Updates in the Law
Since our last update on April 27, 2020, the U.S. Treasury Department (“Treasury”) and Small Business Administration (“SBA”) have continued to apply pressure on borrowers who obtained PPP loans to repay such loans in full if the borrower’s certification of need for the PPP loan was not made in good faith.
On April 23, 2020, the Treasury published an FAQ response wherein it stated that if borrowers repaid PPP loans in full prior to May 7, 2020, the borrower will be deemed by the SBA to have made the certification of need in good faith.
An FAQ response published by the Treasury on May 5, 2020 states that the SBA is extending the above- noted deadline for repayment of PPP loans to May 14, 2020. This FAQ response also states that the SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
The Treasury published an FAQ response on May 6th stating a PPP borrower that repays its PPP loan on or before May 14, 2020 is eligible for the Employee Retention Credit under the CARES Act.
On April 29, 2020, the Treasury published an FAQ response regarding the question of whether the SBA will review PPP Loan Files. The response stated that the SBA will review PPP loan files “in excess of $2 million, in addition to other loans as appropriate” and that the purpose of this review was “to further ensure that PPP loans are limited to eligible borrowers in need.” The SBA’s review will be conducted after the lender’s submission of the borrower’s loan forgiveness application. The FAQ response states that additional guidance implementing this procedure will be forthcoming.
Generally, under the CARES Act, the amount of a borrower’s loan forgiveness will be reduced if the borrower terminates an employee during the covered period and does not re-hire the employee before June 30. The CARES Act further provides that if a borrower terminated an employee on or before April 26 and re-hires the employee before June 30, the termination of the employee would not reduce the amount of the loan forgiveness.
Many borrowers have questioned what happens to their loan forgiveness amount if the borrower offers to re-hire an employee previously laid off, but the employee rejects the offer. This scenario was addressed in an FAQ response published by the Treasury on April 29, 2020.
In its response, the Treasury stated that a borrower’s loan forgiveness amount would not be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer. To qualify for this exception, however, the borrower must have made a good faith, written offer of re-hire, and the employee’s rejection of that offer must be documented by the borrower. (emphasis added). The Treasury stated that an Interim Final Rule will be issued which specifies the foregoing.
On April 28, 2020, The Treasury posted the Interim Final Rule on Disbursements (the “Rule”). This Rule states that a borrower on a PPP loan may not take multiply draws and thereby delay the start of the eight-week covered period for forgiveness. The Rule further provides that lenders must make a one-time full disbursement of the PPP loan within 10 calendar days of loan approval. A prior Treasury FAQ response stated that the “first” disbursement on a PPP loan was to be made within 10 calendar days of the loan approval.
With respect to PPP loans that were approved before this Rule was posted, the Rule states that the ten-calendar day period for full disbursement of the PPP loan began on April 28, 2020. It further states that the eight-week covered period on these loans began on the date of the first disbursement.
The Rule also provides that PPP loans which had not been disbursed because the borrower had not supplied the required loan documentation to the lender within 20 days of the loan approval shall be canceled, subject to the rules set forth in the preceding paragraph.
On April 30, 2020, the Treasury posted an Interim Final Rule on Corporate Groups, and Non-Bank and Non-Insured Depository Institution Lenders. This Rules states, among other things, that a single corporate group may not receive unlimited PPP loans, and further provides that businesses that are a part of a single corporate group may not receive more than $20,000,000 of PPP loans in the aggregate. Businesses are a part of a single corporate group if they are majority-owned, directly or indirectly, by a common parent.
This week the SBA published an announcement that due to limitations in funding, it will begin accepting new Economic Injury Disaster Loans (EIDL) and EIDL Advance applications on a limited basis only to provide relief to U.S. Agricultural businesses. Applicants who have already submitted their applications will continue to be processed on a first-come, first-serve basis.
The foregoing is a summary of the more notable rules and guidance which have been issued regarding PPP and EIDL loans since April 27, 2020. For a complete disclosure of these rules and guidance, you may review the Treasury Department website.