President Trump signed the PPPFA into law on Friday and two key provisions have already apparently been scrapped. It appears that the “cliff” and the extended PPP lending period existed for all of 3 days, at least according to today’s joint announcement from SBA and Treasury regarding their plans to “promptly issue rules and guidance” and new loan and forgiveness applications implementing the PPPFA.
Key takeaways from the statement, and keep in mind that this could all change … again:
· There will be no “forgiveness cliff”. Despite the language in the PPPFA creating such cliff, the statement expressly says:
“If a borrower uses less than 60 percentof the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.”
This means that the forgiveness amount can be calculated in the same manner as had been contemplated by IFR 1, but with a 60-40 split instead of 75-25. If so, thenirrespective of what percentage of the loan is spent on payroll costs, borrowers can obtain forgiveness for 5/3 of the amount spent on payroll costs. Thus a borrower with a $1M PPP loan who uses $300k on payroll costs can apply for forgiveness for up to $500k, as long as it can document that it has spent up to $200k on forgivable non-payroll costs.
o Under IFR 1, such borrower would have been eligible for $400k of forgiveness.
o Under the PPPFA’s cliff provision, such borrower would be eligible for NO forgiveness.
· PPP loan applications must (again? still?)be submitted by June 30, despite the PPPFA extending the loan period through December 31.
o While removing he cliff is a more technical fix that arguably fixes a drafting error, this change directly contradicts the language in the PPPFA. While this appears to be in response to concerns expressed by Senator Johnson and others, it is NOT at all clear how Democrats will react to this change.
o Presumably because the application cutoff is reverting to June 30, the release does not track the PPPFA requirement that the forgiveness period end on theearlier of 24-weeks after disbursement or December 31, 2020. Loans funded after July 18, 2020 would have a 24-week forgiveness period that extends into 2021. That date is only 12 business days after June 30, so based on what we had been seeing regarding timing of approvals and funding, some PPP loans could be funded after such date. Presumably (hopefully?), the actual regulations will clarify how such a loan would be treated.
o $130B of funding remains available. Unless the PPPFA drives a significant spike in demand, it appears that a large portion of that amount will go unused by the new/original June 30 deadline.
· The 5-year maturity will apply to PPP loans that are approved by SBA after June 5 (i.e.,this applies to loans that receive an e-Tran number after June 5). It thus appears that loans that were approved prior to June 5, but are or will be funded after June 5 will still have the 2-year maturity. There is no discussion of whether borrowers and lenders have the option to modify the maturity of those or any prior PPP loans.
· The release does NOT contemplate a couple of changes that many of us have been hoping to see:
o There is no mention of a modified, intermediate forgiveness period of “up to” 24-weeks, which would expedite forgiveness determinations for borrowers who use their PPP proceeds in less than 24 weeks. This would also ease the burden on banks and SBA by spreading out the timing of when forgiveness applications are submitted.
o There is no mention of a de minimis threshold below which smaller borrowers could apply on a “PPP-EZ” forgiveness application.
· The other provisions of the release generally track the language of the PPPFA, which is summarized in the email below, and reflected in the “conformed copy” of the CARES Act sections attached.
In discussing this joint statement with our policy team, our thinking is that it reflects some behind-the-scenes horse-trading that was required to in order to obtain the Senate’s unanimous consent, They also suggested that it was issued to address some of the time-sensitive issues (e.g.,when the 5-year maturity kicks in, and the deadline for applying for PPP loans) in order to buy time for SBA and Treasury to issue the new IFR and applications in a more deliberate and hopefully better-crafted manner. Hope springs eternal. Stay tuned.
P.S. In the interest of completeness, on Friday SBA also issued IFR 16 (the first in two weeks), which sweetly deems 501(c)(12) telephone cooperatives to each be “a business entity organized for profit” and thus eligible for a PPP loan if it meets the other PPP eligibility requirements.