The Paycheck Protection Program (the “PPP”) has come a long way since Congress approved the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) on March 27, 2020—which, while barely two and half months ago on the calendar, seems like a decade in terms of what has gone on in the world—and particularly in terms of the evolution of the PPP. 

Since its enactment, there have been multiple “Interim Final Rules” issued by the Small Business Administration (“SBA”) to address various aspects of it and ongoing and ever expanding FAQs alongside them to help all parties understand what to do with the PPP loans.  And litigation about the way lenders have made loans.  Most recently there has been first the focus on the review of whether companies that received PPP loans really needed them, including a safe harbor for companies to return the loans, and then the actual implementation of the loan forgiveness component of the program—really the key to its purpose and success.

The latest chapter of the PPP was just written with the enactment of the Paycheck Protection Program Flexibility Act of 2020 on Friday, June 5, 2020. 

There is a lot of good news in the new PPP “Flexibility Act” for those borrowers in the portfolios of asset-based lenders that have received or still expect to receive a PPP loan. Here are few of the changes that will have significant benefits for PPP borrowers: 

Extension of the “covered period”

The “covered period” is a fundamental element in determining the amount of the PPP loan to a borrower that may be forgiven. 

Under Section 1106(b) of the CARES Act, a borrower is eligible for forgiveness of the loan in an amount equal to the sum of payroll costs, covered mortgage interest payments, covered rent payments and covered utility payments incurred and made during the “covered period.” So the PPP loan is only forgiven if the borrower can spend the loan proceeds for the specified categories of expenses in that period of time.  The “covered period” was the 8 weeks from the date of the PPP loan.  Under the PPP Flexibility Act it will now be 24 weeks from the date of the loan, but not past December 31, 2020, giving the borrower more flexibility to determine when to use the funds.  Current PPP borrowers may elect either the 8-week period or the 24-week period.

Reduction of minimum payroll costs required for loan forgiveness amount from 75% to 60%

The key element of the PPP is the forgiveness of the loan.  But the amount that may be forgiven is limited based on how much of the loan proceeds are used for payroll costs during the “covered period.”  Until the Flexibility Act, the rule was that 75% of the PPP loan proceeds had to be used for payroll costs in order to be forgiven. So, while a PPP borrower could use its loan proceeds for mortgage interest payments, rent payments and utility payments, in addition to payroll costs, any portion of the loan proceeds in excess of 25% of the total loan used for such non-payroll costs, would not be forgiven.  With the PPP Flexibility Act, that has been changed from 25% to 40%.  A PPP borrower may now use this greater portion of its PPP loan proceeds for allowable purposes other than payroll costs and still have that portion of the loan forgiven.

Extension of PPP loan maturity date from two years to five years 

The PPP provided for a two-year maturity date from the date the loan is made for any portion of the PPP loan that may not be forgiven, with a 6-month deferral of any payments of principal and interest.  So, once the 6-month period ended, any balance of the PPP loan not forgiven, had to be repaid in an 18-month period—typically, although not specified in the legislation or rules, based on a monthly amortization. 

Under the PPP Flexibility Act, any new PPP loan made after the enactment of the Flexibility Act is to have a maturity date of five years from the date of the loan, rather than two years.  While the Flexibility Act says that it applies to any loan made on or after the enactment of the Flexibility Act (unlike the other provisions of the PPP Flexibility Act) it does go on to say that nothing in the Act should be construed to prohibit lenders and borrowers from mutually agreeing to modify the maturity terms of a covered loan to provide for a five-year term.  Borrowers may want to consider seeking such an extension—whether a lender will be receptive to such a modification of course is another matter.

Change to period for deferral of principal, interest and fee payments

Prior to the PPP Flexibility Act, the PPP provided that no payments of principal, interest or fees were required for six months from the date of the loan.   

The PPP Flexibility Act says now that instead of no payments being required until after six months from the date the loan is made, no payments of principal, interest or fees are to be required to be made until the date on which the amount of the loan that is forgiven has been determined and is remitted to the lender that made the PPP loan.  The PPP provides for the SBA to guarantee 100% of the loan that the PPP lender makes to the PPP borrower—so now the deferral period is tied to the timing of the payout by the SBA on that guarantee.

Under Section 1106 of the CARES Act, a PPP borrower seeking loan forgiveness is to submit an application to the PPP lender.  Within 60 days after the lender receives the application for loan forgiveness the lender is to issue a decision on the application. To the extent that the PPP borrower has 24 weeks to use the PPP loan proceeds, it will not be in a position to submit its application for loan forgiveness until the end of such period. 

The PPP Flexibility Act seems intended to provide that payments on the portion of the loan that is not forgiven will not be required until after the 24-week “covered period” for the use of the loan proceeds has ended (unless a borrower has elected the 8 week period, then after the end of such period), plus whatever time it takes for the lender to receive and approve the application from the borrower for loan forgiveness and then for the SBA to pay the PPP lender.

The PPP Flexibility Act does include an outside date for the PPP borrower to submit its application for loan forgiveness.  Under the PPP Flexibility Act, the PPP borrower must submit its application on or before the date that is 10 months after the end of the borrower’s covered period (which may be 24 weeks from the date of the loan or 8 weeks from the date of the loan, at the borrower’s option).

Extension of deadline to rehire employees and restore salaries and wages from June 30, 2020 to December 31, 2020

Under the PPP, the amount of the PPP loan that could be forgiven is reduced by reductions in the number of employees and reductions in the salaries and wages that the PPP borrower pays based on a comparison of the period beginning on February 15, 2019 and ending June 30, 2019 and the period beginning on January 1, 2020 and ending on February 29, 2020.

However, the amount of the loan that is forgiven is not reduced to the extent that the borrower rehires and restores salaries and wages by June 30, 2020 under the PPP prior to the PPP Flexibility Act.  Under the PPP Flexibility Act, the borrower has until December 31, 2020 to rehire and restore employees and salaries and wages. 

Additional exemptions from reductions in loan forgiveness amount based on employee and salaries and wages reductions

The PPP Flexibility Act provides some additional reasons that the amount of a borrower’s PPP loan that may be forgiven will not be reduced based on the changes in the borrower’s number of employees and salaries and wages during the applicable period.

During the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness is to be determined without regard to a proportional reduction in the number of full-time equivalent employees if either:

• the borrower is able to document both (i) an inability to rehire individuals who were employees of the borrower on February 15, 2020; and (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
• the borrower is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with governmental requirements or guidance related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

Elimination of PPP borrowers deferring payroll taxes under Section 2302 of the CARES Act

Section 2302 of the CARES Act provides that employers may defer the portion of Social Security taxes and certain other “applicable employment taxes” (the taxes under Section 3211(a) and Section 3221(a) of the Internal Revenue Code) otherwise required to be made by employers during the period beginning on March 27, 2020 and ending before January 1, 2021.  Under the CARES Act, the borrower was not permitted to use the deferral once its PPP loan was forgiven.  Under the PPP Flexibility Act, a borrower that has its PPP loan forgiven may continue to defer the borrower’s share of such taxes until December 31, 2020.

Conclusion

As always with the PPP, the implementation of the changes to it as a result of the new PPP Flexibility Act will no doubt evolve still further through more rules and FAQs (including changes to the loan forgiveness application form).  However, the specific elements may develop, some of the key aspects of the PPP Flexibility Act will clearly enhance the benefits to borrowers under the program.