What the new PPP loan guidelines mean for entrepreneurs

It hasn’t been easy for those applying for or administering Paycheck Protection Program loans since the program went into effect on April 15. Lightning-fast deployment, different interpretations of the rules, a constant stream of updates, recipient warnings, audits and penalties, as well as negative press regarding SOEs receiving money while requests from small businesses were stuck in a lender deadlock, frustrating many potential borrowers to the point that some withdrew their applications or returned the money.

In fact, in early May, an Associated General Contractors of America (AGC) survey found that 18% of its members who had received PPP loans were considering returning them. This uncertainty among small business owners could explain why, at the end of May, there was nearly $ 150 billion untapped in the P3.

There has, however, been some progress in making the program more user-friendly with the release of new rules and a bill passed in the House awaiting a decision in the Senate.

New Federal Directive

In previous guidelines, the Treasury Department and the SBA have stated that all PPP loans of $ 2 million or more, upon request for forgiveness, will be audited. The implication was that companies that did not provide the correct information on their rebate requests or loan requests or did not perform due diligence could be referred to the Department of Justice or to other agencies for further examination and possibly investigation.

On May 13, however, the federal government released an important clarification (FAQ 46) regarding loans over and under $ 2 million. According to Crowell & Moring lawyer Mana Lombardo, companies that take out PPP loans of less than $ 2 million would be “automatically deemed” to have acted in good faith when certifying their economic needs.

Loans over $ 2 million, she said, would still be reviewed, but if the SBA determines that the loan does not meet economic needs requirements, the company will have to repay the loan but without a performance penalty. or referral. to the DOJ or another agency.

“This was the most important development in terms of… having a security language,” said Lombardo.

New SBA rule

The SBA has also released a new interim final rule on PPP loan review procedures, which includes more details on lender obligations.

In an AGC webinar last month, attorney Amy O’Sullivan, also of Crowell & Moring, said borrowers, although they typically rely on input from lenders to complete loan applications, were alone in terms of PPP eligibility. Even being approved for a loan, she said, does not guarantee eligibility.

In the interim final rule, however, the SBA specifies that the lender has an obligation in several areas, including:

  • Confirmation that he has received a loan forgiveness request form from a borrower.
  • Verification that he has received documentation from the borrower to support salary and non-salary costs.
  • Verification of the borrower’s calculations on the rebate request.

“The lender has an obligation to examine in good faith,” she said, “and to do so within a reasonable time. And to the extent that they determine that the borrower has not provided sufficient documentation substantial to safeguard (his) record, the guidelines ask lenders to assist the borrower in this process and to try to remedy the situation with them.

Ultimately, however, the accuracy of the information contained in the loan application remains the responsibility of the borrower.

Potential extension of the program

The House passed legislation last week that has the potential to have the biggest impact on PPP, an amendment to CARES called the Paycheck Protection Program Flexibility Act of 2020.

If the Senate approves the bill as is, it:

  • Extend the “covered period” for PPP loans from eight to 24 weeks.
  • Change the requirement to cancel the use of funds from 75% salary costs / 25% non-salary costs to 60% salary costs / 40% non-salary costs.
  • Create a safe haven for employers who have made a good faith effort to hire or rehire qualified employees.
  • Extend the maturity of PPP loans from two to five years.
  • Allow PPP loan recipients to defer payroll taxes until the end of 2020.

The extension of the period covered, said Jimmy Christianson, vice president of government relations at the AGC, is the most important potential change “because timing is everything.” He said this element of the bill is most important for companies that were the first participants in the PPP, as their period of coverage is expected to expire soon, if it hasn’t already.

“But the reality is in any economic downturn, the worst for construction [industry] is still coming towards the latter part of the recession, ”he said. “And we have a lot of members who [have] backlog and do their best to continue to secure this backlog. … So the ability to extend that period from eight weeks to 24 weeks is extremely useful.

Change in the salary / non-salary expense ratio, allowing flexibility when it comes to keeping employees on the payroll or re-hiring them in an environment where they might not want to return to work, extending the repayment period two to five years and letting entrepreneurs defer payroll taxes are all things that will give them the best chance of survival, Christianson said.

As the Senate struggles to reconcile the House bill with its proposals, Crowell & Moring attorney Paul Pollock said the program could also see an overhaul of the complicated loan forgiveness request. and cumbersome in the way companies calculate. how much of their loan is forgivable.

“We can probably expect,” he said, “that this whole begging for forgiveness is going to be reinvented at some point in the next couple of weeks.”

However, Lombardo said, unless there are relevant changes to the surrender decision schedule, between the necessary SBA and lender approvals, it will still take up to 150 days before the SBA approves the surrender. PPP loans.

The bottom line, Christianson said, is that the legislation will help entrepreneurs stay in business, as long as the Senate acts in a timely manner.

“My biggest fear is that when they decide it’s time to take care of the infrastructure,” he said, “the [contractors] they have to face will not be there.

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