Regulations for the Paycheck Protection Program Provide Clarity and More Questions

Applications under the Paycheck Protection Program opened for small businesses and sole proprietors on Friday April 3, 2020, with applications for independent contractors and the self-employed set to open on April 10. However, it was not until the evening of April 2 that the Treasury released needed guidelines for lenders handling this influx of loan applications.

This article summarizes the guidance given in the interim rule (the "Rule") released on Paycheck Protection Program. For a summary of how the Program was outlined in the CARES Act, please refer to this article (updated).

About the Paycheck Protection Program: The Paycheck Protection Program (the "Program") authorizes the SBA to fully guarantee loans through June 30, 2020. Through the CARES Act, Congress authorized $349 billion to provide loans to small businesses under the SBA 7(a) loan program. These loans are to be issued on a first-come, first-served basis.

Eligibility: The Rule clarifies which businesses are eligible to apply for loans under the Program.
Your business is eligible for a Program loan if:

• It has 500 or fewer employees who live in the U.S. or operate in a certain industry that meets applicable SBA employee-based size standards for that industry, and
• It is a small business concern, non-profit organization, tax exempt veteran's organization, or Tribal Business Concern, and
• It was in operation on February 15, 2020, and had employees from whom you paid salaries or payroll taxes or independent contractors.

Sole proprietorships, independent contractors, and self-employed individuals are also eligible, if they were in operation on February 15, 2020.

Your business is ineligible for a Program loan if:

• It is a business described in in 13 CFR 120.110,
• It is engaged in illegal activity under federal law,
• It is a household employer,
• It is owned 20% or more by a person incarcerated, on probation, or under indictment, or
• It is owned by any owners who have obtained and defaulted on SBA loans which caused a loss to the government.

Calculating maximum loan amount: The maximum amount the applicant can seek to borrow is calculated in the same manner as described in the CARES Act. However, one significant change from the CARES Act is that independent contractors do not count as employees for purposes of Program loan applications.

Additionally, the Rule clarifies that only one Program loan will be issued per borrower, and recommends that borrowers apply for the maximum amount they could receive.

Interest: The interest rate will be 1%. This is changed from yesterday, where the interest rate was said to be 0.5%, and the CARES Act, which said it could be 4%.

Maturity: The maturity is two years. This is different from the CARES Act, which stated it could be ten years.

Deferment: While payments are deferred for six months following the disbursement of the loan, interest will continue to accrue during this deferment. This is a change from the CARES Act, which stated payment could be deferred for up to one year.

Forgiveness: The method of determining forgiveness is much the same as the CARES Act, however, the Rule states that not more than 25% of forgiveness can be attributed to non-payroll costs. The SBA will be releasing additional guidance on forgiveness. Payroll costs are defined in the CARES Act.

Forms to apply: Applicants can apply through their preferred lender, if authorized to issue Program loans, and must submit SBA Form 2483 (available here), and payroll documentation. Lenders must submit SBA Form 2484 (available here).

Underwriting requirements for lenders: Each lender shall confirm the receipt of borrower certifications required under the CARES Act, confirm receipt of information showing a borrower had employees from whom they paid salaries and payroll taxes on or around February 15, 2020, confirm the average monthly payroll costs for the preceding calendar year by reviewing borrower's submitted payroll documentation, and meet applicable BSA requirements.

The Rule clarifies that lenders are allowed to rely on the borrower's certifications in order to determine the loan amount and eligibility for forgiveness. Further, lenders are held harmless for borrower's failure to comply with the Program.

Fees: No fees shall be paid by any borrower. The SBA will pay lenders fees for processing Program loans in rates of:

• 5% for loans not more than $350,000
• 3% for loans between $350,000 and $2,000,000
• 1% for loans of at least $2,000,000

Agent fees will be paid by the lender out of fees receives from the SBA in rates of:

• 1% for loans not more than $350,000
• 0.5% for loans between $350,000 and $2,000,000
• 0.25% loans at least $2,000,000

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As with everything involving the coronavirus pandemic, this situation is evolving. The SBA still has additional guidance to issue and lenders have already expressed doubts about their ability to process loan applications for new clients, so existing relationships with lenders will be key to obtaining these funds.