PPP Loans | Paycheck Protection Program Explained

COVID-19 UPDATE | APRIL 2, 2020 PAYCHECK PROTECTION PROGRAM (PPP) UPDATE FOR LENDERS AND BORROWERS

The CARES Act authorized $349 billion to provide guaranteed loans through a new program under Section 7(a) of the SBA Loan Programs.  The Program provides for loans up to $10 million to employers with fewer than 500 employees.  Under certain conditions, some or all of the debt can be forgiven.  The loans are non-recourse and unsecured.  On April 2, 2020, the SBA published its “Interim Final Guidance”.  [Click here for a copy of the Interim Final Guidance (the “Guidance”).]  This Guidance altered some of the initial program descriptions in the original Statute.

I: LENDERS – NEW GUIDANCE

A. Good News.  Lenders have the right to rely upon the Certifications made by Borrowers to determine eligibility and use of loan proceeds.

B. Specified documents from the Borrower shall determine the qualifying loan amount and eligibility for forgiveness.

C. Lenders must comply with the obligations in the Guidance; however, they will be held harmless for the Borrower’s failure to comply with the protocols in the PPP.

D. Agent Fees.  Agent fees need to be paid by the Lender out of the fees that the Lender receives from the SBA.  The maximum agent fees that someone may collect from the Lender for assisting a Borrower in applying for a PPP Loan may not exceed:

1. 1% for loans up to $350,000;
2. .5% for loans greater than $350,000 and less than $2,000,000;
3. .25% for loans greater than $2,000,000;
4. Agent fees include referrals to Lenders.

E. Lender Fees.  The SBA will pay Lender fees for processing PPP Loans as follows:

1. 5% for loans not more than $350,000;
2. 3% for loans more than $350,000 and less than $2,000,000;
3. 1% for loans of $2,000,000 or greater.

F. Secondary Market.  A PPP Loan can be sold on the secondary market after it is fully disbursed.  It may be sold at a premium or discount to par.

II: BORROWERS – NEW GUIDANCE

A. Loan Amounts.  The Guidance not only shows how to calculate the amount that can be borrowed, it also provides examples on how it should be calculated.

B. There is a question and answer section that describes documents that the Borrower must provide to establish its eligibility for a PPP Loan.

1. Payroll records;
2. Payroll tax filings;
3. Form 1099-MISC.

C. Payroll Costs.  The SBA Guidance further provides an explanation of what can be included in payroll costs.

1. Independent contractors cannot be counted as employees for purposes of calculating PPP Loan amounts.
2. Compensation to employees (whose principal place of residence is in the United States) in the form of salary, wages, commission or similar compensation; cash tips or the equivalent, payroll for vacation to a family, medical or sick leave, allowance for separation or dismissal, payment for the provision of employee benefits consisting of group healthcare coverage, including insurance premiums and retirement, payment of state and local taxes assessed on compensation of employees, and, for independent contractor or sole proprietor, wages, commissions, income or net earnings from self-employment or similar compensation.

D. Payroll Cost Exclusions.

1. Compensation of any employee whose principal place of residence is outside the United States.
2. Compensation of an individual employee in excess of $100,000 per annum.
3. Federal employment tax imposed or withheld between February 15, 2020 and June 30, 2020.
4. Qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

E. Interest Rates.  The interest rate on a PPP Loan will be 1% per annum.

F. Term.  The term on a PPP Loan is two years.  This differs from the Act which said the maximum majority was up to ten (10) years, however, the Government has determined that a two year term loan is sufficient.

G. ESignatures.  ESignatures can be used for the Application and the Loan.

H. Maximum Dollars Under CARES Act.  Loans will be disbursed on a first come first served basis.  When the money is gone, it is gone.

I. Deferral.  No payments will be due for six months following the date of disbursement.  However, interest accrues during the six month deferral.

J. Debt Forgiveness.

1. Forgiveness can be up to the full principal amount of the loan and any accrued interest.
2. Forgiveness depends on the amount of payroll costs, payments of interest, payment of mortgage obligations, rent payments and utility payments over the eight week period following the date of the loan.
3. Not more than 25 percent of the loan forgiveness may be attributed to non-payroll costs.  THIS IS NEW AND A CHANGE, HAVE CAUTION.
4. Use of Proceeds.
   1. Payroll costs is defined in the Act;
   2. Group healthcare benefits;
   3. Mortgage interest payments, exclusive of prepayments or principal;
   4. Rent payments;
   5. Utility payments;
   6. Interest payments on other debt obligations incurred before February 15, 2020;
   7. Refinancing an SBA Loan that is EIDL qualified.

K. Misused Proceeds. 

1. If PPP funds are used for improper purposes, SBA will require you to repay these amounts.
2. If the funds are knowingly used for unauthorized purposes, there will be additional liability such as fraud charges.
3. If a shareholder, member or partner uses PPP funds for unauthorized purposes, the SBA shall have recourse against the shareholder, member or partner personally for the unauthorized use.  This is different from authorized uses which are non-recourse.

THE PPP LOANS CONTAIN MANY NUANCES.  FEEL FREE TO CONSULT WITH A MEMBER OF OUR TEAM FOR FURTHER INFORMATION.  THIS IS ONLY TO ASSIST YOU WITH THE PROCESS AND IS NOT INTENDED TO SERVE AS LEGAL ADVICE.  PLEASE CONSULT WITH AN ATTORNEY FOR LEGAL ADVICE.  APPLY AS SOON AS POSSIBLE.