Recent PPP Developments: Loan Forgiveness and SBA Loan Review Interim Final Rules Released

May.27.2020

On May 22, 2020, the Small Business Administration (SBA) released the Interim Final Rule on Loan Forgiveness (the “Forgiveness Rule”). The release of the Forgiveness Rule followed the issuance by the SBA of the Paycheck Protection Program (“PPP”) Loan Forgiveness Application on May 18, 2020.[1] Like the Loan Forgiveness Application, the Forgiveness Rule has been eagerly awaited in the market and clarifies a number of persistent issues. Additionally, on May 22, 2020, the SBA also released the Interim Final Rule on SBA Loan Review Procedures and Related Borrower and Lender Responsibilities (the “SBA Review Rule”), which provides guidance on the SBA’s process for reviewing PPP loan applications and loan forgiveness applications. Both of these interim final rules are discussed below.

Forgiveness Rule

The Forgiveness Rule provides an overview of the loan forgiveness-related provisions under the CARES Act and prior SBA interim final rules and guidance, and also provides certain substantive clarifications. An overview of key provisions is provided below.

Loan forgiveness process. The Forgiveness Rule delineates the following steps for a borrower to receive loan forgiveness:

  • The borrower must complete and submit the Loan Forgiveness Application to its lender (or the lender servicing its loan).
  • The lender then has 60 days to issue a decision to the SBA. If the lender determines that the borrower is entitled to forgiveness in full or in part, the lender should request payment from SBA at the time the lender issues its decision to the SBA.
  • Subject to its review of the loan or loan application, the SBA will remit the appropriate forgiveness amount to the lender, plus any accrued interest, within 90 days after the lender issues its decision to the SBA.[2] (As discussed in the “SBA Review Rule” section below, however, it does not appear that the SBA is compelled to make an ultimate determination regarding a loan’s eligibility during such 90-day period. The SBA has advised that it may undertake a review of a PPP loan at any time, and that borrowers are required to retain PPP loan documentation for six years after forgiveness or repayment of the loan.)
  • If, however, the SBA determines in the course of its review that the borrower was ineligible for the PPP loan, the loan will not be eligible for loan forgiveness.
  • If only a portion of the loan is forgiven, or if the forgiveness request is denied, any remaining balance due on the loan must be repaid by the borrower on or before the two-year maturity of the loan.[3]

Payroll costs eligible for loan forgiveness. Borrowers may seek forgiveness for payroll costs of U.S. resident employees for the eight weeks (56 days) beginning on either: (i) the date of disbursement of the borrower’s PPP loan proceeds from the lender (i.e., the start of the covered period); or (ii) the first day of the first full payroll cycle during the covered period (the “alternative payroll covered period”). In general, payroll costs either paid or incurred during the covered period or alternative payroll covered period are eligible for forgiveness. Payroll costs incurred during the covered period or the alternative payroll covered period must be paid on or before the next regular payroll date to be eligible for forgiveness. To illustrate, the Forgiveness Rule provides the following example:

A borrower has a bi-weekly payroll schedule (every other week). The borrower’s eight-week covered period begins on June 1 and ends on July 26. The first day of the borrower’s first payroll cycle that starts in the covered period is June 7. The borrower may elect an alternative payroll covered period for payroll cost purposes that starts on June 7 and ends 55 days later (for a total of 56 days) on August 1. Payroll costs paid during this alternative payroll covered period are eligible for forgiveness. In addition, payroll costs incurred during this alternative payroll covered period are eligible for forgiveness as long as they are paid on or before the first regular payroll date occurring after August 1.

The Forgiveness Rule provides the following additional clarifications regarding eligible payroll costs:

  • Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction.
  • Payroll costs are generally incurred on the day the employee’s pay is earned (i.e., on the day the employee worked).
  • For employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day that the employee would have performed work).
  • Salary, wages, and commission payments to furloughed employees, bonuses, and hazard pay during the covered period are eligible for loan forgiveness (provided they do not exceed an annual salary of $100,000, as prorated for the covered period).
  • The Forgiveness Rule provides further details regarding caps on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation.

Although not squarely addressed, it appears that PPP loan proceeds may be used to pay severance obligations incurred prior to or during the covered period (or alternative payroll covered period) to the extent payable during the covered period (or alternative payroll covered period).

