Business Loan Program Temporary Changes; Paycheck Protection Program-Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules
| Citation | 85 FR 38304 |
| Record Number | 2020-13782 |
| Published date | 26 June 2020 |
| Section | Rules and Regulations |
| Court | Small Business Administration |
Federal Register, Volume 85 Issue 124 (Friday, June 26, 2020)
[Federal Register Volume 85, Number 124 (Friday, June 26, 2020)]
[Rules and Regulations]
[Pages 38304-38312]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13782]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
[Docket No. SBA-2020-0038]
RIN 3245-AH52
DEPARTMENT OF THE TREASURY
RIN 1505-AC70
Business Loan Program Temporary Changes; Paycheck Protection
Program--Revisions to Loan Forgiveness and Loan Review Procedures
Interim Final Rules
AGENCY: U.S. Small Business Administration; Department of the Treasury.
ACTION: Interim final rule.
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SUMMARY: On April 2, 2020, the U.S. Small Business Administration (SBA)
posted on its website an interim final rule relating to the
implementation of sections 1102 and 1106 of the Coronavirus Aid,
Relief, and Economic Security Act (CARES Act or the Act) (published in
the Federal Register on April 15, 2020). Section 1102 of the Act
temporarily adds a new product, titled the ``Paycheck Protection
Program,'' to the SBA's 7(a) Loan Program. Subsequently, SBA and
Treasury issued additional interim final rules implementing the
Paycheck Protection Program. On June 5, 2020, the Paycheck Protection
Program Flexibility Act of 2020 (Flexibility Act) was signed into law,
amending the CARES Act. This interim final rule revises interim final
rules posted on SBA's and the Department of the Treasury's websites on
May 22, 2020 (published on June 1, 2020, in the Federal Register), by
changing key provisions to conform to the Flexibility Act. Several of
these amendments are retroactive to the date of enactment of the CARES
Act, as required by section 3(d) of the Flexibility Act.
DATES:
Effective Date: This interim final rule is effective March 27,
2020, except for the provision relating to the maturity date of PPP
loans, which is effective June 5, 2020, and the provision relating to
the cap on the amount of loan forgiveness for owner-employees and self-
employed individuals, which is effective on June 24, 2020.
Comment Date: Comments must be received on or before July 27, 2020.
ADDRESSES: You may submit comments, identified by number SBA-2020-0038,
through the Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
[[Page 38305]]
SBA and Treasury will post all comments on www.regulations.gov. If
you wish to submit confidential business information (CBI) as defined
in the User Notice at www.regulations.gov, please send an email to [email protected]. Highlight the information that you consider to be CBI and
explain why you believe SBA and Treasury should hold this information
as confidential. SBA and Treasury will review the information and make
the final determination whether it will publish the information.
FOR FURTHER INFORMATION CONTACT: A Call Center Representative at 833-
572-0502, or the local SBA Field Office; the list of offices can be
found at https://www.sba.gov/tools/local-assistance/districtoffices.
SUPPLEMENTARY INFORMATION:
I. Background Information
On March 13, 2020, President Trump declared the ongoing Coronavirus
Disease 2019 (COVID-19) pandemic of sufficient severity and magnitude
to warrant an emergency declaration for all states, territories, and
the District of Columbia. With the COVID-19 emergency, many small
businesses nationwide are experiencing economic hardship as a direct
result of the Federal, State, and local public health measures that are
being taken to minimize the public's exposure to the virus. These
measures, some of which are government-mandated, have been implemented
nationwide and include the closures of restaurants, bars, and gyms. In
addition, based on the advice of public health officials, other
measures, such as keeping a safe distance from others or even stay-at-
home orders, have been implemented, resulting in a dramatic decrease in
economic activity as the public avoids malls, retail stores, and other
businesses.
On March 27, 2020, the President signed the Coronavirus Aid,
Relief, and Economic Security Act (the CARES Act or the Act) (Pub. L.
116-136) to provide emergency assistance and health care response for
individuals, families, and businesses affected by the coronavirus
pandemic. The Small Business Administration (SBA) received funding and
authority through the Act to modify existing loan programs and
establish a new loan program to assist small businesses nationwide
adversely impacted by the COVID-19 emergency.
Section 1102 of the Act temporarily permits SBA to guarantee 100
percent of 7(a) loans under a new program titled the ``Paycheck
Protection Program.'' Section 1106 of the Act provides for forgiveness
of up to the full principal amount of qualifying loans guaranteed under
the Paycheck Protection Program.
