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  • Paul Manigrasso

PPP RULES



These rules came out late last night. In the interest of speed, I'm posting them unredacted, and I'm reviewing them this morning.

News from all sources are that these loan programs are off to a very rocky start. Some lenders are refusing even their existing clients!

I'll post more on this as information becomes available.


In the interim, you can contact me at 817-800-5662.


SMALL BUSINESS ADMINISTRATION

[Docket No. SBA-2020-0015]

13 CFR Part 120

Business Loan Program Temporary Changes; Paycheck Protection Program

RIN 3245-AH34

AGENCY: U. S. Small Business Administration.

ACTION: Interim Final Rule.

SUMMARY: This interim final rule announces the implementation of sections 1102 and

1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the

Act). Section 1102 of the Act temporarily adds a new product, titled the “Paycheck

Protection Program,” to the U.S. Small Business Administration’s (SBA’s) 7(a) Loan

Program. Section 1106 of the Act provides for forgiveness of up to the full principal

amount of qualifying loans guaranteed under the Paycheck Protection Program. The

Paycheck Protection Program and loan forgiveness are intended to provide economic

relief to small businesses nationwide adversely impacted under the Coronavirus Disease

2019 (COVID-19) Emergency Declaration (COVID-19 Emergency Declaration) issued

by President Trump on March 13, 2020. This interim final rule outlines the key

provisions of SBA’s implementation of sections 1102 and 1106 of the Act in formal

guidance and requests public comment.

DATES: Effective Date: This interim final rule is effective [INSERT DATE OF

PUBLICATION IN THE FEDERAL REGISTER].


Applicability Date: This interim final rule applies to applications submitted under the

Paycheck Protection Program through June 30, 2020, or until funds made available for

this purpose are exhausted.

Comment Date: Comments must be received on or before [INSERT DATE 30 DAYS

AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].

You may submit comments, identified by number SBA-2020-0015 through the Federal

eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting

comments.

SBA will post all comments on www.regulations.gov. If you wish to submit

confidential business information (CBI) as defined in the User Notice at

www.regulations.gov, please send an email to dianna.seaborn@sba.gov. Highlight the

information that you consider to be CBI and explain why you believe SBA should hold

this information as confidential. SBA will review the information and make the final

determination whether it will publish the information.

FOR FURTHER INFORMATION CONTACT: The local SBA Field Office; the list of

offices can be found at https://www.sba.gov/tools/local-assistance/districtoffices.

SUPPLEMENTARY INFORMATION:

I. Background Information

On March 13, 2020, President Trump declared the ongoing Coronavirus Disease 2019

(COVID-19) pandemic of sufficient severity and magnitude to warrant an emergency

declaration for all states, territories, and the District of Columbia. With the COVID-19

emergency, many small businesses nationwide are experiencing economic hardship as a

direct result of the Federal, State, and local public health measures that are being taken to

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minimize the public’s exposure to the virus. These measures, some of which are

government-mandated, are being implemented nationwide and include the closures of

restaurants, bars, and gyms. In addition, based on the advice of public health officials,

other measures, such as keeping a safe distance from others or even stay-at-home orders,

are being implemented, resulting in a dramatic decrease in economic activity as the

public avoids malls, retail stores, and other businesses.

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic

Security Act (the CARES Act or the Act) (P.L. 116-136) to provide emergency assistance

and health care response for individuals, families, and businesses affected by the

coronavirus pandemic. The Small Business Administration (SBA) received funding and

authority through the Act to modify existing loan programs and establish a new loan

program to assist small businesses nationwide adversely impacted by the COVID-19

emergency.

Section 1102 of the Act temporarily permits SBA to guarantee 100 percent of 7(a)

loans under a new program titled the “Paycheck Protection Program.” Section 1106 of

the Act provides for forgiveness of up to the full principal amount of qualifying loans

guaranteed under the Paycheck Protection Program. A more detailed discussion of

sections 1102 and 1106 of the Act is found in section III below.

