SBA and Treasury Issue Guidance on the Paycheck Protection Program

By Peter Bosman, Bart Norman and Charles Kabugo-Musoke

On April 2, 2020, the Small Business Administration (SBA) issued an Interim Final Rule (IFR) regarding the $349 billion Paycheck Protection Program (PPP) under Title I of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), supplemented on April 3, 2020, by an Interim Final Rule on Affiliation (Affiliation IFR) and an overview of the Applicable Affiliation Rules for the PPP (Affiliation Overview). The IFR was preceded by separate U.S. Treasury Department (Treasury Department) guidance regarding the new loan program, which was issued on March 31, 2020 (Treasury Department Guidance). The Treasury Department Guidance includes a two-page borrower application, facts sheets for SBA borrowers and lenders, as well as a top-line overview of the PPP and the loans available under it. The Treasury Department has also provided the lender application for the PPP loan guaranty as well as a New Lender Application Form for federally insured depository institutions, federally insured credit unions and farm credit system institutions. 

The following paragraphs include updates from the Treasury Department Guidance, the IFR and the Affiliation IFR, as well as responses to various client questions regarding the PPP. This update does not include a comprehensive discussion of the new guidance or the new loan program. Further discussion regarding PPP loans may be found in our prior Client Alert published on March 31, 2020. 

• PPP Application (SBA Form 2483) 
  • Supporting Documentation.  In addition to the PPP Application, borrowers are required to submit any documentation that establishes eligibility, and the examples provided include payroll processor records, payroll tax filings, Form 1099-MISC, income and expenses from a sole proprietorship, bank records, or any other supporting documentation sufficient to demonstrate the qualifying payroll amount.
  • Required Certifications.  The PPP Application will require specific certifications from an authorized representative of the borrower applicant as to certain factual matters, but perhaps most notably, also to the borrower applicant’s eligibility for loans under the program, potentially placing increased risk on borrower applicants for misinterpretations or misapplications of the CARES Act and the regulations promulgated thereunder. The Application does remove the requirement contained in previous iterations that each owner of 20% of the applicant’s equity join in making the required certifications, an obligation that had been anticipated to be difficult for applicants with institutional minority investors to comply with. 
  • Application Timing.  The Treasury Department Guidance indicates that, beginning April 3, 2020, small businesses and sole proprietorships that were in operation on February 15, 2020 can apply for and receive PPP loans, and beginning April 10, 2020, independent contractors and self-employed individuals that were in operation on February 15, 2020 can apply for and receive PPP loans. As of the time of writing this alert, however, many banks and other financial institutions anticipated to participate in making PPP loans are awaiting additional clarification and guidance from the SBA and have not activated their application processes.  
  • Priority for Receiving PPP Loans.  The IFR makes clear that PPP loans will awarded on a “first-come, first-served” basis.  Accordingly, eligible borrowers should prioritize applying for the PPP loans as soon as they are able.