On April 24, 2020, the President signed the Paycheck Protection
Program and Health Care Enhancement Act (Pub. L. 116-139), which
provided additional funding and authority for the PPP. On June 5, 2020,
the President signed the Paycheck Protection Program Flexibility Act of
2020 (Flexibility Act) (Pub. L. 116-142), which changes key provisions
of the Paycheck Protection Program, including provisions relating to
the maturity of PPP loans, the deferral of PPP loan payments, and the
forgiveness of PPP loans. Section 3(d) of the Flexibility Act provides
that the amendments relating to PPP loan forgiveness and extension of
the deferral period for PPP loans shall be effective as if included in
the CARES Act, which means that they are retroactive to March 27, 2020.
Section 2 of the Flexibility Act provides that the amendment relating
to the extension of the maturity date for PPP loans shall take effect
on the date of enactment (June 5, 2020). Under the Flexibility Act, the
extension of the maturity date for PPP loans is applicable to PPP loans
made on or after that date, and lenders and borrowers may mutually
agree to modify PPP loans made before such date to reflect the longer
maturity.
II. Comments and Retroactive/Immediate Effective Date
This interim final rule is effective without advance notice and
public comment because section 1114 of the CARES Act authorizes SBA to
issue regulations to implement Title I of the Act without regard to
notice requirements. In addition, SBA has determined that there is good
cause for dispensing with advance public notice and comment on the
grounds that it would be contrary to the public interest. Specifically,
advance public notice and comment would defeat the purpose of this
interim final rule given that SBA's authority to guarantee PPP loans
expires on June 30, 2020, and that many PPP borrowers can now apply for
loan forgiveness following the end of their eight-week covered period.
Providing borrowers and lenders with certainty on both loan
requirements and loan forgiveness requirements following the enactment
of the Flexibility Act will enhance the ability of lenders to make
loans and process loan forgiveness applications, particularly in light
of the fact that most of the Flexibility Act's provisions are
retroactive to March 27, 2020. Specifically, small businesses that have
yet to apply for and receive a PPP loan need to be informed of the
terms of PPP loans as soon as possible, because the last day on which a
lender can obtain an SBA loan number for a PPP loan is June 30, 2020.
Borrowers that have already applied for and received a PPP loan need
certainty regarding how loan proceeds must be used during the covered
period, as amended by the Flexibility Act, so that they can maximize
the amount of loan forgiveness. Additionally, because some borrowers
can apply for loan forgiveness now, those borrowers need updated
direction on how to do so. These same reasons provide good cause for
SBA to dispense with the 30-day delayed effective date provided in the
Administrative Procedure Act. Although this interim final rule is
effective on or before date of filing, comments are solicited from
interested members of the public on all aspects of the interim final
rule, including section III below. These comments must be submitted on
or before July 27, 2020. The SBA and Treasury will consider these
comments, comments received on the two interim final rules amended by
this interim final rule, which were posted on SBA's website May 22,
2020 and published on June 1, 2020, in the Federal Register, and the
need for making any revisions as a result of these comments.
III. Paycheck Protection Program--Revisions to Loan Forgiveness Interim
Final Rule and SBA Loan Review Procedures and Related Borrower and
Lender Responsibilities Interim Final Rule
Overview
The CARES Act was enacted to provide immediate assistance to
individuals, families, and businesses affected by the COVID-19
emergency. Among the provisions contained in the CARES Act are
provisions authorizing SBA to temporarily guarantee loans under a new
7(a) loan program titled the ``Paycheck Protection Program.'' Loans
guaranteed under the Paycheck Protection Program (PPP) will be 100
percent guaranteed by SBA, and the full principal amount of the loans
may qualify for loan forgiveness.
SBA and Treasury have posted several documents on the loan
forgiveness provisions in the CARES Act on their websites. On April 2,
2020, SBA posted its first PPP interim final rule (85 FR 20811)
covering in part loan forgiveness. On April 8, 2020 and April 26, 2020,
SBA also posted Frequently Asked Questions relating to loan
forgiveness. On April 14, 2020, SBA posted an interim final rule
covering in part loan forgiveness for individuals with self-employment
income. On May 22, 2020,
[[Page 38306]]
SBA and Treasury jointly posted an additional interim final rule on
loan forgiveness (85 FR 33004) (First Loan Forgiveness Rule). The SBA
also posted an interim final rule on May 22, 2020 on SBA loan review
procedures and related borrower and lender responsibilities (85 FR
33010) (First Loan Review Rule). On June 11, 2020, SBA posted an
interim final rule revising the first PPP interim final rule to
incorporate Flexibility Act amendments, including those relating to
loan forgiveness. On June 17, 2020, SBA posted an interim final rule
revising the interim final rule covering individuals with self-
employment income to incorporate Flexibility Act amendments, including
those relating to loan forgiveness.
