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Vedder Thinking | Articles UPDATE: SBA Issues Interim Final Rules Concerning Loan Forgiveness and Loan Review Procedures

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On May 22, 2020, the Small Business Administration (“SBA”) issued two interim final rules concerning the Paycheck Protection Program (“PPP”) addressing both (i) loan forgiveness (the “Loan Forgiveness Rule”) and (ii) the SBA’s process for reviewing PPP loans and loan forgiveness applications (the “Loan Review Rule”). A summary of the material provisions of these two interim final rules is provided below. Please note that these rules supplement the loan forgiveness application issued by the SBA on May 15, 2020. For additional information on loan forgiveness, please also consult our summary of the SBA’s loan forgiveness application.

We note that further revisions to the PPP are currently being contemplated by Congress. Among the various potential changes to the PPP being considered are the following: (i) expansion of the 8 week applicable covered period and (ii) revisions relating to the requirement that 75% of PPP loan proceeds be used on eligible payroll costs.

Questions Answers
Has the SBA clarified how the “paid and incurred” requirement for loan forgiveness will be implemented? Yes. The SBA has clarified that eligible costs which are paid or incurred during the applicable covered period, as described below, will be subject to loan forgiveness.
 
In general, to be eligible for forgiveness, a borrower must have “paid” eligible payroll costs and eligible non-payroll costs (i.e., covered mortgage obligations, covered rent obligations and utility payments) during the applicable covered period. In particular, with respect to payroll costs, the Loan Forgiveness Rule provides that such costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction.
 
In addition, consistent with the SBA’s previously issued loan forgiveness application, the Loan Forgiveness Rule provides that payroll costs that are incurred during the applicable covered period are subject to loan forgiveness if paid on or before the first regular payroll date following the end of the applicable covered period. The Loan Forgiveness Rule also states that payroll costs are generally considered to be “incurred” on the day that the employee’s pay is earned – i.e., on the day the employee worked, or for furloughed employees or employees who are not then performing work, but being paid, on the day such employees would have worked.
 
With respect to non-payroll costs incurred during the covered period, such incurred costs are eligible for loan forgiveness if they are paid on or before the next regular billing date, even if the billing date is after the end of the 8 week covered period.
Are salary/wages paid to furloughed employees eligible for forgiveness? Yes. If a borrower pays furloughed employees salary or wages during the applicable covered period, those payments are eligible for forgiveness as long as they do not exceed an annual salary of $100,000, as prorated for the applicable covered period. This is true regardless of the fact that certain employees may not be able to perform their day-to-day duties, whether due to lack of business activity or a business’ adherence to the shelter-in-place orders.
Are bonuses or hazard pay paid to employees eligible for loan forgiveness? Yes. Provided an employee’s total compensation does not exceed $100,000 on an annualized basis during the applicable covered period, hazard pay and bonuses are eligible for loan forgiveness as the SBA has determined that hazard pay and bonuses “constitute a supplement to salary or wages, and are thus a similar form of compensation.”
Are advanced payments of interest on covered mortgage obligations eligible for loan forgiveness? No. Advanced payments of interest on covered mortgage obligations are treated as “prepayments” and are ineligible for forgiveness under any circumstances.
Does a borrower count a terminated employee’s salary/wages in calculating the salary/wage reduction calculation? No. To ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to a reduction in hours of an employee as such reduction in hours will be reflected in the full-time equivalent (“FTE”) employee reduction calculation.
Has the SBA provided additional information on the FTE employee reduction calculation and employees who refuse an offer to be rehired? Yes. The Loan Forgiveness Rule has included the following specific criteria that must be met to exclude an employee who the borrower has offered to rehire, or has offered to restore an employee’s reduced hours:
 
(i) the borrower made a good faith, written offer to rehire such employee or, if applicable, to restore reduced hours of such employee;
 
(ii) the offer was for the same salary or wages and same number of hours as earned in the last pay period prior to separation or reduction in hours;
 
(iii) the offer was rejected by the employee;
 
(iv) the borrower has maintained records documenting the offer and rejection; and
 
(v) the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer or reemployment within 30 days of such rejection.
Has the SBA confirmed the impact of an FTE reduction or salary/wage reduction on loan forgiveness? Yes. The SBA has confirmed that a reduction in FTE employees during the applicable covered period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees (unless the borrower satisfies the safe harbor for rehiring employees by June 30, 2020). The Loan Forgiveness Rule notes that if a borrower experienced a 20% reduction in FTE employees then only 80% of otherwise eligible expenses would be available for forgiveness.
 
