Update: Today President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 ("FA"). The House passed the law on May 27 and the Senate approved on June 3. The legislation provides more flexibility to small businesses who received loans under the Paycheck Protection Program (“PPP”).
Maturity of PPP Loans
To start, the FA establishes that all PPP loans granted after the enactment of the FA will carry a 5-year minimum maturity term. For already existing loans, the FA allows for lenders and borrowers to mutually agree to modify the 2-year maturity term of the existing loan and implement the new 5-year minimum.
Extended Covered Period
Further, the FA extends the deadline to apply for a PPP loan to December 31, 2020. The covered period for which PPP loan recipients may spend the loan is also extended. Originally, small businesses had 8 weeks to spend the PPP loan money. Under the FA, small businesses may spend the PPP loan money during a 24-week period or until December 31, 2020, whichever occurs first. A business that has received a loan prior to the enactment of the FA may elect to spend their loan within the 8-week spending period that coincides with origination of their loan or extend it through the new 24-week covered period.
Payroll vs Nonpayroll Uses
Prior to the FA, recipients of a PPP loan were required to use 75% or more of the loan on payroll expenses in order to be eligible for loan forgiveness. The FA reduces that amount and requires recipients to spend at least 60% of the loan amount on payroll expenses in order to be eligible for loan forgiveness. This allows a recipient of a PPP loan to use up to 40% of the loan amount on non-payroll expenses like mortgage, rent, and utility payments.
Full-Time Equivalent Safe Harbor
The PPP requires loan recipients to restore its full-time employee count or employee wages to its February 15, 2020 level by June 30, 2020 in order to receive the full amount of loan forgiveness. Because many businesses are still facing difficulties in restoring operations to their February 15, 2020 levels, the FA extended the date to restore the loan recipient’s full-time employee count or employee wages to December 31, 2020.
Further, the FA provides a new exemption from a proportional reduction of loan forgiveness due to a reduction in full-time employees. This exemption is conditioned on the PPP loan recipient documenting, in good faith, one of the following two findings. First, a loan recipient can document an inability to rehire individuals who were employees on February 15, 2020 and document an inability to hire similarly qualified employees for unfilled positions by December 31, 2020. Second, a loan recipient can document:
“an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”
Extended Deferral Period
Under the initial CARES Act, a deferral period of not less than six months and no more than one year was allowed for loan payments of principal and interest. Under the FA, the deferral of payments of principle and interest extends until the lender receives the total forgiveness amount of the loan, which is determined by the CARES Act. Additionally, if a PPP loan recipient fails to apply for forgiveness of the loan, then the recipient must begin payments of interest and principle within 10 months of the end of the newly established 24-week covered period.
It is anticipated that President Trump will sign the FA into law but, until then, the CARES Act and the PPP remain in effect leaving the above-mentioned changes unimplemented.
For questions regarding the Paycheck Protection Program Flexibility Act of 2020, please contact your primary BMD attorney.