The Flexibility Act amends the CARES Act, including its provisions
relating to loan terms and loan forgiveness. The purpose of this
interim final rule is to update the First Loan Forgiveness Rule and the
First Loan Review Rule in light of the amendments under the Flexibility
Act. The First Loan Forgiveness Rule and First Loan Review Rule, as
amended by this interim final rule, should be interpreted consistent
with the frequently asked questions (FAQs) regarding the PPP that are
posted on SBA's website \1\ and the other interim final rules issued
regarding the PPP.\2\
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\1\ See https://www.sba.gov/document/support--faq-lenders-borrowers.
\2\ See https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program.
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1. Changes to the First Loan Forgiveness Rule
a. General
Section 3(b) of the Flexibility Act amended the requirements
regarding forgiveness of PPP loans to reduce, from 75 percent to 60
percent, the portion of PPP loan proceeds that must be used for payroll
costs for the full amount of the PPP loan to be eligible for
forgiveness. Therefore, Part III.1 of the First Loan Forgiveness Rule
(85 FR 33004, 33005) is revised by striking ``25 percent'' in the last
sentence and replacing it with ``40 percent''.
b. Maturity
Section 2(a) of the Flexibility Act provides a minimum maturity of
five years for all PPP loans made on or after the date of enactment of
the Flexibility Act (June 5, 2020), and permits lenders and borrowers
to extend the maturity date of earlier PPP loans by mutual agreement.
Section 3(c) of the Flexibility Act extended the deferral period for
PPP loans to the date that SBA remits the forgiveness amount to the
lender. Further, SBA has issued an alternative Loan Forgiveness
Application Form, SBA Form 3508EZ. Therefore, in Part III.2 of the
First Loan Forgiveness Rule (85 FR 33004, 33005), the introductory
question is redesignated as paragraph a. and revised to read as
follows:
2. Loan Forgiveness Process
a. What is the general process to obtain loan forgiveness?
To receive loan forgiveness, a borrower must complete and submit
the Loan Forgiveness Application (SBA Form 3508, 3508EZ, or lender
equivalent) to its lender (or the lender servicing its loan). As a
general matter, the lender will review the application and make a
decision regarding loan forgiveness. The lender has 60 days from
receipt of a complete application to issue a decision to SBA. If the
lender determines that the borrower is entitled to forgiveness of
some or all of the amount applied for under the statute and
applicable regulations, the lender must request payment from SBA at
the time the lender issues its decision to SBA. SBA will, subject to
any SBA review of the loan or loan application, remit the
appropriate forgiveness amount to the lender, plus any interest
accrued through the date of payment, not later than 90 days after
the lender issues its decision to SBA. If applicable, SBA will
deduct EIDL Advance Amounts from the forgiveness amount remitted to
the Lender as required by section 1110(e)(6) of the CARES Act. If
SBA determines in the course of its review that the borrower was
ineligible for the PPP loan based on the provisions of the CARES
Act, SBA rules or guidance available at the time of the borrower's
loan application, or the terms of the borrower's PPP loan
application (for example, because the borrower lacked an adequate
basis for the certifications that it made in its PPP loan
application), the loan will not be eligible for loan forgiveness.
The lender is responsible for notifying the borrower of the
forgiveness amount. If only a portion of the loan is forgiven, or if
the forgiveness request is denied, any remaining balance due on the
loan must be repaid by the borrower on or before the maturity date
of the loan. The lender is responsible for notifying the borrower of
remittance by SBA of the loan forgiveness amount (or that SBA
determined that no amount of the loan is eligible for forgiveness)
and the date on which the borrower's first payment is due, if
applicable. If SBA determines that the full amount of the loan is
eligible for forgiveness and remits the full amount of the loan to
the lender, the lender must mark the PPP loan note as ``paid in
full'' and report the status of the loan as ``paid in full'' on the
next monthly 1502 report filed by the lender.