II. Comments and Immediate Effective Date

The intent of the Act is that SBA provide relief to America’s small businesses

expeditiously. This intent, along with the dramatic decrease in economic activity

nationwide, provides good cause for SBA to dispense with the 30-day delayed effective

date provided in the Administrative Procedure Act. Specifically, small businesses need

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to be informed on how to apply for a loan and the terms of the loan under section 1102 of

the Act as soon as possible because the last day to apply for and receive a loan is June 30,

2020. The immediate effective date of this interim final rule will benefit small businesses

so that they can immediately apply for the loan with a full understanding of loan terms

and conditions. This interim final rule is effective without advance notice and public

comment because section 1114 of the Act authorizes SBA to issue regulations to

implement Title 1 of the Act without regard to notice requirements. This rule is being

issued to allow for immediate implementation of this program. Although this interim

final rule is effective immediately, comments are solicited from interested members of

the public on all aspects of the interim final rule, including section III below. These

comments must be submitted on or before [INSERT DATE 30 DAYS FROM DATE OF

PUBLICATION IN THE FEDERAL REGISTER]. The SBA will consider these

comments and the need for making any revisions as a result of these comments.

III. Temporary New Business Loan Program: Paycheck Protection Program

Overview

The CARES Act was enacted to provide immediate assistance to individuals,

families, and businesses affected by the COVID-19 emergency. Among the provisions

contained in the CARES Act are provisions authorizing SBA to temporarily guarantee

loans under a new 7(a) loan program titled the “Paycheck Protection Program.” Loans

guaranteed under the Paycheck Protection Program (PPP) will be 100 percent guaranteed

by SBA, and the full principal amount of the loans may qualify for loan forgiveness. The

following outlines the key provisions of the PPP.

1. General

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SBA is authorized to guarantee loans under the PPP through June 30, 2020. Congress

authorized a program level of $349,000,000,000 to provide guaranteed loans under this

new 7(a) program. The intent of the Act is that SBA provide relief to America’s small

businesses expeditiously, which is expressed in the Act by giving all lenders delegated

authority and streamlining the requirements of the regular 7(a) loan program. For

example, for loans made under the PPP, SBA will not require the lenders to comply with

section 120.150 “What are SBA’s lending criteria?.” SBA will allow lenders to rely on

certifications of the borrower in order to determine eligibility of the borrower and use of

loan proceeds and to rely on specified documents provided by the borrower to determine

qualifying loan amount and eligibility for loan forgiveness. Lenders must comply with

the applicable lender obligations set forth in this interim final rule, but will be held

harmless for borrowers’ failure to comply with program criteria; remedies for borrower

violations or fraud are separately addressed in this interim final rule. The program

requirements of the PPP identified in this rule temporarily supersede any conflicting Loan

Program Requirement (as defined in 13 CFR 120.10).

2. What Do Borrowers Need to Know and Do?

a. Am I eligible?

You are eligible for a PPP loan if you have 500 or fewer employees whose

principal place of residence is in the United States, or are a business that operates

in a certain industry and meet the applicable SBA employee-based size standards

for that industry, and:

i. You are:

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A. A small business concern as defined in section 3 of the

Small Business Act (15 USC 632), and subject to SBA’s affiliation

rules under 13 CFR 121.301(f) unless specifically waived in the

Act;

B. A tax-exempt nonprofit organization described in section

501(c)(3) of the Internal Revenue Code (IRC), a tax-exempt

veterans organization described in section 501(c)(19) of the IRC,

Tribal business concern described in section 31(b)(2)(C) of the

Small Business Act, or any other business; and

ii. You were in operation on February 15, 2020 and either had employees for

whom you paid salaries and payroll taxes or paid independent contractors,

as reported on a Form 1099-MISC.

You are also eligible for a PPP loan if you are an individual who operates

under a sole proprietorship or as an independent contractor or eligible self-

employed individual, you were in operation on February 15, 2020.

You must also submit such documentation as is necessary to establish

eligibility such as payroll processor records, payroll tax filings, or Form 1099MISC,

or income and expenses from a sole proprietorship. For borrowers that

do not have any such documentation, the borrower must provide other

supporting documentation, such as bank records, sufficient to demonstrate the

qualifying payroll amount.

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SBA intends to promptly issue additional guidance with regard to the

applicability of affiliation rules at 13 CFR §§ 121.103 and 121.301 to PPP

loans.

b. Could I be ineligible even if I meet the eligibility requirements in (a) above?