Nonpayroll Costs Eligible for Loan Forgiveness. Similar to the payroll cost context as described above, a nonpayroll cost is eligible for forgiveness if it was either: (i) paid during the covered period; or (ii) incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period. To illustrate, the Forgiveness Rule provides the following example:

A borrower’s covered period begins on June 1 and ends on July 26. The borrower pays its May and June electricity bill during the covered period and pays its July electricity bill on August 10, which is the next regular billing date. The borrower may seek loan forgiveness for its May and June electricity bills, because they were paid during the covered period. In addition, the borrower may seek loan forgiveness for the portion of its July electricity bill through July 26 (the end of the covered period), because it was incurred during the covered period and paid on the next regular billing date.

Previous guidance issued by the SBA specified that borrowers may utilize up to 25% of their PPP loan proceeds on eligible non-payroll costs and may seek forgiveness for non-payroll expenditures during the covered period (or alternative payroll covered period) utilized for utility payments, rent, and mortgage interest. The Forgiveness Rule also makes clear that permitted rent and mortgage interest payments that are eligible for forgiveness include expenditures in respect of both real and personal property (as long as such rent and mortgage obligations were incurred before February 15, 2020). The Forgiveness Rule specifies that a borrower may not utilize PPP loan proceeds to make principal payments or pre-pay interest on mortgage obligations but is silent regarding the pre-payment of rent obligations.

Reductions to loan forgiveness amount based on headcount reductions. The CARES Act sets forth loan forgiveness reduction formulas with respect to headcount reductions as well as salary and wage reductions. By way of background, the Forgiveness Rule provides the following description regarding the headcount reduction formula:

In general, a reduction in FTE employees during the covered period or the alternative payroll covered period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. The borrower must first select a reference period: (i) February 15, 2019 through June 30, 2019; (ii) January 1, 2020 through February 29, 2020; or (iii) in the case of a seasonal employer, either of the two preceding methods or a consecutive 12-week period between May 1, 2019 and September 15, 2019.

The Forgiveness Rule includes an exception to the above formula if a borrower makes a good faith offer to rehire an employee for the same salary and same number of hours (or offers to restore the reduction in hours under the salary and wage reduction formula, as described below), but the employee declines the offer. To qualify for this exception, the borrower must, among other conditions, maintain records documenting the offer and its rejection, and furthermore must inform the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.

The Forgiveness Rule provides the following additional clarifications:

  • “Full-time equivalent employee” (FTE) means an employee who works 40 hours or more, on average, each week. The hours of employees who work less than 40 hours are calculated as proportions of a single full-time equivalent employee and aggregated, as explained in the next bullet.
  • For employees who were paid for less than 40 hours per week, borrowers may choose to calculate the full-time equivalency in one of two ways: (i) by calculating the average number of hours a part-time employee was paid per week during the covered period and dividing that number by 40 (e.g., if an employee was paid for 30 hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.75 (30/40 = 0.75)); or (ii) electing to use a full-time equivalency of 0.5 for each employee who on average worked less than 40 hours per week during the covered period. Borrowers may select only one of these two methods, and must apply that method consistently to all of their part-time employees for the covered period (or the alternative payroll covered period) and the selected reference period.

Reductions to loan forgiveness amount based on salary and wage reductions. By way of background, the Forgiveness Rule provides the following description regarding the salary and wage reduction formula:

[A] reduction in an employee’s salary or wages in excess of 25 percent will generally result in a reduction in the loan forgiveness amount, unless an exception applies. Specifically, for each new employee in 2020 and each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, the borrower must reduce the total forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25 percent of base salary or wages between January 1, 2020 and March 31, 2020 (the reference period), subject to exceptions for borrowers who restore reduced wages or salaries. . . . This reduction calculation is performed on a per employee basis, not in the aggregate.

The Forgiveness Rule clarifies that, to ensure that borrowers are not doubly penalized, the salary and wage reduction formula applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction. For example, if a 40-hour employee is reduced to 20 hours, but the employee’s hourly wage during the covered period was unchanged, the reduction in the employee’s total wages would be entirely attributable to the FTE employee reduction and the borrower would not be required to conduct a salary and wage reduction calculation for that employee.

The Forgiveness Rule provides the following additional clarifications:

  • Consistent with the CARES Act and previous guidance, the Forgiveness Rule states that, if a borrower restores reductions made to employee salaries and wages or FTE employee headcount by not later than June 30, 2020, the borrower can avoid a reduction in its loan forgiveness amount.
  • A borrower’s loan forgiveness amount will not be reduced if an employee is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction.