The general loan forgiveness process described above applies
only to loan forgiveness applications that are not reviewed by SBA
prior to the lender's decision on the forgiveness application. A
separate interim final rule on SBA Loan Review Procedures and
Related Borrower and Lender Responsibilities describes SBA's
procedures for reviewing PPP loan applications and loan forgiveness
applications.
c. Deferral Period and Forgiveness
Section 3(c) of the Flexibility Act provides that if the borrower
does not apply for forgiveness of a loan within 10 months after the
last day of the covered period, the PPP loan is no longer deferred and
the borrower must begin paying principal and interest. Therefore, the
following text is added as a new paragraph b. at the end of Part III.2:
b. When must a borrower apply for loan forgiveness or start
making payments on a loan?
A borrower may submit a loan forgiveness application any time on
or before the maturity date of the loan--including before the end of
the covered period--if the borrower has used all of the loan
proceeds for which the borrower is requesting forgiveness. If the
borrower applies for forgiveness before the end of the covered
period and has reduced any employee's salaries or wages in excess of
25 percent, the borrower must account for the excess salary
reduction for the full 8-week or 24-week covered period, as
described in Part III.5. If the borrower does not apply for loan
forgiveness within 10 months after the last day of the covered
period, or if SBA determines that the loan is not eligible for
forgiveness (in whole or in part), the PPP loan is no longer
deferred and the borrower must begin paying principal and interest.
If this occurs, the lender must notify the borrower of the date the
first payment is due. The lender must report that the loan is no
longer deferred to SBA on the next monthly SBA Form 1502 report
filed by the lender.
d. Payroll Costs Eligible for Loan Forgiveness
Under section 1106 of the CARES Act, certain provisions regarding
the forgiveness of PPP loans are limited to the ``covered period.''
``Covered period,'' as that term is used in section 1106 of the CARES
Act, was originally defined as the eight-week period beginning on the
date of the origination of a covered loan. However, section 3(b) of the
Flexibility Act extended the length of the covered period as defined in
section 1106 of the CARES Act from eight to 24 weeks, while allowing
borrowers that received PPP loans before June 5, 2020 to elect to use
the original eight-week covered period. As set forth below, several
provisions in Part III.3 of the First Loan Forgiveness Rule require
revisions to conform to these amendments under Flexibility Act.
Part III.3.a of the First Loan Forgiveness Rule (85 FR 33004,
33006) is revised to read as follows:
a. When must payroll costs be incurred and/or paid to be
eligible for forgiveness?
In general, payroll costs paid or incurred during the covered
period are eligible for
[[Page 38307]]
forgiveness. For purposes of loan forgiveness, the covered period is
the 24-week period beginning on the date the lender disburses the
PPP loan.\3\ Alternatively, a borrower that received a PPP loan
before June 5, 2020 may elect for the covered period to end eight
weeks after the date of disbursement of the PPP loan. Borrowers may
seek forgiveness for payroll costs for the applicable covered period
beginning on either:
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\3\ Under section 3(b)(1) of the Paycheck Protection Program
Flexibility Act of 2020, the loan forgiveness covered period of any
borrower will end no later than December 31, 2020.
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i. the date of disbursement of the borrower's PPP loan proceeds
from the Lender (i.e., the start of the covered period); or
ii. the first day of the first payroll cycle in the covered
period (the ``alternative payroll covered period'').
Payroll costs are considered paid on the day that paychecks are
distributed or the borrower originates an ACH credit transaction.
Payroll costs incurred during the borrower's last pay period of the
covered period or the alternative payroll covered period are
eligible for forgiveness if paid on or before the next regular
payroll date; otherwise, payroll costs must be paid during the
covered period (or alternative payroll covered period) to be
eligible for forgiveness. Payroll costs are generally incurred on
the day the employee's pay is earned (i.e., on the day the employee
worked). For employees who are not performing work but are still on
the borrower's payroll, payroll costs are incurred based on the
schedule established by the borrower (typically, each day that the
employee would have performed work).
The Administrator of the Small Business Administration
(Administrator), in consultation with the Secretary of the Treasury
(Secretary), recognizes that the covered period will not always
align with a borrower's payroll cycle. For administrative
convenience of the borrower, a borrower with a bi-weekly (or more
frequent) payroll cycle may elect to use an alternative payroll
covered period that begins on the first day of the first payroll
cycle in the covered period and continues for either (a) eight
weeks, in the case of a borrower that received its PPP loan before
June 5, 2020 and elects to use an eight-week covered period, or (b)
24 weeks, in the case of all other borrowers. If payroll costs are
incurred during this alternative payroll covered period, but paid
after the end of the alternative payroll covered period, such
payroll costs will be eligible for forgiveness if they are paid no
later than the first regular payroll date thereafter.
