New Paycheck Protection Program Flexibility Act modifies terms of PPP

The United States Congress has enacted the Paycheck Protection Program Flexibility Act (the PPP Flexibility Act), which modifies certain of the terms and conditions of the Paycheck Protection Program (PPP), a forgivable loan program for small businesses administered by the U.S. Small Business Administration (SBA)1 pursuant to the Coronavirus Aid, Relief and Economic Security Act (the CARES Act), which was enacted on March 27.

In this bulletin, we discuss the modifications made by the PPP Flexibility Act to the terms and conditions of the PPP.

What you need to know

  • At least 60% of PPP loan proceeds must be spent on payroll costs to be eligible for forgiveness (the minimum percentage was formerly 75%).
  • To be eligible for forgiveness, PPP loan proceeds must be spent by the earlier of 24 weeks after origination and December 31, 2020 (the deadline was formerly 8 weeks after origination).
  • Borrowers will not be subject to reduction in the amount of loan forgiveness on the basis of having made layoffs if the borrower either attempts to rehire employees or if the borrower’s business does not return to its pre-February 15 activity levels due to compliance with federal COVID-19-related health guidance.
  • Balances of PPP loans that are not forgiven will now have a minimum maturity date of 5 years. Loan payments will be deferred until the date on which the applicable forgiveness amount is remitted to the lender or, if the borrower does not apply for forgiveness, 10 months after the earlier of 24 weeks after origination and December 31, 2020.

Changes to terms and conditions of PPP loans under the PPP Flexibility Act

Use of proceeds

While SBA guidance initially provided that at least 75% of PPP loan proceeds must be used for payroll costs of employees whose principal place of residence is in the U.S. to be forgiven, the PPP Flexibility Act lowers this minimum threshold to 60% and further provides that up to 40% of proceeds may be put toward covered mortgage interest, rent and utility payments.

Loan forgiveness

Under the PPP Flexibility Act, the “covered period” during which PPP loan proceeds must be spent to be eligible for forgiveness has been extended from the 8 weeks following loan origination to the period from origination until the earlier of 24 weeks following origination and December 31, 2020.2 As under the initial PPP, forgivable amount of a PPP loan will be reduced proportionately to any reduction in employee headcount during the covered period compared to specified periods in 2019 and early 2020 and dollar for dollar for any decrease in salary or wages of an employee during the covered period exceeding 25% of their total salary in the most recent full quarter prior to the covered period.

The CARES Act also provided that prior to June 30, employers could re-hire employees laid off between February 15 and April 27 or reverse reductions in salaries or wages made between February 15 and April 27 and still be eligible for full loan forgiveness. The PPP Flexibility Act extends through December 31, 2020 the period during which employers can rehire employees or reverse reductions in salaries or wages without penalty. Employers will also be exempted from the proportional forgiveness reduction for layoffs if they can show that they were unable to rehire the laid-off or similarly qualified employees prior to December 31, 2020 or that their business was unable to return to its pre-February 15 activity levels prior to December 31, 2020 due to compliance with federal COVID-19-related health guidance.

Maturity date

The PPP Flexibility Act provides that any principal balance of a PPP loan that is not forgiven will have a minimum maturity of 5 years from the date on which the borrower applies for forgiveness; the CARES Act had previously only provided for a maximum maturity of 10 years and no minimum maturity.

Deferral period

Whereas the CARES Act provided that PPP loan payments would be deferred for a period of not less than 6 months and not more than 1 year, the PPP Flexibility Act provides that loan payments will be deferred until the date on which the amount of forgiveness determined under the CARES Act is remitted to the lender. If a PPP borrower does not apply for forgiveness within 10 months after the last day of the “covered period”, the borrower’s PPP loan payments will not be due until at least the date that is 10 months after the last day of the covered period.

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1 It is worth noting that SBA has announced that, following a lender’s submission of the borrower’s loan forgiveness application, it will review all PPP loans to borrowers that, together with their affiliates, borrow an aggregate principal amount greater than $2 million. SBA may also review smaller loans. SBA has provided details of its loan review procedure pursuant to an interim final rule here. Per the interim final rule, SBA may review individual PPP loans at any time with respect to borrower eligibility, loan and forgiveness amount and use of proceeds. Borrowers may respond to SBA questions, but, subject to an appeal process, if SBA determines that a borrower was ineligible, the loan cannot be forgiven.

2 A borrower that received a PPP loan before June 5 may elect for the covered period applicable to that loan to end on the date that is 8 weeks after the date the loan is originated.

Read all our coronavirus-related updates on our COVID‑19 guidance for organizations resource page.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2020 by Torys LLP.
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