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July 02, 2020

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Paycheck Protection Program Flexibility Act: Major Changes to the PPP

On June 5, 2020, the U.S. President signed into law the Paycheck Protection Program Flexibility Act (PPP Flexibility Act or Act) to provide businesses with greater flexibility and more time to maximize forgiveness of loans received under the Paycheck Protection Program (PPP), as enacted under the Coronavirus Aid, Relief, and Economic Security Act (as amended, supplemented or otherwise modified from time to time, including, without limitation, by the Paycheck Protection Program and Health Care Enhancement Act, applicable federal regulations and interpretive guidance issued by the SBA and Treasury, the CARES Act).

The material changes made to the Paycheck Protection Program by the PPP Flexibility Act are as follows:

I. PPP Application Deadline

On its face, the PPP Flexibility Act extends the period during which prospective PPP borrowers are entitled to apply for PPP loan from June 30, 2020 to December 31, 2020. However, certain members of the U.S. Congress[1] have published a Letter of Congressional Intent indicating this would be a misinterpretation of the PPP Flexibility Act.  The Letter of Congressional Intent states that the extension of the “covered period” as defined in section 1102(a) of the CARES Act, as amended by the PPP Flexibility Act, should not be construed so as to permit the U.S. Small Business Administration (SBA) to continue accepting PPP applications for loans after June 30, 2020.  The Letter of Congressional Intent reasoned that the intent of the law is that, consistent with the CARES Act as amended by the PPP Flexibility Act, when the authorization of funds to guarantee new PPP loans expires on June 30, 2020, the SBA and participating lenders will stop accepting and approving applications for PPP loans, regardless of whether the authorized PPP loan commitment level has been reached.[2]

The SBA, together with the Treasury Department, is likely to issue definitive guidance on this matter confirming that the SBA will not accept PPP applications after June 30, 2020.  It is our recommendation that businesses seeking to apply for loans under the PPP should do so before June 30, 2020.

II. Extension of the Forgiveness Period

Prior to enactment of the PPP Flexibility Act, a PPP borrower could apply for loan forgiveness for up to the amount of PPP loan proceeds expended on authorized uses during the 8-week period immediately following receipt of the loan. The PPP Flexibility Act extends this 8-week “forgiveness period” to 24 weeks after the date of disbursement of the PPP loan to the PPP borrower, but in no event ending later than December 31, 2020.  Although the Act permits a PPP borrower to elect to continue to utilize an 8-week forgiveness period, it is unclear why any PPP borrower would choose to do so as a PPP borrower is not prohibited from applying for, nor is any PPP lender or the SBA prohibited from granting, forgiveness at any time during either of the stated forgiveness periods.

III.  Reduction to Minimum Required Use of Proceeds for Payroll Costs

Prior to enactment of the PPP Flexibility Act, a PPP borrower was required to utilize at least 75% of the PPP loan proceeds it used towards “payroll costs” (as such term is defined in the CARES Act).  The PPP Flexibility Act has relaxed this requirement by reducing the minimum percentage to 60%.  The Act also clearly states, whether intentional or not, that in order to be eligible for any forgiveness, a PPP borrower must spend at least 60% of its total PPP loan proceeds towards “payroll costs”.  Regulatory guidance issued to date has been equivocal as to whether a PPP borrower is obligated to expend a minimum amount of its PPP loan proceeds. A PPP borrower is now technically ineligible for forgiveness if it spends less than 60% of its total PPP loan amount.

IV. Extension of the Safe Harbor Period for Loan Forgiveness

 Prior to enactment of the PPP Flexibility Act, a PPP borrower had until June 30, 2020 to eliminate a reduction in employment, salary and wages that would otherwise reduce the forgivable amount of its PPP loan.  The PPP Flexibility Act extends this safe harbor period to December 31, 2020.  In addition, the Act provides that PPP borrowers will not experience a reduction in their forgiveness amount due to a decline in the FTE employee count if the PPP borrower, in good faith, is able to document:

(A) (i) an inability to rehire individuals who were employees of the PPP borrower on February 15, 2020; and (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or

(B) 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 requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

V. Extension of Payment Deferral

Prior to the enactment of the PPP Flexibility Act, principal and interest payments on each PPP loan were to be deferred until the date that was 6 months after such loan’s funding date.  The PPP Flexibility Act extends the deferral period to the “date on which the amount of forgiveness determined under Section 1106 of the CARES Act is remitted by the lender”.  The Act further provides that a PPP borrower that fails to apply for forgiveness within 10 months after the last day of the 24-week forgiveness period must begin making principal and interest payments on the date that is 10 months after the ending date of the forgiveness period.

VI. Extension to Maturity

Finally, the PPP Flexibility Act extends the maturity date to at least a minimum of 5 years for PPP loans disbursed on or after the date of enactment of the Act.  For PPP loans disbursed prior to the enactment of the PPP Flexibility Act, the Act explicitly permits PPP borrowers and lenders to mutually agree and modify the existing maturity terms to conform with the new minimum of 5 years maturity for any remaining outstanding balance of a PPP loan after determination of forgiveness.

*Things are changing quickly and the measures and interpretations described here may change. Our analysis is necessarily limited by the time sensitivities of the current crisis as well as the absence of precedent for some of what is contained here. This analysis represents our best interpretation and recommendations based on where things currently stand.*

FOOTNOTES

[1] Namely, U.S. Senators Mike Lee (R-UT), Marco Rubio (R-FL), Ron Johnson (R-WI) and Ben Cardin (D-MD), along with U.S. Representatives Dean Phillips (D-MN) and Chip Roy (R-TX).

[2] As of June 1, 2020, there was approximately $159 billion in committed PPP funds available for businesses to access.  See Paycheck Protection Program Loan Report Round 2, issued by the SBA.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume X, Number 157

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About this Author

Nirav Bhatt Finance and Bankruptcy Attorney Sheppard Mullin New York, NY
Associate

Nirav Bhatt is an associate in the Finance and Bankruptcy Practice Group in the firm's New York office.

Areas of Practice

Nirav represents corporate borrowers, financial sponsors, portfolio companies, commercial banks and other financial institutions in a variety of financing transactions. Some of the areas in which Nirav has experience are senior secured, second-lien and mezzanine credit facilities in connection with bilateral club and broadly syndicated transactions, leveraged buyouts and add-on acquisitions. Nirav also specializes in problem loan...

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Bijal Vira Corporate Finance Attorney Sheppard Mullin Law Firm
Partner

Bijal Vira is a partner in the corporate and finance practice areas in the firm's New York office.

Areas of Practice

Bijal's practice is focused on complex, private markets transactions, often involving investment funds (e.g., private equity, private credit, real estate, hedge funds, BDCs), assets managers, insurance companies and other forms of institutional capital in equity and credit investments. He is often engaged to advise clients in deals that involve regulated industries (e.g., healthcare, insurance), cross national borders, or that require novel structuring or restructuring solutions. Bijal is the East Coast leader of the firm’s Alternative Finance Team.

Bijal is a member of the board of directors of BOC Capital Corp., and its affiliate, Business Outreach Center Network, a not-for-profit Community Development Financial Institution (CDFI) and a certified Community Development Entity (CDE) dedicated to providing micro-enterprise financing, with a focus on small-business, women, minority and immigrant entrepreneurs.

Bijal received dual bachelor’s degrees in Chemical Engineering and Economics from the University of Rochester in 1999, and his law degree from the University of Chicago Law School in 2002.

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