The Administrator, in consultation with the Secretary,
determined that this alternative computational method for payroll
costs is justified by considerations of administrative feasibility
for borrowers, as it will reduce burdens on borrowers and their
payroll agents while achieving the paycheck protection purposes
manifest throughout the CARES Act, including section 1102. Because
this alternative computational method is limited to payroll cycles
that are bi-weekly or more frequent, this computational method will
yield a calculation that the Administrator does not expect to
materially differ from the actual covered period, while avoiding
unnecessary administrative burdens and enhancing auditability.
Example: A borrower that received a PPP loan before June 5, 2020
and elects to use an eight-week covered period has a bi-weekly
payroll schedule (with payments made every other week). The
borrower's eight-week covered period begins on June 1 and ends on
July 26. The first day of the borrower's first payroll cycle that
starts in the covered period is June 7. The borrower may elect an
alternative payroll covered period for payroll cost purposes that
starts on June 7 and ends 55 days later (for a total of 56 days), on
August 1. Payroll costs paid during this alternative payroll covered
period are eligible for forgiveness. In addition, payroll costs
incurred during this alternative payroll covered period are eligible
for forgiveness if they are paid on or before the first regular
payroll date occurring after August 1. Payroll costs that were both
paid and incurred during the covered period (or alternative payroll
covered period) may only be counted once.
Part III.3.c of the First Loan Forgiveness Rule (85 FR 33004,
33006) is revised to read as follows:
c. Are there caps on the amount of loan forgiveness available
for owner-employees and self-employed individuals' own payroll
compensation?
Yes. For borrowers that received a PPP loan before June 5, 2020
and elect to use an eight-week covered period, the amount of loan
forgiveness requested for owner-employees and self-employed
individuals' payroll compensation is capped at eight weeks' worth
(8/52) of 2019 compensation (i.e., approximately 15.38 percent of
2019 compensation) or $15,385 per individual, whichever is less, in
total across all businesses. For all other borrowers, the amount of
loan forgiveness requested for owner-employees and self-employed
individuals' payroll compensation is capped at 2.5 months' worth
(2.5/12) of 2019 compensation (i.e., approximately 20.83 percent of
2019 compensation) or $20,833 per individual, whichever is less, in
total across all businesses.
In particular, C-corporation owner-employees are capped by the
amount of their 2019 employee cash compensation and employer
retirement and health insurance contributions made on their behalf.
S-corporation owner-employees are capped by the amount of their 2019
employee cash compensation and employer retirement contributions
made on their behalf, but employer health insurance contributions
made on their behalf cannot be separately added because those
payments are already included in their employee cash compensation.
Schedule C or F filers are capped by the amount of their owner
compensation replacement, calculated based on 2019 net profit.\4\
General partners are capped by the amount of their 2019 net earnings
from self-employment (reduced by claimed section 179 expense
deduction, unreimbursed partnership expenses, and depletion from oil
and gas properties) multiplied by 0.9235. For self-employed
individuals, including Schedule C or F filers and general partners,
retirement and health insurance contributions are included in their
net self-employment income and therefore cannot be separately added
to their payroll calculation.
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\4\ See 85 FR 21747, 21749 (April 20, 2020).
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The Administrator, in consultation with the Secretary,
determined that it is appropriate to limit the forgiveness of owner
compensation to either eight weeks' worth (8/52) of their 2019
compensation (up to $15,385) for an eight-week covered period or 2.5
months' worth (2.5/12) of their 2019 compensation (up to $20,833)
for a 24-week covered period per owner in total across all
businesses. This approach is consistent with the structure of the
CARES Act and its overarching focus on keeping workers paid, and
will prevent windfalls that Congress did not intend. Specifically,
Congress determined that the maximum loan amount is generally based
on 2.5 months of a borrower's average monthly payroll costs during
the one-year period preceding the loan. 15 U.S.C. 636(a)(36)(E). For
example, a borrower with one other employee would receive a maximum
loan amount equal to 5 months of payroll (2.5 months of payroll for
the owner plus 2.5 months of payroll for the employee). If the owner
laid off the employee and availed itself of the exemption in the
Paycheck Protection Program Flexibility Act of 2020 (Flexibility
Act) related to reductions in business activity described in e.
