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. 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.
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:
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:
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:
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:
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:
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. 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:
Please reach out to your Orrick contact for any questions or if you require assistance in connection with a loan forgiveness application.
 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.
 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.
 The SBA Review Rule states that the SBA will issue a separate interim final rule addressing this process.
 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.