Congress Loosens Paycheck Protection Program Requirements

Congress has passed and the President is expected to sign the Paycheck Protection Program Flexibility Act of 2020. The new law will make it easier for borrowers of Paycheck Protection Program (PPP) loans to qualify for loan forgiveness and give them longer to repay any unforgiven portion of their loans. In particular, the legislation:

• Increases the eight-week loan forgiveness period to either 24 weeks from the loan origination date or to December 31, 2020, whichever is earlier. Borrowers that received PPP loans prior to the law’s enactment may opt for either the longer forgiveness period or the original eight-week period.
• Gives borrowers until December 31, 2020 to restore certain employee headcount reductions and to reinstate certain salary or wage cuts in order to qualify for loan forgiveness. The deadline had previously been June 30, 2020.
• Permits borrowers seeking loan forgiveness to spend up to 40% of the loan proceeds on eligible non-payroll costs. The legislation now requires that, in order to qualify for forgiveness, borrowers “shall use” at least 60% of the loan proceeds for payroll costs. Current Small Business Administration (SBA) regulations limit non-payroll costs to 25% of loan proceeds, but merely reduce – rather than eliminate – forgiveness if the borrower spends some but not 75% of the loan proceeds on payroll costs. There is concern that the new legislative language will disqualify borrowers from forgiveness if they do not spend at least 60% of the loan proceeds on payroll costs, but key members of Congress have indicated that was not the intent and that the issue could be remedied by either a legislative correction or SBA regulations.
• Provides that a headcount reduction made between February 15 and December 31, 2020 will not affect a borrower’s loan forgiveness amount if the borrower documents that it was unable:
  • To rehire people whom it employed on February 15, 2020 or to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
  • To return to the same level of business activity that it was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the U.S. 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, related to maintaining standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
• Extends the loan repayment deferral period from six months to the date on which the borrower’s forgiveness amount is remitted to the lender. Borrowers that do not apply for forgiveness within 10 months after the last day of their loan forgiveness period will now have until the end of that 10-month period to start repaying their loans.
• Permits PPP borrowers whose loans are forgiven to qualify for payroll tax deferral under the CARES Act.

These provisions are effective as if included in the March 27, 2020 CARES Act, which established the PPP.

The Paycheck Protection Program Flexibility Act of 2020 also gives borrowers of loans made on or after its enactment five years to repay (up from the two years specified by the SBA) and permits PPP borrowers and lenders to agree to modify existing loans to provide for a five-year repayment period.

A letter entered by Senate Majority Leader Mitch McConnell into the Congressional Record states that Congressional intent is for lenders to stop accepting and approving PPP loan applications after June 30, 2020, regardless of whether funds appropriated for the PPP remain available. Businesses and nonprofits considering applying for PPP loans should therefore submit their applications as soon as possible.