Paycheck Protection Program Flexibility Act Brings Borrower-Friendly Changes to PPP Loans

On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (the “Act“) into law. The Act provides borrowers under the Paycheck Protection Program (“PPP“) with additional time and flexibility in their use of PPP loan proceeds.

The Act revises various rules and requirements regarding PPP loans that were provided in the CARES Act and subsequent interim rules and guidance. The key points are as follows:

  • Extended Forgiveness Period: The Act extends the covered period for loan forgiveness from eight weeks to 24 weeks after disbursement of the loan (or, if earlier, December 31, 2020). Borrowers who already received PPP loans can elect to use the original eight-week covered period.
  • Payroll Costs Requirement: The Act lowers the percentage of loan proceeds that must be spent on payroll costs during the covered period from 75% to 60%. As a result, borrowers can use up to 40% of loan proceeds for eligible non-payroll costs, such as rent, mortgage interest, and utilities. While previous SBA guidance provided for a proportionate reduction in loan forgiveness for borrowers who fail to meet the prior 75% payroll-cost threshold, the Act suggests that the new 60% threshold is a cliff – if a borrower spends less than 60% of its loan proceeds on payroll costs then the entire loan will become ineligible for forgiveness. We expect the SBA or Treasury Department to clarify this point in subsequent guidance.
  • Deadline to Restore FTE and Compensation Levels: Borrowers now have until December 31, 2020 (extended from June 30, 2020) to restore any reductions in full-time equivalent (FTE) employees and/or compensation or wage levels to avoid being subject to a reduction in their loan forgiveness percentage.
  • Additional FTE Re-Hire Exceptions: The Act provides that borrowers are exempt from a reduction in their loan forgiveness percentage due to their inability to restore FTE levels by December 31, 2020 if, in good faith, the borrower is able to document (a) its inability to rehire former employees or similarly-qualified persons and/or (b) its inability to return to the same level of business activity as before February 15, 2020 as a result of COVID-19 regulatory requirements implemented by the Department of Health and Human Services, the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration between March 1, 2020 and December 31, 2020.
  • Extension of Loan Repayment Deferral Period: The Act extends the period in which borrowers may defer loan payments from six months to the date that the SBA remits the borrower’s loan forgiveness amount to the lender (or if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period).
  • Extension of Maturity Date: PPP loans made after the enactment of the Act will have a minimum maturity of five years and maximum maturity of 10 years (with respect to amounts that are not forgiven). Prior to the passage of the Act, all PPP loans were subject to a two-year maturity period. Existing borrowers and lenders may mutually agree to modify the maturity terms of their existing PPP loans.
  • Payroll Tax Deferral: The CARES Act allows employers to delay the deposit of the employer-portion of the social security tax, however prohibits PPP borrower employers from utilizing that payroll tax deferral following the forgiveness of any portion of their PPP loan. The Act eliminates that restriction and allows all PPP borrowers, including those receiving forgiveness, to take advantage of the payroll tax deferral under the CARES Act.
  • Final PPP Loan Date: The Act confirms that June 30, 2020 is the last date on which a PPP loan application can be approved.

UPDATE: The final PPP loan date has been extended to August 8, 2020. Approximately $129 billion remains available for PPP lending.

The changes implemented by the Act will require the SBA and Treasury Department to revisit much of their previous guidance and materials regarding PPP loans. This will be an ongoing task for the SBA and Treasury Department in the upcoming weeks and months.

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