SBA Issues Two Additional Final Rules on PPP Loan Forgiveness


On May 22, 2020, the Small Business Administration (“SBA”) issued two interim final rules providing guidance on the requirements for loan forgiveness and loan review procedures and related borrower and lender responsibilities under the Paycheck Protection Program (“PPP”).

Loan Forgiveness Guidance

The first interim final rule issued by the SBA provides noteworthy guidance on loan forgiveness.

Payroll Costs: The guidance reaffirms that payroll costs must comprise 75% of the amount for which a borrower seeks forgiveness. Payroll costs paid or incurred during the eight-week covered period of the loan are eligible for forgiveness. The interim final rule explains that borrowers may elect the eight week period by selecting either 1) the date the loan is disbursed, or  2) an “alternative payroll covered period” in which the covered period begins on the first day of the borrower’s first payroll cycle following loan disbursement. The guidance clarifies that payroll costs for employees not performing work but still on the payroll are incurred based on the schedule established by the borrower (typically, each day the employee would have performed work).

Furthermore, if an employee’s total compensation does not exceed $100,000 on an annualized basis, bonuses and hazard pay are eligible for loan forgiveness. Additionally, the salary, wages, or commission payments to furloughed employees are forgivable payroll costs.

Loan forgiveness for owner-employees and self-employed individuals’ payroll compensation is also addressed in the guidance.

Nonpayroll Costs: Nonpayroll costs may be forgiven if they were paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date falls after the covered period. The example provided in the guidance states that if the covered period is from June 1-July 26, and the company’s July electric bill is paid on August 10, the company may seek forgiveness for the portion of the electric bill through July 26. Advance payments of interest on mortgage obligations are not eligible for loan forgiveness. Payments of principal on mortgage obligations remain ineligible for loan forgiveness.

Reductions to Loan Forgiveness Amount: Under the CARES Act, forgiveness may be reduced if 1) there is a reduction to a borrower’s full-time equivalent (“FTE”) workforce during the 8 week period as compared to the FTEs in a previous period, or 2) wages are reduced more than 25% as compared to the most recent quarter (for FTEs or non-FTEs).

The interim final rule provides that the loan forgiveness amount will not be reduced if the borrower laid off or reduced the hours of an employee and the borrower made a good faith, written offer to rehire the employee for the same salary and the same number of hours, or if the borrower offered to restore the reduction in hours, but the employee declined the offer. The borrower must maintain records documenting the offer and its rejection, and inform the state unemployment insurance office of the employee’s rejected offer of employment within 30 days of the employee’s rejection of the offer.

The interim final rule further states that a full-time equivalent (“FTE”) employee is an employee who works 40 hours or more each week. In calculating its number of FTEs, borrowers divide the average number of hours paid for each employee per week by 40, capping this quotient at 1. For example, an employee who was paid 48 hours per week on average during the covered period would be considered to be one FTE.

For part-time employees, the borrower can decide to count all such employees either (i) using their average hours worked per week divided by 40 and rounding to the nearest tenth, or (ii) by counting each employee working fewer than 40 hours as 0.5. Borrowers may select only one of these two methods and must apply it consistently.

The interim final rule restates prior guidance that a reduction in an employee’s salary or wages in excess of 25% will result in a reduction in the loan forgiveness amount, unless an exception applies.  The salary or wage reduction will apply only to the portion of the decline in salary and wages that is not attributable to the FTE reduction.  For example, if an employee goes from FTE to 20 hours per week, that is entirely attributable to the FTE reduction and not a reduction in salary. This ensures borrowers are not penalized twice for reductions.

The “safe harbor” provision continues to allow borrowers the ability to avoid reductions in the loan forgiveness amount if FTE counts and salary reductions (which the borrower implemented between February 15 and April 26) are restored by June 30.

Critically, the SBA weighed in on an issue that was quite unclear and clarified that borrowers will not be penalized for voluntary resignations, employees who request schedule reductions, or for-cause terminations. Borrowers must maintain records documenting these events.

The Process of Loan Forgiveness: The interim final rule provides that lenders must issue decisions on loan forgiveness to the SBA within 60 days from receipt of a completed forgiveness application. If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for under the statute, the lender must request payment from the SBA at the time the lender issues its decision to the SBA. The SBA must remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment (subject to any SBA review of the loan or loan application) not later than 90 days after the lender issues its decision to the SBA.

If the SBA determines that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act, SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application, the loan will not be eligible for forgiveness. The lender is responsible for notifying the borrower of the forgiveness amount. The borrower is responsible for paying any balance on the loan on or before the two-year maturity of the loan.

Loan Review Guidance

In its second interim final rule, the SBA addressed loan review procedures and responsibilities of borrowers and lenders.

The guidance states that the SBA may review “any PPP loan,” at any time in its discretion. Accordingly, it stands to reason that the SBA may undertake review of loans under $2 million, despite the safe harbor announced regarding the necessity certification for such loans. Such a review may entail borrower eligibility, the amount and use of loan proceeds, and the borrower’s entitlement to loan forgiveness. If the SBA undertakes such a review, it will notify the lender in writing and the lender must notify the borrower in writing within five business days of receipt.

If the SBA believes that the borrower may be ineligible for a loan or ineligible for loan forgiveness, the SBA may require the lender to obtain additional information from the borrower, or the SBA may request information directly from the borrower. Borrowers must retain all PPP documentation for a period of six years after the loan is forgiven or repaid in full, and permit the SBA access to such files as requested.

In reviewing loans, each lender must (1) confirm receipt of the borrower certifications in the application, (2) confirm receipt of documentation to aid in verifying payroll and nonpayroll costs, (3) confirm the borrower’s calculations on the loan forgiveness application (including cash compensation, non-cash compensation, and compensation to owners, as well as nonpayroll costs) by reviewing the documentation submitted with the application, and (4) confirm the borrower made the calculation correctly by dividing eligible payroll costs by .75.

Borrowers are responsible for the forgiveness calculations they submit; however, lenders are expected to perform a good faith review in a reasonable amount of time. The interim final rule permits minimal review by lenders of forgiveness calculations based on recognized third-party payroll company provided data; however, more extensive review is required in the absence of recognized third-party payroll company provided data.

If the SBA determines a borrower is ineligible for a PPP loan, the loan cannot be forgiven and the SBA will direct the lender to deny forgiveness. The SBA may also seek repayment or pursue other remedies.

Within 60 days, lenders must issue a decision to the SBA, either approving a Forgiveness Application in whole or in part, denying it, or, if directed by the SBA, issuing a denial without prejudice due to a pending review of the loan. If denied in whole or in part, a borrower may appeal. Additional guidance will be issued addressing appeals of forgiveness and eligibility determinations.