With respect to the salary/wage reduction calculation, the reduction calculation is to be performed for each applicable employee and not on an aggregate basis. Specifically, the Loan Forgiveness Rule clarifies that the calculation is to be performed for each new employee in 2020 and each existing employee who was not paid more than the annualized equivalent $100,000 in any pay period in 2019. Specifically, a borrower must reduce the total forgiveness amount by the total dollar amount of salary/wage reductions for each such employee that are in excess of 25% ofsuch employee’s salary for the period from January 1, 2020 through March 31, 2020 (unless the borrower satisfies the safe harbor for restoring salary/wages by June 30, 2020).
What is the general process to obtain loan forgiveness? In general, the process to obtain loan forgiveness is as follows:
 
1. A borrower must complete and submit the loan forgiveness application to its lender (or the lender servicing its loan).
 
2. The lender will review the application and make a decision regarding loan forgiveness within 60 days of receipt of a complete application.
 
3. If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for, the lender must submit its determination to the SBA and request payment from the SBA.
 
4. When the lender issues its decision to the SBA approving the application (in whole or in part), it must include the following parts of the loan forgiveness application, (i) the PPP Loan Forgiveness Calculation Form; (ii) Schedule A; and, (iii) if available, the Borrower Demographic Information Form. The lender must confirm that the information provided by the lender to the SBA accurately reflects the lender’s records for the loan, and that the lender has made its decision in accordance with all requirements (discussed below).
 
5. The SBA will, subject to any SBA review of the loan or loan application (discussed below), remit the forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to SBA. If applicable, the SBA will deduct Economic Injury Disaster Loan (EIDL) advance amounts (i.e., the $10,000 grant) from the forgiveness amount.
What is a lender required to review in a borrower’s loan forgiveness application? For all PPP loan forgiveness applications, each lender must confirm the following:
 
1. receipt of the borrower certifications contained in the loan forgiveness application;
 
2. receipt of the documentation borrowers must submit to aid in verifying payroll and nonpayroll costs, as specified in the instructions to the loan forgiveness application;
 
3. the borrower’s calculations on the borrower’s loan forgiveness application, including the dollar amount of (i) cash compensation, non-cash compensation and compensation to owners claimed on Lines 1, 4, 6, 7, 8, and 9 on Schedule A of the loan forgiveness application and (ii) business mortgage interest payments, business rent or lease payments, and business utility payments claimed on Lines 2, 3, and 4 on the Loan Forgiveness Calculation Form to the loan forgiveness application; and
 
4. that the borrower accurately made the calculation in the loan forgiveness application to confirm that at least 75% of the loan forgiveness amount consists of payroll costs.
 
The SBA notes that “[p]roviding an accurate calculation of the loan forgiveness amount is the responsibility of the borrower, and the borrower is required to attest to the accuracy of its reported information and calculations on the Loan Forgiveness Application.” However, “[l]enders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness.”
 
The Loan Review Rule notes that minimal review of calculations by a lender based on payroll reports by a recognized third-party payroll processer would be reasonable, but that a more extensive review of calculations and data would be appropriate if payroll costs are not documented with such recognized sources.
 
Further, a lender may rely on a borrower’s representations, but if a “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.”
What are the possible outcomes of a lender’s review of a loan forgiveness application? A lender’s decision on a loan forgiveness application may take the form of (i) an approval (in whole or in part); (ii) denial; or (iii) if directed by the 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 the SBA has determined that the borrower is ineligible for a PPP loan.
What happens if a borrower’s forgiveness application is denied? In the event the borrower’s loan forgiveness application is denied, the lender must notify the borrower in writing that the lender has issued a decision to the SBA denying the loan forgiveness application. The lender must also inform the SBA of its reason for the denial.
 
