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The CARES Act – Opening Day Update on Paycheck Protection Program Loans
On Friday, April 3, the Small Business Administration (“SBA”) opened the window for loan applications under the Paycheck Protection Program (“PPP”) established under the CARES Act. During the overnight hours just before starting the intake process, the SBA also released a revised PPP loan application form and additional regulatory guidance with important new information
Opening of PPP Loan Processing Window
As promised, the SBA began processing PPP loans on Friday, April 3, 2020. Community banks led the charge, as many of the bigger banks either limited participation to existing customers, delayed participation or are still determining whether to participate at all.
After the close of business on April 3, SBA Administrator Jovita Carranza tweeted the following:
“Latest #PaycheckProtectionProgram numbers: 17,503 loans valued at more than $5,400,000,000. @SBAgov + over 1,100 local lenders helping small businesses stay afloat with working capital to keep employees paid + doors open.”
So, based on the assumption that the term “valued at” means that a PPP loan has actually been approved and funded, the current average principal amount for a PPP loan sits at approximately $309,000. Based on ongoing tweets from the SBA throughout Friday, the average PPP loan has been running fairly consistently in the low- to mid-$300,000s. At this time, we cannot tell how the average principal amount compares against the average requested loan amount.
Overnight Actions by the SBA
On Thursday night and into early Friday morning (just prior to the opening of the PPP loan processing window), the SBA provided additional guidance on the PPP by releasing (i) a revised borrower application (Form 2483) (the “Revised Application”) and (ii) an interim final rule (the “Rule”) that provides underwriting and other guidance to banks participating in the PPP loan program.
Important Developments in the Revised Application and the Rule
The following summarizes the major developments in the Revised Application and the Rule:
1. Reduced Eligibility for PPP Loans
Under the Rule, persons engaged in businesses ineligible under existing SBA rules (13 CFR 120.110) cannot apply for a PPP loan, except for nonprofit organizations exempt under 501(c)(3) or 501(c)(19) of the Internal Revenue Code (which were taken off the ineligible list by the CARES Act). Under existing SBA rules, ineligible businesses include certain types of rental and real estate development, life insurance, gambling, any business illegal under federal or state law (e.g., cannabis), religious organizations, political or lobbying organizations, various “sin” businesses and certain “speculative” businesses. Any potential applicant should carefully review existing SBA rules regarding business eligibility.
According to the Rule, the CARES Act expanded eligibility only for the above-described nonprofits (and not any business concern) meeting the 500-employee test.
2. Funding Priority
The Rule states that PPP loans will be approved and funded on a “first come, first served” basis. However, the Rule does not indicate if PPP loans will be funded in full or rationed out based on some percentage.
3. Foreign-Owned Enterprises
The Revised Application clarifies that foreign-owned enterprises can apply for a PPP loan.
4. 500-Employee Test
The Rule provides that only employees residing in the United States count towards the 500-employee limit. So, while the affiliation rules still apply to a multinational enterprise, only U.S. workers within the affiliated entities are taken into account.
5. Promise of Additional Guidance on Affiliation Rules
The Rule promises additional guidance on the affiliation rules under which businesses under common control must be aggregated for purposes of the 500-employee test. This action appears to be in response to concerns that private equity investments could cause portfolio companies to become affiliated.
6. Calculation of Borrowing Base
For purposes of calculating the 2.5x borrowing base, the Rule simplifies the calculation of the “average monthly payments” for payroll costs, as follows: (i) an applicant totals all eligible payroll costs over a one-year period for all U.S.-based employees, (ii) any payroll costs for any single employee in excess of $100,000 are excluded (regardless of the employee’s annual rate) from the total payroll costs, and (iii) the resulting total is divided by 12. The total PPP principal amount (up to a maximum of $10 million) equals 2.5 times the resulting quotient, plus the amount of any loan under the SBA’s Economic Injury Disaster Program that is refinanced with the PPP loan.
The Rule and the Revised Application conflict on which one-year period to use. As provided in the CARES Act, the Rule uses the one-year period ending on the loan origination date (which seems impractical). In contrast, the Revised Application looks to calendar year 2019.
7. Increased PPP Loan Interest Rate
The Rule increased the annual interest rate on a PPP loan to one percent, up from the previously announced rate of 0.5 percent.
8. Use of Proceeds
As promised in early SBA announcements, the Rule states that non-payroll payments cannot be used to cancel more than 25 percent of a PPP loan. It is not clear how the headcount and wage reduction cutback on loan cancellation interacts with this cap.
9. Documentation of Payroll Costs on Revised Application
The Rule allows applicants to submit payroll reports from third-party payroll companies to support their payroll costs.
10. Simplified Certification on Revised Application
The Revised Application now only requires certification from the loan applicant, eliminating the prior requirement of additional certifications (and signatures) from the applicant’s 20-percent owners.