Author: Tory Hill
The SBA has released the Interim Final Rule announcing the Paycheck Protection Program.
Overview of the Interim Final Rule
The Interim Final Rule, together with the supplemental guidance on the SBA and Treasury Department websites, provide additional detail as to the implementation and procedural requirements of the Paycheck Protection Program. The Interim Final Rule provides the following additional information on the statutory requirements.
- All loans will be guaranteed under the PPP under the same terms and conditions. PPP loans are “first-come, first-served.”
- The maximum amount of each loan is the lesser of $10 million or 2.5 times the average monthly “payroll costs”, plus the value of any existing Economic Injury Disaster Loans received after January 31, 2020. Determining the accuracy of payroll costs is the responsibility of the borrower, and the borrower must attest to the accuracy of those calculations.
- Interest Rate: 1 percent fixed rate.
- Maturity date: 2 years, with no prepayment penalties or early repayment fees.
- The use of the PPP loans for mortgage interest, rent and utilities, must be with respect to obligations incurred, leases in force, or service started, in each case, before February 15, 2020.
- The borrower must certify that, to the extent feasible, it will purchase only “American-made equipment and products.”
- Loans will be forgiven unless they are used for ineligible purposes.
- The Treasury Department has made clear that, if proceeds of any PPP loans are used for fraudulent purposes, criminal charges may be pursued against the borrower. In this regard, the borrower must acknowledge in the loan application that the lender may share information disclosed by the borrower with relevant federal government agencies for purposes of ensuring compliance.
- All U.S.-based solvent businesses in operation on February 15, 2020, with 500 or fewer employees (determined subject to the SBA’s affiliation rules) can apply, including nonprofits, veterans’ organizations, tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors, Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.
- The borrower will need to provide identifying information and documentation proof to the lender in its loan applications. Identifying information includes: (i) business legal name, (ii) business address, (iii) tax identification number, (iv) primary contact, (v) average monthly payroll amount, (vi) number of employees, and (vii) purposes of the loan. Because the PPP loans may only be used for qualifying purposes, to prove that the intended purposes for borrowing the loan are qualify purposes, the borrower is required to compile and submit documentation proof in connection with its loan applications, including: (i) recent tax returns, (ii) documents evidencing the number of employees, (iii) payroll costs, (iv) mortgage interest payments, (v) rent payments, and (vi) utilities payments, in each case of (ii)-(vi), for the eight-week period following loan disbursement.
- The borrower must also disclose its ownership information, including owner name, title, ownership percentage, tax identification number, and address.
- If any of the following applies to the borrower, the PPP loan will not be approved:
- The borrower or any owner of the borrower is presently suspended, debarred, proposed for debarment, declared ineligible, voluntarily excluded from participation in this transaction by any federal department or agency, or presently involved in any bankruptcy.
- The borrower, any owner of the borrower, or any business owned or controlled by any of them, has ever obtained a direct or guaranteed loan from SBA or any other federal agency that is currently delinquent or has defaulted in the last 7 years and caused a loss to the government.
- The borrower (if an individual) or any individual owning 20% or more of the equity of the borrower is subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction, or presently incarcerated, or on probation or parole.
- Within the last 5 years, for any felony, the borrower (if an individual) or any owner of the borrower has: (1) been convicted; (2) pleaded guilty; (3) pleaded nolo contendere; (4) been placed on pretrial diversion; or (5) been placed on any form of parole or probation (including probation before judgment).
- The entire principal amount of a borrower’s loan can be forgiven if the borrower uses all of the loan proceeds for qualifying purposes and maintains the requisite employee and compensation levels.
- However, due to likely high subscription, not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.
- Existing SBA lenders, and certain other additional lenders, are pre-approved to process PPP loans under delegated authority from the SBA. New lenders may apply to the SBA for authorization. Authority may be terminated by either the lender or the SBA on 10 days written notice to the other, without affecting any PPP loans already made (although the lender may be required to transfer such loans to another entity approved under the PPP).
- If a lender presently not subject to the requirements of the Bank Secrecy Act, it must establish an appropriate anti-money laundering compliance program equivalent to that of a comparable federally regulated institution.
- As part of its obligations to ensure borrowers are permitted to participate in the PPP, lenders will be required to follow applicable Bank Secrecy Act requirements, obtain and review all required documentation from the borrower, and also verify:
• that the borrower was in operation on February 15, 2020;
• that the borrower had employees for whom the borrower paid salaries and payroll taxes; and
• the dollar amount of average monthly payroll costs.
- Lenders can rely on borrower documentation for loan forgiveness. Lenders do not need to conduct any verification themselves. The SBA will hold harmless any lender that relies on appropriate borrower documentation and attestation.
- Lenders will be paid a fee by the SBA, depending on the size of the loan. Any agent fees will be paid out of lender fees, and must not be passed on to, or offset by loan proceeds paid to, the borrower. Agent fees collected from the lender may not exceed 1% for loans of $350,000 or less, 0.5% for loans more than $350,000 but less than $2 million, and 0.25% for loans greater than $2 million.
- Fee waivers:
• No up-front guarantee fee payable to SBA by borrowers;
• No lender’s annual service fee (no ongoing guaranty fee);
• No subsidy recoupment fee; and
• No fee payable to SBA for any guarantees sold into the secondary market.
- PPP loans can be sold on the secondary market, at a premium or a discount to par value.
Links to the SBA and Treasury Department guidance and regulations are as follows:
SBA – Interim Final Rule, Lender Application Form, Lender Agreement for Federally Insured Depository Institutions, Federally Insured Credit Unions, and Farm Credit System Institutions, and SBA Standard Loan Note (Form 147).
Treasury Department – additional guidance and regulations.
The information above is a summary only and is subject to forthcoming SBA regulations.