Yesterday, the Small Business Administration issued an Interim Final Rule (the “Rule”) regarding the CARES Act’s Paycheck Protection Loan program. The SBA also released the Paycheck Protection Loan borrower application form that lenders are to use in processing applications. The Rule – which is applicable to all applications for Paycheck Protection Loans – and the application provide critical additional insight for businesses who are considering applying, or have already applied, for a Paycheck Protection Loan.
Many lenders began accepting Paycheck Protection Loan applications today, Friday, April 3, 2020. Though some lenders have indicated that they are not yet prepared to begin processing these applications, businesses should nonetheless be ready to submit their application as soon as their lender is ready to accept it. It is critical that you contact your lender to determine specifics about their requirements to accept and process the applications, as it is anticipated that demand for the loans will be high, and that funds may run out. Availability of Paycheck Protection Loans is on a first-come, first-served basis.
The Rule interprets several provisions of the Paycheck Protection Loan program, discusses borrower eligibility and provides significant clarifications on the details of the Paycheck Protection Loan program, such as the applicable interest rate and loan maturity date. For more specific discussion regarding the Paycheck Protection Loan program, see FOS’ President Signs Coronavirus Stimulus Legislation.
Given that the Treasury Department has directed that the Paycheck Protection Loan program is to be rolled out as quickly as possible to get much-needed cash to businesses impacted by the COVID-19 pandemic, the Rule is applicable to all Paycheck Protection Loan applications, but is still subject to modification based on future comment.
The following are some of the Rule’s key provisions regarding Paycheck Protection Loans:
• “Payroll costs” – which are used to calculate the amount of the loan available to a business – do not include federal employment taxes, including the employee’s and employer’s share of FICA and income taxes required to be withheld from employees, imposed or withheld between February 15, 2020 and June 30, 2020.
• Interest rate for the loans is 1%.
• Interest on the loans, in addition to principal, is subject to forgiveness.
• To be fully forgiven, at least 75% of the Paycheck Protection Loan proceeds must have been used for payroll costs (as defined) within the 8 week period after the loan is made. This means that no more than 25% of the proceeds of the loan can be used for items such as mortgage interest, rent or utilities.
• The loans will mature in 2 years (note that the law indicated that the loans could mature in no more than 10 years).
• If the borrower received an Economic Injury Disaster Loan (“EIDL”) between January 31, 2020 and April 3, 2020, and the proceeds were used for payroll costs, the borrower’s Paycheck Protection Loan must be used to refinance the EIDL. Proceeds from any advance up to $10,000 on the EIDL will be deducted from the loan forgiveness amount on the Paycheck Protection Loan.
• The Rule makes clear that entities that are otherwise ineligible for 7a SBA loans (13 CFR 120.110) such as banks, are also ineligible for Paycheck Protection Loans. The Rule, however, states that nonprofit organizations are eligible for the Paycheck Protection Loan program.
FOS is here to guide you through the requirements and procedures for successfully obtaining a forgivable Paycheck Protection Loan. If you have any questions regarding the Paycheck Protection Loan program, the recent federal stimulus legislation, workplace or insurance issues related to COVID-19, or any legal issue, please call your FOS attorney.