SBA Addresses Excess Forgiveness Costs For ALL PPP Borrowers in Rule Streamlining Process for Loans Under $50k

Yes, SBA streamlined forgiveness for loans under $50k, but the IFR also tries to clarify how to handle a borrower whose payroll and non-payroll costs exceed its loan amount. This is getting much less attention, but it applies to borrowers with loans of ANY SIZE and is important and helpful, so let’s Jump in.

1.       Once PPPFA extended the covered period to 24 weeks, we began to get questions from borrowers about whether they could use forgiveness costs that exceed their PPP loan amount so that when such amounts were reduced by the FTE and salary/wage reduction requirements the borrowers could still get full forgiveness.  Let’s look at the math briefly. 

a.       A borrower with a $1M PPP loan who cut its FTE number (and thus payroll cost) by 50% , may only have $500k of payroll expense for an 8 week period, which under the 60% rule allows for another $333k of non-payroll costs, totaling $833k of forgivable expenses.  But, because the FTE count is reduced by 50% that borrowercan only achieve $416.5k of actual forgiveness.

b.       By extending to a 24 week period, that same $1Mborrower now has $1.5M of payroll expense, $1M of non-payroll costs for $2.5M of forgivable expenses.  Applying the 50% FTE reduction now yields a maximum forgiveness of $1.25M  Obviously, it can’t get more than its full loan amount forgiven, but the full original $1M is now forgivable under this approach.

However, it was not clear whether a borrower could actually use that full $2.5M amount as the starting point, because it is in excess of the loan amount.  The new IFR asks the question “What should a lender do if a borrower submits documentation of eligible costs that exceed a borrower’s PPP Loan Amount?” and “answers” it by saying :

“The amount of loan forgiveness that a borrower may receive cannot exceed the principal amount of the PPP loan.  … [A] lender should confirm receipt of the documentation … verifying payroll and nonpayroll costs … up to the amount required to reach the requested Forgiveness Amount.” 

Would it have killed them to actually ANSWER their own question by adding “even if such costs exceed the PPP loan amount”??  However, even with SBA’s usual suboptimal drafting and without the clarifying language, the bold language above *seems* to be a pretty clear indication that, yes, the borrower can use the higher amount ($2.5Min the example above) because that is the amount required to be used to reach the full requested ($1M) forgiveness amount.  Despite me nitpicking the language, this is to some extent the Best of Both Worldsand actually a very good result for borrowers and hopefully removes any uncertainty around this approach.

2.       Turning to the headline story, the streamlining for loans under $50k primarily consists of:

a.       Allowing those borrowers to ignore the FTE and salary/wage reductions.

b.       Eliminating any requirement for the lender to verify such a borrower’s forgiveness data or calculations.  The lender need only confirm that the borrower has made the necessary certifications and submitted supporting documentation.

The first part of the rule is pretty close to a nothing burgerOut of 5.2 million PPP loans, 3.57 million are under $50k and 1.7M of these reported zero employees, so this “streamlining” doesn’t affect them at all, but SBA needed a “hook” on which to tell congress to Beat It, so that SBA could take the streamlining into its own hands.  The latter is really the key driver here.  Many banks have said “I’ll Wait” and have held off on opening their forgiveness portals because of the costs and headaches involved in processing each forgiveness application.  This new rule eliminates most of the processing requirements for more than 60% of the PPP loans (3.5M / 5.2M), which is what the banks have been demanding.   

SBA notes that the remaining cohort of 1.87M loans under $50k represents only 9% of the PPP principal balance probably wouldn’t be impacted by the FTE or salary/wage reductions because … SBA doesn’t think that they reduced FTEs or wages and if they did, well, by golly, they probably fall into one of the safe harbors.  SBA cites exactly ZERO data in making this assertion, but it’s frankly hard to give SBA much grief for this. Keep in mind that SBA’s hands are largely tied by the CARES Act and Congress’s inability to reach agreement on a legislative fix for smaller loans.  (Though you could argue that there are plenty of areas where SBA has simply made up PPP law on its own, here they seem to be trying to creatively color within the statutory lines).  Absent congressional action, this seems to be a reasonable fix, even though it may not be what the banks and smaller borrowers were fully hoping for.  It will be interesting to see whether this change is Good Enough and, when combined with the recent change of control rule noted below, will put pressure on banks to open their forgiveness portals Right Now.  

Also, in a mini flashback to the Eruption of IFRs and FAQs from early summer, SBA also added a new FAQ (#52) on Wednesday night.  It didn’t add anything substantive, merely clarifying that borrowers and lenders do NOT need to modify their PPP notes to reflect the 10 month post-covered-period deferral period implemented by the PPPFA.  That deferral applies regardless and overrides anything in a PPP note to the contrary.

For those who missed our PPP M&A webinar, you can watch the on-demand recording here.  For those who did, I apologize for recycling many of the Eddie Van Halen tributes above.

Happy Trails and have a good weekend.