You are ineligible for a PPP loan if, for example:

i. You are engaged in any activity that is illegal under federal, state, or local

law;

ii. You are a household employer (individuals who employ household

employees such as nannies or housekeepers);

iii. An owner of 20 percent or more of the equity of the applicant is

incarcerated, on probation, on parole; presently subject to an indictment,

criminal information, arraignment, or other means by which formal

criminal charges are brought in any jurisdiction; or has been convicted of a

felony within the last five years; or

iv. You, or any business owned or controlled by you or any of your owners,

has ever obtained a direct or guaranteed loan from SBA or any other

Federal agency that is currently delinquent or has defaulted within the last

seven years and caused a loss to the government.

The Administrator, in consultation with the Secretary of the Treasury (the

Secretary), determined that household employers are ineligible because they are

not businesses. 13 CFR 120.100.

c. How do I determine if I am ineligible?

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Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110

and described further in SBA’s Standard Operating Procedure (SOP) 50 10,

Subpart B, Chapter 2, except that nonprofit organizations authorized under the

Act are eligible. (SOP 50 10 can be found at https://www.sba.gov/document/sop50-

10-5-lender-development-company-loan-programs.)

d. I have determined that I am eligible. How much can I borrow?

Under the PPP, the maximum loan amount is the lesser of $10 million or an

amount that you will calculate using a payroll-based formula specified in the Act,

as explained below.

e. How do I calculate the maximum amount I can borrow?

The following methodology, which is one of the methodologies contained in the

Act, will be most useful for many applicants.

i. Step 1: Aggregate payroll costs (defined in detail below in f.) from the last

twelve months for employees whose principal place of residence is the

United States.

ii. Step 2: Subtract any compensation paid to an employee in excess of an

annual salary of $100,000 and/or any amounts paid to an independent

contractor or sole proprietor in excess of $100,000 per year.

iii. Step 3: Calculate average monthly payroll costs (divide the amount from

Step 2 by 12).

iv. Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.

v. Step 5: Add the outstanding amount of an Economic Injury Disaster Loan

(EIDL) made between January 31, 2020 and April 3, 2020, less the

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amount of any “advance” under an EIDL COVID-19 loan (because it does

not have to be repaid).

The examples below illustrate this methodology.

i. Example 1 – No employees make more than $100,000

Annual payroll: $120,000

Average monthly payroll: $10,000

Multiply by 2.5 = $25,000

Maximum loan amount is $25,000

ii. Example 2 – Some employees make more than $100,000

Annual payroll: $1,500,000

Subtract compensation amounts in excess of an annual salary of

$100,000: $1,200,000

Average monthly qualifying payroll: $100,000

Multiply by 2.5 = $250,000

Maximim loan amount is $250,000

iii. Example 3 – No employees make more than $100,000, outstanding EIDL

loan of $10,000.

Annual payroll: $120,000

Average monthly payroll: $10,000

Multiply by 2.5 = $25,000

Add EIDL loan of $10,000 = $35,000

Maximum loan amount is $35,000

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iv. Example 4 – Some employees make more than $100,000, outstanding

EIDL loan of $10,000

Annual payroll: $1,500,000

Subtract compensation amounts in excess of an annual salary of

$100,000: $1,200,000

Average monthly qualifying payroll: $100,000

Multiply by 2.5 = $250,000

Add EIDL loan of $10,000 = $260,000

Maximum loan amount is $260,000

f. What qualifies as “payroll costs?”

Payroll costs consist of compensation to employees (whose principal place of

residence is the United States) in the form of salary, wages, commissions, or

similar compensation; cash tips or the equivalent (based on employer records of

past tips or, in the absence of such records, a reasonable, good-faith employer

estimate of such tips); payment for vacation, parental, family, medical, or sick

leave; allowance for separation or dismissal; payment for the provision of

employee benefits consisting of group health care coverage, including insurance

premiums, and retirement; payment of state and local taxes assessed on

compensation of employees; and for an independent contractor or sole proprietor,

wage, commissions, income, or net earnings from self-employment or similar

compensation.

g. Is there anything that is expressly excluded from the definition of payroll costs?

