On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act (PPPFA). The PPPFA would change some of requirements of the PPP previously established by the CARES Act, signed into law on March 27, 2020.
The PPPFA is intended to address common complaints by borrowers about the PPP, particularly around its requirements to dedicate a high percentage of the loan to payroll and the relatively short timeframe allowed for businesses to spend the loan – which could prove impractical in light of mandated government shutdowns across the country.
Among other things, the PPPFA changes the following key requirements:
- Extends the time period (i.e. “covered period) to use funds from 8 to 24 weeks. One of the biggest issues around the PPP was that it required businesses to use the funds in the 8-week period after fund disbursement. This was problematic for most businesses that were forced to shut down by government mandate. This extension will allow businesses more time to spend the funds after reopening. It would also make complete loan forgiveness more likely since original issuances of PPP loans were based on one month of 2019 payroll multiplied by 2.5 (10 weeks). Note that the PPPFA still permits borrowers to choose an 8-week forgiveness period and apply for forgiveness after such 8-week period.
- Reduces minimum required use of funds for payroll from 75% to 60%. Another issue with the original PPP was that it required borrowers to dedicate at least 75% of the loan proceeds for “payroll costs” (defined in CARES Act). Realizing that many businesses cannot spend PPP funds on payroll while closed, the PPPFA now permits borrowers to dedicate at least 60% of the loan proceeds for “payroll costs.”
- Extends payment deferral date to 6 months after SBA determination of loan forgiveness. Under the original PPP, borrowers must make their first principal and interest payments on any non-forgiven portion of the loan on the 6-month anniversary of their loan disbursement. Under the PPPFA, the deferral period is now extended to the 6-month anniversary after the date in which the SBA makes a forgiveness determination. Since under current rules, the lending bank has 60 days to make a forgiveness determination and the SBA has an additional 90 days, a borrower who received a loan on May 6, 2020 could theoretically not have to make any payments on non-forgiven portions of the loan until September 20, 2021 (May 6, 2020 + 24 weeks + 60 days + 90 days + 6 months). However, the PPPFA provides that a borrower that fails to apply for forgiveness within 10 months after the 24-week forgiveness period must start making payments on the loan on the 10-month anniversary of the forgiveness period.
- Extends maturity date from 2 to 5 years. Businesses now have 5 years (instead of 2) to repay PPP loans.
- Allows until December 31, 2020 to rehire and increase wages to avoid reduction in loan forgiveness. Under the original PPP, in order to avoid reductions to PPP loan forgiveness amounts, businesses had until June 30, 2020 to rehire and increase salary / hourly wages for any employees that were fired or experienced reduced pay between February 15, 2020 and April 26, 2020. Under the PPPFA, businesses now have until December 31, 2020 to rehire and increase wages to avoid reductions to PPP loan forgiveness amounts.
- Provides additional safe harbors from reduction in loan forgiveness. Forgiveness will not be reduced for borrowers who fail to maintain employment levels – provided that the borrower is able to document that it is unable to return to the same level of business activity that existed prior to February 15, 2020 because of compliance with COVID-19 related rules established by HHS, CDC or OSHA between March 1, and December 31, 2020 relating to standards for sanitation, social distancing or any worker or customer safety requirements.
Some lawmakers have stated their intentions to further clarify and add more details to the PPPFA, so further changes to PPP could come soon.
In any case, the SBA’s Loan Forgiveness Application Form (found here) and Interim Final Rules (found here) will need to be amended to reflect the new PPPFA changes.
Borrowers who elect to stay with the 8-week covered period for loan forgiveness should be able to use the current Loan Forgiveness Application Form. Other borrowers will need to wait for revised forms and instructions from the SBA and Treasury Department.
Stay tuned for new developments.
DISCLAIMER: The subject matter discussed above is constantly evolving and may change on a frequent basis. The information contained in this post is for general education and informational purposes only.