SBA Review Rule

The SBA Review Rule provides further information regarding (i) SBA review of individual PPP loans, (ii) the loan forgiveness process for lenders, and (iii) lender fees, each as discussed below.

SBA review of individual PPP loans. The SBA Review Rule provides various clarifications regarding its loan review process, including the following:

  • The SBA may review any PPP loan as it deems appropriate, including with respect to borrower eligibility, loan amount and whether the borrower used loan proceeds for the allowable uses specified in the CARES Act, and loan forgiveness amounts.
  • For a PPP loan of any size, the SBA may undertake a review at any time. In its discussion of this point, the SBA Review Rule also points out that “the borrower must retain PPP documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA . . . to access such files upon request.” Furthermore, lenders must comply with applicable SBA requirements for records retention.
  • PPP borrowers will be able to respond to the SBA’s questions in a review.
  • If the SBA determines that a borrower is ineligible for a PPP loan, the loan cannot be forgiven. The SBA will direct the lender to deny the loan forgiveness application in whole or in part, as appropriate, and may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.
  • A borrower may appeal the SBA’s determination that the borrower is ineligible for a PPP loan, the loan amount, or the loan forgiveness amount claimed by the borrower.[4]

Loan forgiveness process for lenders.

The SBA Review Rule provides a framework for review by lenders of PPP Loan Forgiveness Applications, as well as certain related clarifications. In particular, the SBA Review Rule states that lenders are expected to perform a good-faith review, in a reasonable time, of a borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness.[5] Lenders may, however, rely on borrower representations, and if the lender identifies errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue. The lender does not need to independently verify the borrower’s reported information if the borrower submits documentation supporting its request for loan forgiveness and attests that it accurately verified the payments for eligible costs.

Regarding the timeline for the lender’s decision on a loan forgiveness application, the SBA Review Rule states the following:

The lender must issue a decision to SBA on a loan forgiveness application not later than 60 days after receipt of a complete loan forgiveness application from the borrower. That decision may take the form of an approval (in whole or in part); denial; or (if directed by SBA) a denial without prejudice due to a pending SBA review of the loan for which forgiveness is sought. In the case of a denial without prejudice, the borrower may subsequently request that the lender reconsider its application for loan forgiveness, unless SBA has determined that the borrower is ineligible for a PPP loan.

The SBA Review Rule also outlines the process for lenders and borrowers to undertake if they receive notice that the SBA is reviewing a loan. Specifically, if the SBA undertakes such a review, the SBA will notify the lender in writing and the lender must notify the borrower in writing within five business days of receipt. Within five business days of receipt of such notice, the lender must transmit to the SBA the Borrower Application Form, the Loan Forgiveness Application, and various supporting documentation. If the SBA has notified the lender that the SBA has commenced a loan review, the lender must not approve any application for loan forgiveness for such loan until the SBA notifies the lender in writing that the SBA has completed its review.

Loan forgiveness process for lenders. Finally, the SBA Review Rule provides the following clarifications:

  • A lender is not eligible for a processing fee if the SBA determines that a borrower was ineligible.
  • Lender processing fees are subject to clawback if the SBA determines that a borrower was ineligible. Specifically, if within one year after a loan was disbursed the SBA determines that a borrower was ineligible, the SBA will seek repayment of the lender processing fee from the lender.
  • Lender processing fees are subject to clawback if a lender has not fulfilled its obligations under PPP regulations.

Please reach out to your Orrick contact for any questions or if you require assistance in connection with a loan forgiveness application.



[1] Our previous client alert discusses the Loan Forgiveness Application in detail.

[2] If applicable, the SBA will deduct EIDL Advance Amounts from the forgiveness amount remitted to the lender as required by section 1110(e)(6) of the CARES Act.

[3] If the amount remitted by the SBA to the lender exceeds the remaining principal balance of the PPP loan (because the borrower made scheduled payments on the loan after the initial deferment period), the lender must remit the excess amount, including accrued interest, to the borrower.

[4] The SBA Review Rule states that the SBA will issue a separate interim final rule addressing this process.

[5] The SBA Review Rule states that, for example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. By contrast, if payroll costs are not documented with such recognized sources, more extensive review of calculations and data would be appropriate. Also, the borrower may not receive forgiveness without submitting all required documentation to the lender.