Yes. The Act expressly excludes the following:

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i. Any compensation of an employee whose principal place of residence is

outside of the United States;

ii. The compensation of an individual employee in excess of an annual salary

of $100,000, prorated as necessary;

iii. Federal employment taxes imposed or withheld between February 15,

2020 and June 30, 2020, including the employee’s and employer’s share

of FICA (Federal Insurance Contributions Act) and Railroad Retirement

Act taxes, and income taxes required to be withheld from employees; and

iv. Qualified sick and family leave wages for which a credit is allowed under

sections 7001 and 7003 of the Families First Coronavirus Response Act

(Public Law 116–127).

h. Do independent contractors count as employees for purposes of PPP loan

calculations?

No, independent contractors have the ability to apply for a PPP loan on their own

so they do not count for purposes of a borrower’s PPP loan calculation.

i. What is the interest rate on a PPP loan?

The interest rate will be 100 basis points or one percent.

The Administrator, in consultation with the Secretary, determined that a one

percent interest rate is appropriate. First, it provides low cost funds to borrowers

to meet eligible payroll costs and other eligible expenses during this temporary

period of economic dislocation caused by the coronavirus. Second, for lenders,

the 100 basis points offers an attractive interest rate relative to the cost of funding

for comparable maturities. For example, the FDIC’s weekly national average rate

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for a 24-month CD deposit product for the week of March 30, 2020 is 42 basis

points for non-jumbo and 44 basis points for jumbo

(https://www.fdic.gov/regulations/resources/rates/). Third, the interest rate is

higher than the yield on Treasury securities of comparable maturity. For example,

the yield on the Treasury two-year note is approximately 23 basis points. This

higher yield combined with the fact that the loans are 100 percent guaranteed by

the SBA and the fact that lenders will receive a substantial processing fee from

the SBA provide ample inducement for lenders to participate in the PPP.

j. What will be the maturity date on a PPP loan?

The maturity is two years. While the Act provides that a loan will have a

maximum maturity of up to ten years from the date the borrower applies for loan

forgiveness (described below), the Administrator, in consultation with the

Secretary, determined that a two year loan term is sufficient in light of the

temporary economic dislocations caused by the coronavirus. Specifically, the

considerable economic disruption caused by the coronavirus is expected to abate

well before the two year maturity date such that borrowers will be able to recommence

business operations and pay off any outstanding balances on their PPP

loans.

k. Can I apply for more than one PPP loan?

No. The Administrator, in consultation with the Secretary, determined that no

eligible borrower may receive more than one PPP loan. This means that if you

apply for a PPP loan you should consider applying for the maximum amount.

While the Act does not expressly provide that each eligible borrower may only

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receive one PPP loan, the Administrator has determined, in consultation with the

Secretary, that because all PPP loans must be made on or before June 30, 2020, a

one loan per borrower limitation is necessary to help ensure that as many eligible

borrowers as possible may obtain a PPP loan. This limitation will also help

advance Congress’ goal of keeping workers paid and employed across the United

States.

l. Can I use e-signatures or e-consents if a borrower has multiple owners?

Yes, e-signature or e-consents can be used regardless of the number of owners.

m. Is the PPP “first-come, first-served?”

Yes.

n. When will I have to begin paying principal and interest on my PPP loan?

You will not have to make any payments for six months following the date of

disbursement of the loan. However, interest will continue to accrue on PPP loans

during this six-month deferment. The Act authorizes the Administrator to defer

loan payments for up to one year. The Administrator determined, in consultation

with the Secretary, that a six-month deferment period is appropriate in light of the

modest interest rate (one percent) on PPP loans and the loan forgiveness

provisions contained in the Act.

o. Can my PPP loan be forgiven in whole or in part?

