SBA Releases Guidance on PPP Small Business Loans

The Small Business Administration (SBA) released an interim final rule the evening of April 2 outlining key provisions of the SBA’s Paycheck Protection Program (PPP) and the provisions of the CARES Act relating to loan forgiveness. The rule is effective immediately.

Some highlights of the rule include:

Increase in interest rate. The interest rate on any PPP loan will be 1%, which is an increase from the 0.5% previously announced earlier this week.

Two-year term; six-month deferment period.  Consistent with the SBA’s prior guidance, the term of each loan will be  two years, which is below the 10 year limit specified in the CARES Act, subject to a six-month deferment period (also less favorable than the one-year deferment period authorized by the CARES Act).

Loan forgiveness and use of proceeds capped based on payroll costs.  Consistent with statements made in the prior guidance, not more than 25% of the loan forgiveness amount can be attributable to non-payroll costs.  In addition, (i) at least 75% of the PPP loan proceeds must be used for payroll costs and (ii) the remainder of the PPP loan proceeds may be used for health care benefits, rent, utilities, interest on mortgages and certain other debts, and/or to refinance certain SBA loans (but not be used for other otherwise-permissible 7(a) loan purposes).  Each of these is a restriction imposed by the SBA that is not provided for in the CARES Act itself.

Streamlining of regular 7(a) program allows reliance on borrower certification. The SBA will allow lenders to rely on certifications of the borrower to determine eligibility and use of proceeds of the PPP loan. Borrowers must submit such documentation as necessary to establish eligibility (e.g., payroll processor records, payroll tax filings or Form1099-MISC and bank records).  Lenders must confirm receipt of documentation and confirm the dollar amount of the average payroll expenses for the preceding calendar year by reviewing the documentation the borrower has submitted . Accordingly, while lenders will have to conduct some substantive underwriting to arrive at the permissible loan amount, they may rely on borrower certifications for several determinations that might otherwise have been burdensome.

One loan per borrower; other SBA 7(a) eligibility requirements not expressly waived by the CARES Act remain applicable. Each eligible borrower may receive only one loan, therefore the rule encourages borrowers to consider applying for the maximum amount; questions remain as to what entity or group of entities might constitute a single borrower. The rule clarifies that the SBA’s 7(a) borrower eligibility criteria will continue to apply except to the extent that the CARES Act or the rule expressly waives or supersedes them.

Guidance to be promptly issued on affiliation rules. The rule did not ease or make any changes to existing SBA affiliation rules for purposes of PPP loans. However, it states that the SBA intends to issue additional guidance promptly on this issue. We will update this alert when it releases additional guidance.

Additional guidance to be issued on forgiveness. The rule also states that SBA intends to issue additional guidance on loan forgiveness.

The rule does not address organizational challenges hotels face. The rule did not address some of the hotel-specific issues relating to PPP loans, including whether hotel borrowers can access and use loans to pay hotel employees supplied by third-party management companies. Although SBA has stated informally that it is aware of these issues, the rule does not say whether additional guidance on that subject will be forthcoming.  

The rule confirms that PPP money will be released on a first come, first served basis. Of course, as the Secretary of the Treasury has indicated this week, the Administration may ask Congress for additional funding.

Additional lenders. Federally-insured banks, credit unions, and Farm Credit System institutions automatically qualify (subject to limited exceptions), but will need to submit a CARES Act Section 1102 Lender Agreement (SBA Form 3506), once available (likely tomorrow, April 3), to become eligible to underwrite and make PPP loans. In addition, eligible lenders may include any other lender that: (i) originates, maintains, and services business loans or other commercial financial receivables; (ii) has a formalized compliance program; (iii) applies the requirements of the Bank Secrecy Act (BSA) applicable to it as a federally-regulated financial institution (or requirements applicable to an equivalent federal regulated financial institution); (iv) has been operating since at least February 15, 2019 and (v) has originated, maintained and serviced more than $50 million in business loans or other commercial financial receivables during a consecutive 12 month period in the past 36 months, or is a service provider to any insured depository institution that has a contract to support such institution’s lending activities and is in good standing. The rule does not yet set a process for non-federally-insured entities qualified to participate in the PPP as “additional lenders” to obtain authority to underwrite and make PPP loans.

Agent compensation payable by lender and capped. Fees payable to agents that assist borrowers will be paid out of fees the lender receives from the SBA; agents may not collect fees from borrowers or be paid out of loan proceeds. The total amount an agent may collect is capped at: 1% for loans not more than $350,000, 0.5% for loans greater than $350,000 and less than $2 million, and  0.25% for loans of not less than $2 million. Some ambiguity exists as to whether the concept of an “agent” extends to a party assisting the lender, rather than assisting the borrower.

Loan Sales and Advance Purchase Guidance. The rule clarifies that lenders may sell PPP loans  at a premium or discount, and indicates that the SBA will issue guidance regarding “advance purchases.”

Advance Purchase/Expected Forgiveness. Holders may request that the SBA purchase the expected forgiveness amount for a guaranteed loan at the end of the seventh week after origination.  The rule establishes documentation requirements and procedural expectations for the processing of expected forgiveness claims.

Loan and Program Documentation. Several forms required to be used by the rule, including the application form, lender’s application for guaranty, and additional lender’s guaranty agreement with the SBA remain under development, though they are expected to be available shortly. The rule does not reference form loan documentation such as uniform notes or additional program documentation such as forgiveness claims forms, but the SBA may also be developing such documents .  Although lenders and borrowers are anxious for the launch of the PPP, they may need to be patient  for a little longer as the authorities finalize the last-minute details.

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