Best Practices: Paycheck Protection Program Loan Forgiveness: What We Know, What We Need To Find Out

Now that the first wave of Paycheck Protection Program (“PPP”) loans have been approved and are being funded, Lenders’ and Borrowers’ attention have turned to Section 1106 of the CARES Act (Pub.L. 116-136), Loan Forgiveness.

According to the statute, Borrowers will be eligible for forgiveness of indebtedness on a PPP loan in an amount equal to the sum of the following costs incurred and payments made during the 8-week period after the first disbursement of the PPP loan: (i) payroll costs; (ii) interest payment on any mortgage incurred prior to February 15; (iii) payment of rent on any lease in force prior to February 15, and (iv) payment on any utility for which service began before February 15.  The First Interim Final Rule issued by SBA, clarified that not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.

The CARES Act provides the amount of loan forgiveness shall not exceed the principal amount of the PPP loan (clarified in the Interim Final Rule to be Principal and accrued Interest). It also provides for a reduction in the amount of loan forgiveness by:

• the reduction in number of full-time employees of a PPP loan borrower; and
• the reduction in excess of 25% the total salary/wages of any employee during the 8 week period after disbursement compared to the most recent full quarter during which the employee was employed before the PPP loan disbursement (excluding reductions for salary and wage amounts over $100,000).

The CARES Act calculation for determining any reduction in number employees is (A) the average number of full-time employees per month employed during the 8 week period after disbursement of the PPP loan, by either (B)(i) average number of full time equivalent employees per month between 2/15/2019-6/30/2019 (for established or existing businesses) or (ii) average number of full time equivalent per month employed between 1/1/2020-2/29/2020 (for businesses that were not established in 2/15/2019-6/30/2019).   However, there is an exemption for reduction in PPP loan forgiveness for rehires in the CARES Act.  If a PPP Borrower reduced employees and/or salaries during the period between 2/15/2020 – 4/26/2020, but during the 8 weeks after PPP Loan disbursement, but not later than 6/30/2020 eliminates the reduction in employees and salaries, then according to the CARES Act, the PPP Borrower’s loan forgiveness should not be reduced.

However, many Borrower and Lenders are looking for confirmation and clarity on how to calculate loan forgiveness based on the CARES Act formula. Borrowers are worried that they won’t be able to rehire enough employees fast enough to spend the funds in 8 weeks or re-establish their headcount.  Also unclear is exactly what Borrowers and/or Lender must submit for PPP loan forgiveness.  The CARES Act appears to require the following documentation: (i) evidence of full-time employees on payroll and pay rates, (ii) documentation on non-payroll costs and (iii) a certification that the (a) documentation is true and correct and (b) the amount for which forgiveness is requested was used for eligible purposes, and (iv) any other documentation the Administrator determines is necessary.  Borrowers and Lenders are waiting for more information regarding additional documentation requirements from the SBA.

While the CARES Act provides a general timeline for the forgiveness process, Borrowers and Lenders are already asking exactly how and when will they be able to submit for loan forgiveness.  The CARES Act provides that a Lender must issue a decision on an application for loan forgiveness not later than 60 days after the Borrower’s request for forgiveness.  It also states that no later than 90 days after the date on which the amount of forgiveness is determined, the Administrator shall remit to the Lender an amount equal to the forgiveness, plus any interest accrued through the date of payment.

What Lender and Borrowers do not know is whether a Lender can and should make the decision on loan forgiveness unilaterally, and what are the consequences, if any, of an incorrect determination.  The CARES Act provides that Lenders will be held harmless if they received required, “documentation from an eligible recipient attesting that the eligible recipient has accurately verified the payments….” for eligible purposes, and will not be subject to an enforcement action or subject to any penalties related to loan forgiveness for payments for eligible purposes.  If SBA determines that the documentation was not accurate, or the recipient or use of funds were not eligible, it is unclear whether lenders will be “held harmless.”  While we wait for further guidance from SBA, Lenders should advise their Borrowers about the need to maintain accurate records and carefully track the use of PPP loan proceeds.  Lenders should also consider developing a loan forgiveness certification form, and create a process for efficiently receiving, processing and approving loan forgiveness applications.

For questions or assistance with your PPP loan forgiveness process, please feel free to reach out to the attorneys at Starfield & Smith, PC at 215.542.7070.