Hello friends and welcome back. It’s been a while, but don’t call it a comeback. I’ve been here, but there just hasn’t been much to say on the PPP regulatory front. By far the most common challenge that we’ve been dealing with lately is assisting clients with the legal, economic and tax (especially ERTC) implications of buying and selling PPP borrowers.
But since we’re far from the shallow now, let’s dive back in as this is a more momentous week, including new PPP FAQ for the first time in more than a month, the closing of the PPP window (maybe?) and the opening of the PPP forgiveness portal:
Down on Main Street. But first the dog that didn’t bark. The Fed released its first report on Main Street Lending Program volume this week. The MSLP opened six weeks ago, and just a few days after SBA reported that the 5 millionth PPP loan had been funded, the Fed reported that lenders had funded a total of eight (yes, eight (8)) MSLP loans (5 priority, 3 new, 0 expanded).
· The loans total $80.9M of original principal. The $77M being reportedelsewhere is the 95% participation percentage purchased by the Fed SPV. One of those loans was $50M, so the other 7 total $30.9M.
· Our finance team has had a LOT of conversations about the MSLP, but have yet to see a deal closed. While there was a flurry of enthusiasm for the program, once we worked through the program requirements with our clients, we found that it is almost impossible to structure a MSLP loan for a borrower that has any meaningful existing leverage, due to both those program requirements and what the existing lenders will require.
· So this data is consistent with our experience as well as the perspectives of both Chairman Powell (“not getting a ton of interest” in the MSLP) and Bob Seger (he was “down” on Main Street) (Yeah, I know, that one was terrible – I’m out of practice.).
Return of the FAQ. After issuing 19 IFR and 49 FAQ through June 25, SBA went radio silent and didn’t issue any meaningful guidance for more than a month, perhaps sleeping off a hangover from IFR #19. Although the August 4 FAQ on Loan Forgiveness mainly retreads familiar ground, there are a few interesting points:
· A key open question has been whether interest on loans secured by traditional liens on personal property is forgivable, which turns on whether such loans meet the standard of being secured by a “mortgageon real or personal property.” Good news: FAQ #4 seems to say that such yes, such interest is forgivable. “Payments of interest on business mortgages on real orpersonal property (such as an auto loan)are eligible for loan forgiveness.”
o This seems to mean that that interest on all secured debt is now forgivable … unless they are referring to an auto loan because it has a written certificate of title where liens need to be recorded, which is more akin to a “mortgage”?? (I certainly have not missed these mental gymnastics) (Return of the FAQ, Come on … Return of the FAQ, Oh my God, … here I am … once again.)
o Oh, and note that I’m referring to the second FAQ #4, which is on page 7 of the PDF. Rather than simply adding these to the end of the existing FAQ, they’ve started a new document … with a new numbering system that starts over on each topic. Perhaps the one thing that wasn’t broken with the existing FAQs was the numbering system. So… of course they “fixed” it.
· Another lingering question was whether borrowers would be obligated to pay interest on forgiven PPP amounts, because the CARES Act provides that the forgiveness amount will not exceed principal. SBA neatly avoids this limitation by simply not referring to such interest as being forgiven. Instead, SBA cleverly says that the borrower was never “responsible” for such payment, so there is nothing to forgive per FAQ #3 on pp 1-2 (credit where credit is due, this is well done by SBA):
“If the loan is fully forgiven, the borrower is not responsible for any payments. … The borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven.”
· We also finally have an answer to what the constitutes “transportation” in the context of being a forgivable “utility” payment under the CARES Act. Some commentators had wrongly speculated that this covered fuel for company vehicles, but alas, it instead refers only to “transportation utility fees [TUFs]assessed by state and local governments.” Oh. Of course.
o TUFs were charged by all of 34 cities around the US, encompassing a whopping 1.5 million residents, according to a 2016 article cleverly – and accurately – titled “A TUF Sell …” which is linked by the Federal Highway Administration on its TUF Resources Page.)
o (Do we think SBA just decided this on their own because they didn’t know what Congress meant and settled on TUFs out of thin air… or that TUFs are in fact exactly what Congress intended and someone at SBA just recently pulled out the Final Jeopardy answer out of a hat?)
The End of the Beginning. After four tumultuous months, the PPP 2.0 application period is set to expire tomorrow night (Friday, August 8). After approving the entire $349B initial allocation in less than two weeks, SBA approved only about $180B over the remaining three and one half months, leaving nearly $130B of the second funding allocation unclaimed.
· Originally designed as a bridge through hoped-for short term economic disruption, the PPP was beset by problems from the start and has been criticized as a “Band-Aid on a bullet wound” and a “bridge to nowhere.”
· Debates around the next phase of the stimulus continue in Congress, with both parties seeming to support an extension of at least a modified PPP 3.0, though it is not clear that there is much appetite among businesses for additional debt-like programs.
· Despite its flaws, the program has funded more than 5.1M loans in four months through an SBA 7(a) program that funded all of 63,000 loans in all of 2019. A preliminary study by MIT and Fed researchers estimates that PPP loans saved between 1.4 and 3.2million jobs through early June, while another study by the National Bureau of Economic Research indicated that taking a PPP loan increased businesses’ “expected survival” by 14-30%.
Application Portal Set to Open. The SBA has announced that the application portal is scheduled to open this coming Monday, August 10th. The initial loan portal suffered from numerous technical glitches, so both borrowers and lenders are hoping this will go more smoothly. However, borrowers have 10 months from the date of their loan to apply for forgiveness, and it appears that many may wait to apply in the hope that one of the many measures pending in Congress will provide additional flexibility, perhaps including automatic forgiveness for loans below a threshold of $100-250k, which is supported by banks and Secretary Mnuchin, though such a measure of course faces opposition. Stay tuned.
I hope that all of you, your teams and your loved ones are staying safe, healthy and sane.