• Changes to Loan Terms.  The CARES Act included maximum interest rates of 4% and terms to maturity of 10 years (to the extent not forgiven). The IFR, however, provides for all loans under the PPP to have identical features, including interest rates equal to 1% (an increase from the Treasury Department Guidance rate of 0.5%) and maturities of 2 years. The IFR notes that, for lenders, the 1% rate is attractive relative to the cost of funding for comparable maturities. It is yet to be seen whether the decreased interest rate may contribute to hesitancy among banks to implement the program.
• Treatment of Employees with Compensation that Exceeds $100,000.  Prior to the IFR, there was ambiguity around treatment of employees with compensation in excess of $100,000. The IFR clarifies that compensation for these employees does not need to be disregarded entirely, but solely the excess above $100,000 when calculating payroll costs for purposes of determining the amount that can be loaned as well as the portion of the PPP loans that can be forgiven.
• Treatment of Independent Contractors.  The IFR states that  independent contractors do not count as employees for purposes of PPP loan calculations, nor do payments to independent contractors constitute “payroll costs” (except in the case of an application by an independent contractor for a PPP loan). The SBA explains that independent contractors have the ability to apply for a PPP loan independently so they do not count for purposes of a borrower’s PPP loan calculation. We note that the practical impact of this regulation may be to exclude individual independent contractors from the PPP, given the complexity of the application process and the present capacity of lending institutions.
• Loan Forgiveness for Non-Payroll Costs.  The principal amount of the PPP loan and accrued interest may still be forgiven in full to the extent used for payroll costs, mortgage interest, rent, and utilities payments over the eight-week period after getting the loan, and so long as the borrower maintains its levels of full-time equivalent employees and salaries during that same period following the making of a loan. However, the IFR and the Treasury Department Guidance state that not more than 25% of the forgiven amount is expected to be available for non-payroll costs.
• Loan Forgiveness Process.  Following the eight-week period, borrowers will be able to submit a loan forgiveness request to the lender servicing the loan, which will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. Borrowers will be required to certify that the documents are true and that the borrower used the forgivable amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.
• Updates Specific to Approved SBA Lenders
  • Lender Eligibility to Participate in the PPP.  The Federal guidance describes a number of bank and nonbank lenders that can originate PPP loans, including (i) existing SBA-approved lenders; (ii) federally insured depository institutions; (iii) federally insured credit unions; (iv) Farm Credit System institutions; and (v) any depository or non-depository lender that:
    • has a formalized compliance program;
    • applies the requirements under the Bank Secrecy Act and its implementing regulations (collectively, BSA); and
    • has been operating since at least February 15, 2019, and has originated, maintained, and serviced more than $50 million in business loans or other commercial financial receivables during a consecutive 12-month period in the past 36 months, or is a service provider to any insured depository institution that has a contract to support such institution’s lending activities and is in good standing with the appropriate Federal banking agency.
  • Lender Due Diligence Requirements.  Per the IFR, the SBA will allow lenders to rely on the borrower’s certifications in order to determine their eligibility and use of loan proceeds. Lenders may also rely on the borrower’s documentation to determine the loan amount and eligibility for loan forgiveness. Lenders are not required to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs. However, lenders will be required to confirm receipt of the borrower certifications and the appropriate supporting documentation, and for new customers, lenders will need to complete additional diligence to comply with the BSA’s requirements. Lenders not subject to the BSA will also need to establish an anti-money laundering (AML) compliance program equivalent to that of a comparable federally regulated institution.
  • Lender Liability Protections.  The IFR includes specific underwriting requirements that lenders must comply with. So long as a lender satisfies the IFR’s underwriting requirements, they will be held harmless for borrowers’ failure to comply with program criteria.
  • Lender Fees.  Lenders will be paid fees by the SBA for processing loans in the following amounts: (i) 5% for loans up to $350,000; (ii) 3% for loans of more than $350,000 and less than $2 million; and (iii) 1% for loans of $2 million or more. 

• Affiliation Rules.  There has been significant interest around the application of the SBA’s affiliation rules under the PPP. The rules, speaking generally, require that an applicant to combine its employees (or revenues, depending on the relevant size standard) with those of other entities controlling, controlled by, or under common control with the applicant. Control may be established through ownership or common management, but also by contract, and the analysis of what contractual rights trigger the affiliation rules is often complex, particularly with respect to the treatment of minority shareholders in venture capital or private equity-backed companies. Because of the tension between this complexity and the need to make an extraordinary amount of PPP funds available quickly, many had anticipated that the SBA would establish a bright line standard for treatment of minority shareholders. The Affiliation IFR, however, does not include such a standard, only a statement that existing affiliation rules as set out in 13 C.F.R. 301 apply. For minority shareholders, the standard, as stated in the Affiliation Overview, remains that the “SBA will deem a minority shareholder to be in control, if that individual or entity has the ability, under the concern's charter, by-laws, or shareholder's agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.” The Affiliation IFR did make clear that churches and other faith-based organizations do not need to consider other entities or organizations to which they are related for sincere religious purposes as “affiliates” (i.e. a church is not affiliated with other churches of its denomination).  
• Timing for Effectiveness of the IFR.  The intent of the CARES Act is to provide relief to America’s small businesses swiftly and to slow down the dramatic decrease in U.S. economic activity. In furtherance of this intent, the SBA is dispensing with the 30-day delayed effective date provided in the Administrative Procedure Act and is making the IFR immediately effective without advance notice or public comment. However, the IFR remains subject to a comment period, and the SBA explains that additional guidance will be provided with regard to several issues related to the PPP.

When the PPP loans became available on April 3, 2020, SBA lenders experienced a high volume of applicants. However, more questions regarding the PPP loans remain, including whether the Affiliation IFR and Affiliation Overview will be supplemented or revised to clarify the treatment of minority shareholders. We anticipate the Treasury Department and the SBA will provide additional regulatory or interpretive guidance over the coming days and weeks, and Smith Anderson will continue to provide updates as additional guidance is issued. 

If you have any questions related to this alert, please do not hesitate to contact your regular Smith Anderson lawyer or any other member of our firm. Additionally, please visit and bookmark our firm’s Coronavirus (COVID-19) Business Resource Center, which is continuously updated with useful materials, and resources related to COVID-19. This tool has been made available to ensure our clients and the broader business community stay informed on key issues that may impact their operations and to navigate the related business and legal issues during these challenging times.