Loan Forgiveness
Recipients of Paycheck Protection Program (PPP) loans of $50,000 or less will be able to apply for forgiveness using a simplified application that was released by Treasury and the U.S. Small Business Administration (SBA).
A new interim final rule (IFR) provides new guidance concerning forgiveness and loan review processes for PPP loans of $50,000 or less.
Under the IFR, PPP borrowers of $50,000 or less are exempted from any reductions in forgiveness based on:
- Reductions in full-time-equivalent (FTE) employees; and
- Reduction in employee salary or wages.
The new application form, SBA Form 3508S, can be used by PPP borrowers applying for forgiveness on PPP loans with a total loan amount of $50,000 or less, unless those borrowers together with their affiliates received loans totaling $2 million or more.
Of the 5.2 million PPP loans approved by the SBA, about 3.57 million were for $50,000 or less, according the IFR. Those loans accounted for about $62 billion of the $525 billion in PPP loans. About 1.71 million PPP loans of $50,000 or less were made to businesses that reported having zero employees or one employee.
The IFR streamlines the forgiveness process for PPP borrowers of $50,000 or less because they will not be required to perform potentially complicated FTE or salary reduction calculations. Borrowers of $50,000 or less still will have to make some certifications and provide documentation to the lender for payroll and non-payroll costs.
Lender Responsibilities
For PPP loans of all sizes, the IFR also contains guidance on lender responsibilities with respect to the review of borrower documentation of eligible costs for forgiveness in excess of a borrower’s PPP loan amount.
According to the IFR, when a borrower submits Form 3508S or the lender’s equivalent form, the lender will be required to:
- Confirm receipt of the borrower certifications contained in the form; and
- Confirm receipt of the documentation the borrower is required to submit to aid in verifying payroll and nonpayroll costs, as specified in the instructions to the form.
The borrower is responsible for providing an accurate calculation of the loan forgiveness amount. The borrower will attest to the accuracy of the reported information and calculations on the loan forgiveness application. Lenders are permitted to rely on borrower representations, according to the IFR.
In addition, the IFR addresses what a lender should do if a borrower submits documentation of eligible costs that exceed the borrower’s PPP loan amount. According to the IFR, the amount of loan forgiveness that a borrower may receive cannot exceed the principal amount of the PPP loan.
Whether a borrower submits SBA Form 3508, 3508EZ, or 3508S, or a lender’s equivalent form, the lender is required to confirm receipt of the documentation the borrower is required to submit to aid in verifying payroll and nonpayroll costs. If applicable, the lender also is required to confirm the borrower’s calculations on the loan forgiveness application, up to the amount required to reach the requested forgiveness amount.
Deferral Period Clarified
The US Small Business Administration released guidance last week clarifying that lenders must recognize the previously established extended deferral period for payments on the principal, interest, and fees on all Paycheck Protection Program (PPP) loans, even if the executed promissory note indicates only a six-month deferral.
The guidance means that lenders must immediately comply with the extended deferral period and notify borrowers of the change.
The Paycheck Protection Flexibility Act of 2020, P.L. 116-142, extended the deferral period for loan payments to either (1) the date that SBA remits the borrower’s loan forgiveness amount to the lender or (2) if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period.
Before the Flexibility Act became law June 5, the deferral period could end after six months. And while the Flexibility Act extended the deferral period, it did not specify whether lenders and borrowers had to modify promissory notes used for PPP loans to reflect the extended deferral period.
Because the first PPP loans were awarded in April, some PPP borrowers had recently received notices from lenders that payments on their PPP loans were due. The new guidance, found in question No. 52 in the SBA’s frequently asked questions document for the PPP, clarifies that the deferral period extension automatically applies to all loans, with no requirement from the SBA of a formal modification of the promissory note.
This is not intended as legal advice; for more information, please contact your lender.