below, the owner could treat the entire amount of the PPP loan as
payroll, with the entire loan being forgiven. This would not only
result in a windfall for the owner, by providing the owner with five
months of payroll instead of 2.5 months, but also defeat the purpose
of the CARES Act of protecting the paycheck of the employee. For
owners with no employees, this limitation will have no effect,
because the maximum loan amount for such borrowers already includes
only 2.5 months of their payroll.
e. Nonpayroll Costs Eligible for Loan Forgiveness
Part III.4.a of the First Loan Forgiveness Rule (85 FR 33004,
33007) is revised to read as follows:
a. When must nonpayroll costs be incurred and/or paid to be
eligible for forgiveness?
A nonpayroll cost is eligible for forgiveness if it was:
i. Paid during the covered period; or
ii. incurred during the covered period and paid on or before the
next regular billing date, even if the billing date is after the
covered period.
Example: A borrower that received a loan before June 5, 2020
uses a 24-week covered period that begins on June 1 and ends on
November 15. The borrower pays its electricity bills for June
through October during the covered period and pays its November
electricity bill on December 10, which is the next regular billing
date. The borrower may seek loan forgiveness for its June through
October electricity bills, because they were paid during the covered
[[Page 38308]]
period. In addition, the borrower may seek loan forgiveness for the
portion of its November electricity bill through November 15 (the
end of the covered period), because it was incurred during the
covered period and paid on the next regular billing date. The
Administrator, in consultation with the Secretary, has determined
that this interpretation provides an appropriate degree of borrower
flexibility while remaining consistent with the text of section
1106(b). The Administrator believes that this simplified approach to
calculation of forgivable nonpayroll costs is also supported by
considerations of administrative convenience for borrowers, and the
Administrator notes that the 40 percent cap on nonpayroll costs as a
portion of the total loan forgiveness amount will avoid excessive
inclusion of nonpayroll costs.
f. Reductions to Loan Forgiveness Amount
As described above, section 3(b) of the Flexibility Act amended
provisions of the CARES Act regarding the covered period and the
portion of PPP loan proceeds that must be used for payroll costs for
the full amount of the PPP loan to be eligible for forgiveness. As set
forth below, these amendments necessitate several revisions to Part
III.5 of the First Loan Forgiveness Rule. First, the introductory
paragraph in Part III.5 of the First Loan Forgiveness Rule (85 FR
33004, 33007) is revised to read as follows:
5. Reductions to Loan Forgiveness Amount
Section 1106 of the CARES Act, as amended by Section 3(b)(2) of the
Flexibility Act, specifically requires certain reductions in a
borrower's loan forgiveness amount based on reductions in full-time
equivalent employees or in employee salary and wages, subject to an
important statutory exemption for borrowers that have eliminated the
reduction on or before December 31, 2020. Section 3(b)(2) of the
Flexibility Act also adds exemptions from reductions in loan
forgiveness amounts based on employee availability and business
activity. In addition, SBA and Treasury have adopted a regulatory
exemption to the reduction rules for borrowers that have offered to
restore employee hours at the same salary or wages, even if the
employees have not accepted. The instructions to the loan forgiveness
applications and the guidance below explains how the statutory
forgiveness reduction formulas work.
Section 1106(d)(2) of the CARES Act reduces the amount of the PPP
loan that may be forgiven if the borrower reduces full-time equivalent
employees during the covered period as compared to a base period
selected by the borrower. Section 1106(d)(5) of the CARES Act
originally waived this reduction in the forgiveness amount if the
borrower eliminates the reduction in full-time equivalent employees
occurring during a different statutory reference period by not later
than June 30, 2020. Section 3(b)(2) of the Flexibility Act amended this
provision to replace ``June 30'' with ``December 31.'' To conform the
First Loan Forgiveness Rule to this amendment under the Flexibility
Act, Part III.5.a of the First Loan Forgiveness Rule (85 FR 33004,
33007) is revised by striking ``June 30, 2020'' and replacing it with
``December 31, 2020.'' Section 3(d) of the Flexibility Act provides
that this amendment shall be effective as if included in the CARES Act,
which was enacted on March 27, 2020.
