In the last edition of Jones Walker’s Banking & Financial Services Newsletter, one of the featured articles discussed the frustration of Paycheck Protection Program (PPP) lenders as they continued to wait for the first forgiveness payments to be remitted by the Small Business Administration (SBA). Within the past week many PPP lenders have begun receiving forgiveness payments. This was good news for the banking industry as the forgiveness payments will allow lenders to redeploy the funds into higher-earning assets. Below is a summary of several additional recent developments regarding the PPP.
SBA Guidance on Change in Ownership of PPP Borrowers
On October 2, 2020, the SBA issued guidance on the required procedures to be followed with respect to a change in ownership of a PPP borrower. A “change in ownership” occurs when (1) at least 20% of the common stock or other ownership interest of a PPP borrower is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or existing owner (all sales/transfers occurring since the PPP loan application was approved must be aggregated for purposes of the calculation); (2) a PPP borrower sells or otherwise transfers at least 50% of its assets in one or more transactions; or (3) a PPP borrower is merged with or into another entity.
The guidance states that regardless of the change of ownership, the PPP borrower remains responsible for performance of all obligations under the PPP loan, the certifications made in connection with the application, and compliance with all other PPP requirements. It requires the PPP borrower to notify the PPP lender in writing of the contemplated transaction and to provide certain documentation to the PPP lender. There are no restrictions on a change of ownership if, prior to the transaction closing, the PPP borrower has repaid the PPP loan in full either through a payoff or through completion of the PPP forgiveness process with remittance to the lender of the full amount of the PPP loan. If the PPP loan has not been satisfied in full prior to the transaction closing, then the guidance sets forth the procedures that must be followed by the PPP lender and the PPP borrower. In certain cases, SBA approval is required before the change of ownership occurs. It is important for PPP lenders to follow the guidance to avoid jeopardizing their SBA guaranty.
You can access the SBA guidance at this link.
SBA Guidance on Modification of PPP Loans due to Change in Deferral Period Resulting from PPP Flexibility Act
We have had several bank clients inquire about the process for notifying PPP borrowers of the change in the deferral period resulting from the enactment of the PPP Flexibility Act of 2020. The PPP originally imposed a deferral period of six months. The PPP Flexibility Act changed the deferral period to the earlier of the date the SBA remits the forgiveness amount to the PPP lender, the forgiveness application is denied, or if no forgiveness application is filed by the borrower, 10 months from the end of the covered period. Many PPP lenders questioned whether they could send a notice to PPP borrowers advising them of the change or a formal modification of the PPP note was required. On October 7, 2020, the SBA updated its FAQs to include FAQ 52, which addresses this issue. The FAQ states that the extension of the deferral period under the PPP Flexibility Act automatically applies to all PPP loans and that PPP lenders should notify borrowers of the change. It goes on to state that the SBA does not require a formal modification of the promissory note.
SBA Guidance on Deadline for Filing Loan Forgiveness Applications
Many PPP lenders noticed an expiration date of October 31, 2020, on the PPP loan forgiveness application forms and questioned whether this was the deadline for filing loan forgiveness applications. On October 13, 2020, the SBA updated its FAQs on PPP Loan Forgiveness to include a new FAQ addressing this question. It states that October 31, 2020, is not a deadline for filing forgiveness applications but rather is displayed on the forms to comply with the Paperwork Reduction Act. It notes that PPP borrowers may submit a loan forgiveness application at any time before the maturity date of the PPP loan.
SBA Issues Simplified Loan Forgiveness Process for PPP Loans of $50,000 or Less
On October 8, 2020, the SBA released a simplified PPP loan forgiveness application form (Form 3508S) and instructions for borrowers with a PPP loan of $50,000 or less (other than borrowers that together with affiliates received PPP loans of $2 million or more). It also issued a new interim final rule with respect to the new loan forgiveness form. Borrowers using the new simplified form are not subject to reductions in the forgiveness amount based on reductions in full-time employees or reductions in employee salaries or wages and need not make such calculations.
Following are links to the form, instructions, and interim final rule.