Borrowers under the Paycheck Protection Program (PPP) are breathing a sigh of relief after the US Senate approved legislation yesterday that will ease some of their biggest concerns about PPP loans. H.R. 7010, “The Paycheck Protection Program Flexibility Act of 2020,” was adopted by the US House of Representatives last week, and is expected to be signed by the President soon.
The most significant changes concern loan forgiveness and apply to both existing and new loans. Prior to this legislation, PPP borrowers could only obtain forgiveness for amounts spent in the first eight weeks after receiving their loan. That “covered period” for forgiveness has now been extended to twenty-four weeks, or December 31, 2020, whichever is earlier, providing borrowers a lot more leeway to obtain forgiveness, particularly if they are not ready or able to fully reopen their businesses now.
The legislation also relaxes the amount that borrowers must spend on payroll in order to obtain forgiveness. Existing rules required borrowers to spend at least 75% on payroll. H.R. 7010 reduces that payroll threshold to 60%, which provides flexibility for borrowers to spend more on mortgage interest, rent and utility obligations.
H.R. 7010 also changes the way that borrowers must calculate reductions to their forgiveness amount for layoffs and wage cuts. The general parameters behind the calculation remain the same. Borrowers still face a proportionate reduction to their forgiveness amount if their average FTEs during the PPP covered period is less than their average FTEs during their chosen reference period. They also still face dollar-for-dollar reductions for certain wage cuts above 25%.
However, H.R. 7010 gives borrowers more flexibility to avoid the reductions to loan forgiveness. The deadline to rehire employees and restore wage cuts to avoid the reduction has been moved back from June 30 to December 31, 2020. The bill also creates a new exemption for FTE reductions. The amount of forgiveness will now be determined without regard to the proportional reduction to FTEs if the borrower can demonstrate an inability to:
- rehire the specific individuals who were employees as of February 15, 2020, and hire similarly qualified employees for unfilled positions on or before December 31, 2020, or
- return to the same level of business activity that existed before February 15, 2020, due to social distancing, sanitation or other COVID-19-related requirements established by HHS, CDC or OSHA.
Other highlights of the bill include:
- Borrowers seeking loan forgiveness can now defer principal and interest payments until their forgiveness amount is remitted to the lender. For borrowers not seeking forgiveness, loan payments can now be deferred until ten months after the end of their covered period.
- The minimum maturity period for new PPP loans was extended from two years to five years. Although not required, existing PPP borrowers and their lenders can mutually agree to modify the terms of a covered loan to conform to this extension.
- PPP borrowers can now take advantage of the payroll tax deferment in the CARES Act even after they obtain forgiveness of their PPP loan.
Unfortunately, the added flexibility provided by H.R. 7010 comes with new ambiguity for certain borrowers. For example, the legislation could be interpreted to not only require borrowers to spend 60% of the forgivable amount on payroll, but to spend 60% of the total loan on payroll to obtain any forgiveness at all. Such an interpretation could pose an issue for borrowers that were not planning to seek forgiveness of their entire PPP loan.
The legislation also creates ambiguity for borrowers that are facing further layoffs. The reduction to forgiveness for layoffs is calculated using the average FTEs over the “covered period” of a PPP loan. H.R. 7010 extends that covered period from eight weeks to twenty-four weeks, although it allows current borrowers to elect to retain an eight-week covered period if they so choose. Even so, it is not clear how these changes will impact borrowers that are facing new layoffs within the new twenty-four week covered period but have already exhausted their PPP loan proceeds.
Hopefully, SBA will provide clarity on these issues soon, but if the meantime, we encourage you to consult counsel with any questions.
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