While the SBA reserves the right to review the lender’s decision in its sole discretion, a borrower may request that the SBA review the lender’s decision below within 30 days of notice from the lender.
What borrower representations and statements are subject to the SBA’s review? The Loan Review Rule provides that the SBA may review the following:
 
1. Borrower Eligibility – The SBA may review a borrower’s eligibility to receive a PPP loan based on the provisions of the CARES Act, the rules and guidance available at the time of the borrower’s application and the terms of the borrower’s loan application;
 
2. Loan Amounts and Use of Proceeds – The SBA may review whether the borrower accurately calculated the PPP loan amount and used the loan proceeds for allowable uses as specified by the CARES Act.
 
3. Loan Forgiveness Amount – The SBA may review whether a borrower is entitled to the amount of loan forgiveness claimed in the loan forgiveness application.
What happens if the SBA institutes review of a PPP loan? If the SBA undertakes a discretionary review of a PPP loan, the SBA will notify the lender in writing. Upon receipt of the notice, the lender will have 5 business days to complete the following actions: (i) provide written notice of the SBA’s review to the borrower; and (ii) submit to the SBA electronic copies of the following:
 
1. the borrower’s PPP Loan Application Form (SBA Form 2483) and all supporting documentation provided by the borrower; and
 
2. the borrower’s loan forgiveness application (SBA Form 3508), and all supporting documentation provided by the borrower, including the Schedule A Worksheet to the Application (if lender receives such Application after receipt of notice of the SBA’s review, then such Application and documentation are to be submitted within 5 business days of lender’s receipt of such information);
 
3. a signed and certified transcript of account;
 
4. a copy of the executed note evidencing the PPP loan; and
 
5. any other documents related to the loan requested by the SBA.
 
If the documentation submitted to the SBA by the borrower or any other information indicates that the borrower may be ineligible (i) for a PPP loan (ii) to have received the applicable loan amount or (iii) to have received the applicable loan forgiveness amount claimed by the borrower, the SBA will require the lender to contact the borrower in writing to request additional information, and information provided by the borrower is to be forwarded to the SBA. The SBA may also request information directly from the borrower. SBA will consider all information provided by the borrower in response to such an inquiry.
 
A borrower’s failure to respond to the SBA’s inquiry may result in a determination that the borrower was ineligible for a PPP loan or ineligible to receive the applicable loan amount or loan forgiveness amount claimed by the borrower.
What happens if during the course of the SBA’s review it determines the borrower was ineligible for the PPP loan? If a borrower is deemed to have been illegible to receive a PPP loan, the PPP loan will not be eligible for loan forgiveness. The lender is responsible for notifying the borrower of the SBA’s determination.
 
If the SBA determines that a borrower is ineligible for the loan amount received or the loan forgiveness amount claimed, the SBA will direct the lender to deny the loan forgiveness application in whole or in part, as appropriate.
 
If the SBA makes any of the foregoing determinations, the SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.
May a borrower appeal a SBA determination of ineligibility? Yes. The SBA intends to issue additional guidance on the appeals process a borrower may utilize to challenge a SBA determination that the borrower was ineligible to receive (i) a PPP loan, (ii) the actual amount of the PPP loan granted to the borrower or (iii) the amount of loan forgiveness claimed by the borrower.
Is a lender still entitled to a processing fee if a borrower is determined to have been ineligible to receive a PPP loan? No. To the extent the SBA determines that a borrower was ineligible to receive a PPP loan, the lender will not be entitled to a processing fee.
Are lender fees subject to clawback? For any SBA-reviewed PPP loan, if within 1 year after the loan proceeds were disbursed, the SBA determines that a borrower was ineligible for a PPP loan based on the provisions of the CARES Act, the applicable rules/guidance available at the time of borrower’s application or the terms of the loan application, the SBA will seek repayment of the lender processing fee from the lender.
 
For clarity, a determination that a borrower was ineligible for a PPP loan will not impact the SBA’s guaranty of the loan, provided the lender has complied with its obligations set forth in Section III.3.b of the SBA’s first interim final rule issued on April 3, 2020 and the document collection and retention requirements set forth in the lender application form (SBA Form 2484). If the lender fails to comply with such requirements, however, the SBA may determine that the PPP loan is not eligible for a loan guaranty.
What happens if the borrower receives less than total forgiveness on the PPP loan? If the borrower was otherwise eligible to receive the PPP loan and 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 2 year maturity of the loan.



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