. In contrast to the CARES Act statute, the Interim Final Rule specifies that independent contractors do not count as employees for purposes of PPP loan calculations, on the rationale that independent contractors are able to apply for a PPP loan on their own. This rule may be problematic for both (i) companies that engage independent contractors on a full-time basis, if such companies are unable to obtain funds to pay these independent contractors and (ii) the independent contractors themselves, as it may be difficult for them to certify a PPP loan’s necessity when such independent contractors will continue to be engaged on a full-time basis by a company.

Interest Rate. The Interim Final Rule specifies that the interest rate on all PPP loans will be 1 percent, notwithstanding that the CARES Act statute stated that the interest on a PPP loan could bear a maximum rate of 4 percent.  According to the SBA, this rate was fixed in consultation with the Treasury Department and was intended both (i) to provide “low cost funds to borrowers to meet eligible payroll costs and other eligible expenses” and (ii) to offer to lenders “an attractive interest rate relative to the cost of funding for comparable maturities.” In reaching that conclusion, the SBA noted that the 1 percent rate would be higher than both “the FDIC’s weekly national average rates for 24-month [CDs]” and “the yield on Treasury securities of comparable maturity” (which, for a Treasury two-year note, was approximately 23 basis points (0.23 percent) at the time of the Interim Final Rule’s release).

Maturity Date. The maturity date on all PPP loans will be two years, notwithstanding that the CARES Act statute stated that a loan could have a maximum maturity of up to ten years from the date the borrower applies for loan forgiveness. The Interim Final Rule states that the SBA, in consultation with the Treasury Department, determined that a two-year loan term would be sufficient in light of the expectation that COVID-19 “is expected to abate well before the two year maturity date such that borrowers will be able to re-commence business operations and pay off any outstanding balances on their PPP loans.”

“First-Come, First-Served” Basis. The Interim Final Rule states that the PPP loan program is on a “first-come, first-served” basis. This statement seems potentially to contrast with the statement in the CARES Act statute that: “It is the sense of the Senate that the [SBA] Administrator should issue guidance to lenders and agents to ensure that the processing and disbursement of covered loans prioritizes small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals . . . , women, and businesses in operation for less than 2 years.”

Deferment. The CARES Act statute specified that payments in respect of PPP loans could be deferred for a minimum of six months and a maximum of one year from the date of disbursement of a loan. The Interim Final Rule, however, caps the deferral period at six months (during which deferral period interest will continue to accrue).

Allowable Uses of PPP Loan Proceeds; Loan Forgiveness. The Interim Final Rule specifies that at least 75 percent of the PPP loan proceeds must be used for “payroll costs,” and that no more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.[3] The CARES Act statute did not include any such limitation on allocation of funds among the permitted uses of loan proceeds. The Interim Final Rule notes that the SBA will issue additional guidance on loan forgiveness.

Application Submission and Certifications. A PPP loan applicant must submit SBA Form 2483 (the Borrower Application Form) and certain payroll documentation. The Interim Final Rule requires that the application include certain certifications by the applicant, including, among others, that current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant and that the funds will be used for specified allowable purposes.[4]

Lender Eligibility. The following types of lenders are generally eligible to make PPP loans: (i) any federally insured depository institution or any federally insured credit union; (ii) subject to certain conditions and limitations, any Farm Credit System institution; and (iii) subject to certain conditions and limitations, any depository or non-depository financing provider that originates, maintains, and services business loans or other commercial financial receivables and participation interests. Such institutions described in the foregoing (i) and (ii) will be automatically qualified under delegated authority by the SBA upon transmission of the relevant Lender Agreement (SBA Form 3506), unless currently designated in Troubled Condition or subject to certain types of formal enforcement actions. The Interim Final Rule also states that all existing SBA Section 7(a) lenders are automatically approved to make PPP loans on a delegated basis, and, furthermore, the authority to make PPP loans may be extended to additional lenders determined by the SBA and the Treasury Department to have “the necessary qualifications to process, close, disburse, and service loans made with [an] SBA guarantee.” The Interim Final Rule further elaborates that, “Since SBA is authorized to up to $349 billion of PPP loans by June 30, 2020, the SBA and the Treasury Department have determined that authorizing additional lenders will be necessary to achieve enable as many eligible borrowers as possible to receive loans by the June 30 deadline.”

Lender Processing Fees. Consistent with the CARES Act statute, the Interim Final Rule provides that the SBA will pay lenders fees for processing PPP loans in the following amounts: (i) 5 percent for loans of not more than $350,000; (ii) 3 percent for loans of more than $350,000 and less than $2,000,000; and (iii) 2 percent for loans of at least $2,000,000.

Secondary-Market Sales. According to the Interim Final Rule, a PPP loan may be sold on the secondary market after the loan is fully disbursed and at a premium or a discount to par value.  The SBA will issue guidance regarding any advance purchase for loans sold in the secondary market.

Advance Purchases of PPP Loans by the SBA from Lenders.  The Interim Final Rule provides that a lender may request the SBA to “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” would be 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 weeks following the loan’s disbursement.

Other Lender-Specific Provisions. The Interim Final Rule provides various other clarifications relevant to lenders, including with respect to, among other things, loan underwriting requirements, reliance on borrower documentation for loan forgiveness, and the non-applicability of the “credit elsewhere test.”

As mentioned above, the Treasury Department has released a revised Borrower Application Form and related guidance. Notably, a previous version of the Borrower Application Form required certifications to be made by both the applicant and each 20-percent-or-greater owner of the applicant. The revised version, among other changes, requires only an authorized representative of the applicant to make such certifications. The SBA has also provided a webpage with PPP loan-related information.

We will continue to monitor and update on PPP loan-related developments.

[1] The 500 employee limit for PPP loan eligibility (and certain other thresholds under the CARES Act) is required to be calculated on the aggregated basis of the PPP loan applicant and all of its affiliates, subject to certain exceptions. An “affiliate” for these purposes is an entity that controls, is controlled by, or is under common control with the applicant. Existing SBA regulations further specify the meaning of “control” and types of relationships that may trigger “affiliate” status. Our previous alert (linked above) includes a summary of certain of the SBA affiliation regulations.

[2] These types of ineligible businesses include, among others: financial businesses primarily engaged in the business of lending; passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (with certain exceptions); life insurance companies; businesses located in a foreign country; pyramid sale distribution plans; businesses deriving more than one-third of gross annual revenue from legal gambling activities; businesses engaged in any illegal activity; private clubs and businesses which limit the number of memberships for reasons other than capacity; government-owned entities (except for businesses owned or controlled by a Native American tribe); businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting; and loan packagers earning more than one third of their gross annual revenue from packaging SBA loans.

[3] For a summary of the “payroll costs” definition, please refer to our previous alert (linked above).

[4] Specifically, the applicant must certify all of the following:

“(i) The applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.

(ii) Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.

(iii) The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable such as for charges of fraud. As explained above, not more than 25 percent of loan proceeds may be used for non-payroll costs.

(iv) Documentation verifying the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight week period following this loan will be provided to the lender.

(v) Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. As explained above, not more than 25 percent of the forgiven amount may be for non-payroll costs. (vi) During the period beginning on February 15, 2020 and ending on December 31, 2020, the applicant has not and will not receive another loan under this program.

(vii) I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.

(viii) I acknowledge that the lender will confirm the eligible loan amount using tax documents I have submitted. I affirm that these tax documents are identical to those submitted to the Internal Revenue Service. I also understand, acknowledge, and agree that the Lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews."