Small Business Administration Releases New and Revised Loan Forgiveness Applications to Implement Terms of the Paycheck Protection Program Flexibility Act
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On June 17, 2020, the US Department of the Treasury (Treasury Department) and the Small Business Administration (SBA) announced the release of (i) a revised Paycheck Protection Program PPP Loan Forgiveness Application, Form 3508, to implement the terms of the Paycheck Protection Program Flexibility Act (Flexibility Act), and (ii) a new, simplified "EZ" version of the application, Form 3508EZ, available to certain qualified borrowers. This Advisory provides a brief overview of the new applications and the circumstances behind their release.
A key element of the CARES Act, the Paycheck Protection Program (PPP) was intended to aid small businesses and keep workers on payrolls by providing loans that could be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities. From the very beginning, however, there were criticisms of the PPP. These included that the eight-week "covered period" during which the loan proceeds had to be applied was too short and the requirement that 75% of the loan proceeds be used for payroll costs to get full forgiveness was too high. In addition, many questions about the process arose that were not fully answered by the SBA. When the original loan forgiveness application was released on May 16, actual and potential program participants found it lengthy and confusing, even after the SBA provided additional guidance.
Against this background, the Flexibility Act was enacted on June 5 to address concerns that the PPP was too restrictive. Amendments in the Flexibility Act included, among others:
- Extending the covered period for loan forgiveness from eight weeks following disbursement of loan proceeds to 24 weeks or December 31, 2020, whichever is earlier (a borrower who received a PPP loan before June 5 can elect to continue using the eight-week period);
- Extending the deadline to rehire employees and reverse salary cuts of greater than 25% from June 30 to December 31, 2020;
- Exempting borrowers from the proportional reduction in loan forgiveness due to a reduction in employees, if the borrower is able to document in good faith that for the period of February 15 to December 31, 2020, the borrower was unable to:
- either rehire employees who were employed on February 15, 2020 or hire similarly qualified employees for unfilled positions by December 31, 2020; or
- return to the same level of business activity as the business was operating at before February 15, 2020 due to compliance with federal requirements or guidance issued between March 1 and December 31, 2020 related to standards for sanitation, social distancing, or any other COVID-19 related worker or customer safety requirement; and
- Lowering the amount of PPP loan proceeds that must be used for payroll costs to qualify for full loan forgiveness from 75% to 60%.
On June 11, 2020, the SBA issued an Interim Final Rule (IFR) implementing the Flexibility Act amendments. Among other things, the IFR clarified that the 60% requirement means that if a borrower uses less than 60% of the loan for payroll costs, the borrower would be entitled to a proportional amount of forgiveness.
In order to address the changes made by the Flexibility Act and the IFR to the calculation of applicable loan forgiveness, the SBA released its revised Form 3508 Loan Forgiveness Application, together with revised instructions, on June 17, 2020. Although many of the changes enable borrowers to take advantage of the benefits of the Flexibility Act, borrowers and lenders still need to pay close attention to the detailed calculations required by the Form and the instructions. For example, although the increase in the covered period to 24 weeks provides a longer period in which to comply with the requirements for forgiveness, a longer covered period may result in a greater reduction in loan forgiveness due to reductions in salary or rate over the longer period.
In addition, the SBA released the new Form 3508EZ (and instructions), to simplify the forgiveness application process for borrowers that:
- Are self-employed and have no employees;
- Did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; or
- Experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.
If any one of these requirements is satisfied, there is no reduction in forgiveness required for reductions in employees or salaries and there is no need to complete Schedule A and the Schedule A Worksheet contained in the Form 3508, so a streamlined form can be used. Because borrowers are not required to provide as much documentation for the streamlined forgiveness application, lenders should carefully review the calculations and determine from the information contained in the borrower's files that the calculations are reasonable and appear consistent with its knowledge of the borrower.
Passage of the Flexibility Act raises the potential for significant increases in PPP loan forgiveness and the revision of Form 3508 and the creation of Form 3508EZ advance that goal. At the same time, the forgiveness process is in its early stages and it is likely that the SBA will take further actions as new questions and issues appear.
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.