Yes. The amount of loan forgiveness can be up to the full principal amount of the

loan and any accrued interest. That is, the borrower will not be responsible for

any loan payment if the borrower uses all of the loan proceeds for forgiveable

purposes described below and employee and compensation levels levels are

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maintained. The actual amount of loan forgiveness will depend, in part, on the

total amount of payroll costs, payments of interest on mortgage obligations

incurred before February 15, 2020, rent payments on leases dated before February

15, 2020, and utility payments under service agreements dated before February

15, 2020, over the eight-week period following the date of the loan. However, not

more than 25 percent of the loan forgiveness amount may be attributable to non-

payroll costs. While the Act provides that borrowers are eligible for forgiveness

in an amount equal to the sum of payroll costs and any payments of mortgage

interest, rent, and utilities, the Administrator has determined that the non-payroll

portion of the forgivable loan amount should be limited to effectuate the core

purpose of the statute and ensure finite program resources are devoted primarily

to payroll. The Administrator has determined in consultation with the Secretary

that 75 percent is an appropriate percentage in light of the Act’s overarching focus

on keeping workers paid and employed. Further, the Administrator and the

Secretary believe that applying this threshold to loan forgiveness is consistent

with the structure of the Act, which provides a loan amount 75 percent of which is

equivalent to eight weeks of payroll (8 weeks / 2.5 months = 56 days / 76 days =

74 percent rounded up to 75 percent). Limiting non-payroll costs to 25 percent of

the forgiveness amount will align these elements of the program, and will also

help to ensure that the finite appropriations available for PPP loan forgiveness are

directed toward payroll protection. SBA will issue additional guidance on loan

forgiveness.

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p. Do independent contractors count as employees for purposes of PPP loan

forgiveness?

No, independent contractors have the ability to apply for a PPP loan on their own

so they do not count for purposes of a borrower’s PPP loan forgiveness.

q. What forms do I need and how do I submit an application?

The applicant must submit SBA Form 2483 (Paycheck Protection Program

Application Form) and payroll documentation, as described above. The lender

must submit SBA Form 2484 (Paycheck Protection Program Lender’s

Application for 7(a) Loan Guaranty) electronically in accordance with program

requirements and maintain the forms and supporting documentation in its files.

r. How can PPP loans be used?

The proceeds of a PPP loan are to be used for:

i. payroll costs (as defined in the Act and in 2.f.);

ii. costs related to the continuation of group health care benefits during

periods of paid sick, medical, or family leave, and insurance premiums;

iii. mortgage interest payments (but not mortgage prepayments or principal

payments);

iv. rent payments;

v. utility payments;

vi. interest payments on any other debt obligations that were incurred before

February 15, 2020; and/or

vii. refinancing an SBA EIDL loan made between January 31, 2020 and April

3, 2020. If you received an SBA EIDL loan from January 31, 2020

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through April 3, 2020, you can apply for a PPP loan. If your EIDL loan

was not used for payroll costs, it does not affect your eligibility for a PPP

loan. If your EIDL loan was used for payroll costs, your PPP loan must be

used to refinance your EIDL loan. Proceeds from any advance up to

$10,000 on the EIDL loan will be deducted from the loan forgiveness

amount on the PPP loan.

However, at least 75 percent of the PPP loan proceeds shall be used for payroll

costs. For purposes of determining the percentage of use of proceeds for payroll

costs, the amount of any EIDL refinanced will be included. For purposes of loan

forgiveness, however, the borrower will have to document the proceeds used for

payroll costs in order to determine the amount of forgiveness. While the Act

provides that PPP loan proceeds may be used for the purposes listed above and for

other allowable uses described in section 7(a) of the Small Business Act (15

U.S.C. 636(a)), the Administrator believes that finite appropriations and the

structure of the Act warrant a requirement that borrowers use a substantial portion

of the loan proceeds for payroll costs, consistent with Congress’ overarching goal

of keeping workers paid and employed. As with the similar limitation on the

forgiveness amount explained earlier, the Administrator, in consultation with the

Secretary, has determined that 75 percent is an appropriate percentage that will

align this element of the program with the loan amount, 75 percent of which is

equivalent to eight weeks of payroll. This limitation on use of the loan funds will

help to ensure that the finite appropriations available for these loans are directed

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toward payroll protection, as each loan that is issued depletes the appropriation,

regardless of whether portions of the loan are later forgiven.

s. What happens if PPP loan funds are misused?

If you use PPP funds for unauthorized purposes, SBA will direct you to repay

those amounts. If you knowingly use the funds for unauthorized purposes, you

will be subject to additional liability such as charges for fraud. If one of your

shareholders, members, or partners uses PPP funds for unauthorized purposes,