SBA Issues Additional Guidance on PPP Forgiveness and Review Processes

The Small Business Administration (SBA) continued its incremental rollout of guidance for borrowers under the Paycheck Protection Program (PPP), with two interim final rules issued on the eve of Memorial Day Weekend. The first (IFR 1) includes additional information on the rules governing loan forgiveness – how to perform the calculations, what can and cannot be included, and how to complete the forgiveness application the SBA posted a little over a week ago. The second (IFR 2) delves into the SBA’s loan review process and certain lender obligations.

In many respects, the IFRs codified earlier guidance released by the SBA via its FAQ list or within the forgiveness application itself. However, the IFRs also contains new information and a number of helpful clarifications. The following summarizes some of the most relevant information for borrowers as they continue to plan how best to use their PPP funds and prepare their forgiveness applications.

Borrowers could be looking at a longer wait on loan forgiveness

The CARES Act indicated that lenders would have 60 days to respond to loan forgiveness applications. The new IFRs show that, in practice, some borrowers might be kept waiting much longer. In most cases, at the end of a lender’s 60 day determination period, the lender will relay its decision to the SBA, which then has an additional 90-day period in which it can conduct a supplementary review. However, IFR 2 notes that the SBA may begin its own review of a loan at any time; if an SBA review is ongoing at the time a lender would otherwise have to issue a forgiveness decision, the lender may have to issue a “denial without prejudice”. Borrowers in this situation would have to wait until the SBA has completed its review until returning to their lenders and asking them to reexamine forgiveness applications.

SBA reviews will be thorough

In recent weeks, the SBA has taken a number of opportunities to make clear that it is taking its review and oversight obligations seriously. IFR 2 reiterated this stance by clarifying that the SBA can review PPP loans at any time and with respect to any aspect of a borrower’s initial loan application or its forgiveness application. IFR 2 specifically mentions compliance with the SBA’s “affiliation rules” (as discussed in prior Choate alerts1) as a basis for review.

Per IFR 2, the SBA will generally work through lenders to obtain additional information from PPP borrowers to substantiate a borrower’s claims of eligibility or forgiveness. Borrowers should work with their lenders to respond to these requests – IFR 2 notes that a failure to respond may result in an adverse determination.

For borrowers who receive an unfavorable decision from the SBA, an appeals process will be available; however, the SBA has deferred details on this process to a future release. As for penalties, IFR 2 states that the SBA may “seek repayment of the outstanding PPP loan balance or pursue other available remedies”. It further warns that the CARES Act’s nonrecourse provision limits the SBA’s recourse against “individual shareholders, members, or partners of a PPP borrower for nonpayment of a PPP loan only if the borrower is an eligible recipient of the loan” – i.e., the SBA may seek recourse from other people if the SBA finds that a borrower was never an eligible PPP participant to begin with.

A potential silver lining for borrowers is that IFR 2 states that eligibility will be determined based upon rules and guidance available at the time of the borrower’s loan application. We suggest that borrowers discuss specific situations with counsel.

Some Additional Clarity on Forgiveness Calculations

The IFRs add detail to a number of new concepts contained in the forgiveness application, including the “Alternative Payroll Covered Period” for the payroll cost calculation and the alternative method for counting part-time employees. In addition to a number of helpful examples of specific calculations, the SBA provided the following information to address gaps borrowers had identified in its earlier guidance:

  • Alternative Payroll Covered Period and part-time employees: While the CARES Act stated that only funds used during the first 8 weeks after a borrower received a PPP loan (the “Covered Period”) would be eligible for forgiveness, the SBA’s forgiveness application and IFR 1 recognize that the Covered Period and a borrower’s payroll cycle may not line up and they give borrowers additional flexibility when it comes to payroll costs. Borrowers may seek forgiveness for payroll costs paid or incurred during an “Alternative Payroll Covered Period”: the eight weeks beginning on the first day of their first payroll cycle in the Covered Period. Similarly, noting the difficulty that some borrowers may have determining how to count part-time employees for purposes of the FTE calculation, the SBA will permit borrowers to assign an FTE value of 0.5 to part-time employees, so long as borrowers are consistent in doing so across all part-time employees.
  • Incurring payroll costs: As clarified by IFR 1, payroll costs are generally deemed incurred on the day an employee’s pay is earned, usually meaning the day the employee worked. However, IFR 1 goes on to state that for “employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day that the employee would have performed work).”
    Furloughed employees, bonuses, hazard pay: IFR 1 clarified that hazard pay and bonuses are eligible for forgiveness so long as an employee’s total compensation, including these amounts, does not exceed $100,000 on an annualized basis. Compensation paid to furloughed employees is also eligible for forgiveness (though neither IFR speaks to how to account for furloughed employees when it comes to the forgiveness eligibility reductions arising from decreases in headcount or compensation).
  • Employees who resign, are terminated for cause, or refuse to return to work: IFR 1 also clarified that employees who voluntarily resign, are terminated for cause, or refuse to return to work (when presented with a written offer) will generally not be included in the calculation of headcount reduction that will reduce the level of forgiveness eligibility. Some additional details regarding these carveouts are included in IFR 1.
  • No double penalties on FTE decreases: Loan forgiveness eligibility is reduced to the extent a borrower has decreased its headcount as compared to a reference period and to the extent a borrower has cut salaries or wages by more than 25%. But what happens when reducing employees’ hours reduces their effective salary? The IFR clarifies that a borrower won’t be penalized twice on forgiveness eligibility in this case. The salary-based reduction calculation will only be applied to salary reductions that are not driven by a reduction in headcount.

While it is likely that the SBA will continue to release incremental guidance on loan forgiveness and the SBA’s review process, these most recent IFRs will be helpful to the many borrowers who are now starting to get their paperwork in order to submit applications for loan forgiveness.


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