The SBA’s initial Interim Final Rule addressing the CARES Act’s Paycheck Protection Program (“PPP”), released on April 2, and its revised Borrower Application Form and Lender Application Form for a PPP Loan Guaranty, released the same day, marked huge steps forward in moving the PPP towards launch. In particular, the Lender Application Form eliminated excessive lender burdens and potential pitfalls reflected in an earlier draft of the Application that had circulated through the lender community. Further guidance, in the form of a follow-up Interim Final Rule, the first question and answer to what promises to be an expanding FAQ have also advanced the ball. Now most urgently, the SBA needs to upgrade the processing capacity in its E-TRAN application system and provide clarity on how to use the system and register PPP loans. Congress and the Administration will also need to consider funding increases, since it is widely expected that the $349 billion appropriated to the PPP will fall far short of demand.
On Friday, April 3, Ballard partners Jeremy Rosenblum and John Sadler hosted Renée Bender, Senior Professional Staff to Chairman Marco Rubio, Senate Small Business and Entrepreneurship Committee, for a webinar addressing the PPP. (Webinar password: Ballard0403) In responding to questions from Messrs. Rosenblum and Sadler, Ms. Bender clarified Congressional intent on a number of key points and offered to raise other points with SBA and Treasury staff. Highlights included the following:
- While Ms. Bender could not specify the specific steps lenders must follow to originate PPP loans, she advised that the SBA has been tasked with expanding its existing infrastructure, streamlining procedures and using standardized documents. While PPP lending commenced on April 3 and standardized loan documents are yet to be provided by the SBA, it is rumored that the SBA will be requiring use of promissory notes with mandatory language (hopefully only on a going-forward basis).
- As observed in a previous post, the initial Interim Final Rule was susceptible to the (surprising) reading that affiliation rules do not apply to loans to enterprises of 500 or fewer employees. Ms. Bender was clear that this was not SBA’s intent and, indeed, the second Interim Final Rule is likewise clear that SBA affiliation rules do apply, except for faith-based organizations, companies providing accommodations and food services (with an NAICS code beginning in 72), companies operating as a franchise that has been assigned a franchise identifier code by the SBA and recipients of financial assistance under Section 301 of the Small Business Investment Act.
- Ms. Bender did not take issue with the SBA guidance in the initial Interim Final Rule that traditional limits on businesses eligible for Section 7(a) loans (for example, limits on loans to finance companies and passive investors) would apply to PPP loans. We disagree with Ms. Bender’s interpretation and continue to believe that these limits are inconsistent with the plain language of the CARES Act and its authorization of PPP loans to “any” business concern meeting applicable size requirements. Even given this restriction in the Interim Final Rule, loans to passive enterprises should be permitted because the limitation applies by its terms only to companies that “use or occupy the assets acquired or improved with the loan proceeds.” With PPP loans, of course, proceeds cannot be used for property acquisition or improvement.
- We understood that Ms. Bender agreed with our observation that the $100,000 compensation threshold in the CARES Act is based on salary and not total compensation, as guidance preceding the initial Interim Final Rule might have suggested.
- Ms. Bender confirmed that the SBA will pay lenders the full amount of forgiven debt plus interest.
- Ms. Bender expressed the view that a lender would not be liable for making a loan to a healthy business that makes overly aggressive certifications to the effect that a PPP loan is “necessary” and/or that the loan proceeds will be made to retain workers and maintain payroll. She advised that companies were given until June 30, 2020 to apply for loans so that those not immediately affected would still have the opportunity to get loans. She suggested that the SBA’s Inspector General would likely be looking at companies that make these certifications even though they were readily able to fund their payrolls beyond June 30 without PPP loans (not just out-and-out fraudsters).
- Ms. Bender acknowledged that the initial Interim Final Rule did not explicitly address whether employee counts are determined on a snapshot basis as of February 15, 2020 or on the basis of average employee counts for the pay periods in the 12 full calendar months preceding the date of the loan application, as described at 13 C.F.R. § 121.106. April 4 SBA Guidance regarding Size Eligibility and Affiliation Under the CARES Act has now resolved this issue: Employee counts are based on a twelve-month period.
- Ms. Bender advised that the SBA was at work in producing guidance for loans to independent contractors (which can be made as early as April 10, 2020). She further advised that the intent of the statute was to allow forgiveness for an independent contractor’s lost earnings, even if no payments on account of such lost earnings could be (or are) made during the 8-week forgiveness period.
- Finally, Ms. Bender took the position that a reduction in forgiveness benefits would apply in a scenario where a company discharges part of its employee base in the covered period but replaces the discharged employees prior to June 30 with different lower-paid employees. We understand the policy rationale for this position but do not believe it is consistent with the statutory language.
On the heels of our webinar with Ms. Bender, the SBA released additional guidance in the form of a second Interim Final Rule, a faith-based FAQ and the beginning of a broader FAQ. As noted above, this guidance makes it clear that the SBA’s affiliation rules at 13 C.F.R. § 121.301 (but not its more detailed standards at 13 C.F.R. § 121.103) apply generally to the PPP—but not to faith-based applicants.
Additionally, the new FAQ makes clear that a review of tax filings is not required before each PPP loan. Rather, “[l]enders are expected to perform a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning average monthly payroll cost. For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable.” (emphasis added) Reliance upon data from recognized third-party payroll processors will be essential for lenders seeking to process the ongoing deluge of PPP loan applications in a compressed period of time. We suggest, however, that lenders would be well-advised to review with legal counsel the assumptions made by payroll processors to ensure compliance with the CARES Act, as best as possible in this period of regulatory uncertainty, and to undertake auditing of a representative sample of loans.
We will continue to provide updates of PPP developments as circumstances warrant. In the meantime, Ballard Spahr attorneys are well-prepared to assist lenders and borrowers in making and obtaining PPP loans, and are advising lenders and borrowers in navigating the PPP loan application and origination process. In particular, we stand ready to assist new and existing clients in the payment processor reviews and loan audits recommended above.