As described above, section 3(b) of the Flexibility Act extended
the length of the covered period as defined in section 1106 of the
CARES Act from eight to 24 weeks, while allowing borrowers that
received PPP loans before June 5, 2020 to elect to use the original
eight-week covered period. For consistency with this amendment, the
paragraph consisting of the example in Part III.5.e of the First Loan
Forgiveness Rule (85 FR 33004, 33008) is revised to provide two
examples that read as follows:
Example: A borrower is using a 24-week covered period. This
borrower reduced a full-time employee's weekly salary from $1,000
per week during the reference period to $700 per week during the
covered period. The employee continued to work on a full-time basis
during the covered period, with an FTE of 1.0. In this case, the
first $250 (25 percent of $1,000) is exempted from the loan
forgiveness reduction. The borrower seeking forgiveness would list
$1,200 as the salary/hourly wage reduction for that employee (the
extra $50 weekly reduction multiplied by 24 weeks). If the borrower
applies for forgiveness before the end of the covered period, it
must account for the salary reduction for the full 24-week covered
period (totaling $1,200).
Example: A borrower that received a PPP loan before June 5, 2020
has elected to use an eight-week covered period. This borrower
reduced a full-time employee's weekly salary from $1,000 per week
during the reference period to $700 per week during the covered
period. The employee continued to work on a full-time basis during
the covered period, with an FTE of 1.0. In this case, the first $250
(25 percent of $1,000) is exempted from the loan forgiveness
reduction. The borrower seeking forgiveness would list $400 as the
salary/hourly wage reduction for that employee (the extra $50 weekly
reduction multiplied by eight weeks).
In light of the amendments under the Flexibility Act described
above, Part III.5.g of the First Loan Forgiveness Rule (85 FR 33004,
33009) is revised by striking ``June 30, 2020'' each place that it
appears and replacing it with ``December 31, 2020,'' and by striking
``75 percent'' and replacing it with ``60 percent.'' Section 3(d) of
the Flexibility Act provides that these amendments shall be effective
as if included in the CARES Act, which was enacted on March 27, 2020.
Lastly, section 3(b)(2)(B) of the Flexibility Act established two
new exemptions based on employee availability and business activity,
respectively, that would eliminate a reduction in the loan forgiveness
amount that would otherwise be required due to a reduction in full-time
equivalent (FTE) employees. Specifically, that section of the
Flexibility Act states that the amount of loan forgiveness ``shall be
determined without regard to a proportional reduction in the number of
full-time equivalent employees'' if an eligible recipient, in good
faith, (A) is able to document (i) an inability to rehire individuals
who were employees of the eligible recipient on February 15, 2020; and
(ii) an inability to hire similarly qualified employees for unfilled
positions on or before December 31, 2020; or (B) is able to 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. The new exemption pertaining to
individuals who refuse an offer to be rehired is very similar, but not
identical, to a de minimis exemption that was provided in the First
Loan Forgiveness Rule; therefore, the Administrator and the Secretary
have determined that this new statutory exemption should supersede the
previous de minimis exemption relating to reductions in FTE employees.
However, a related de minimis exemption in the First Loan Forgiveness
Rule for borrowers that have reduced the hours of an employee and
offered to restore the reduction in hours, but the employee declined
the offer, is not addressed in the Flexibility Act and is therefore
being retained.
In order to implement these exemptions, Part III.5.a of the First
Loan Forgiveness Rule (85 FR 33004, 33007) is revised to read:
[[Page 38309]]
a. Will a borrower's loan forgiveness amount be reduced if the
borrower reduced the hours of an employee, then offered to restore
the reduction in hours, but the employee declined the offer?
No. In calculating the loan forgiveness amount, a borrower may
exclude any reduction in full-time equivalent employee headcount
that is attributable to an individual employee if:
i. The borrower made a good faith, written offer to restore the
reduced hours of such employee;
ii. the offer was for the same salary or wages and same number
of hours as earned by such employee in the last pay period prior to
the reduction in hours;
iii. the offer was rejected by such employee; and
iv. the borrower has maintained records documenting the offer
and its rejection.
The Administrator and the Secretary determined that this
exemption is an appropriate exercise of their joint rulemaking
authority to grant a de minimis exemption under section
1106(d)(6).\5\ Section 1106(d)(2) of the CARES Act reduces the
amount of the PPP loan that may be forgiven if the borrower reduces
full-time equivalent employees during the covered period as compared
to a base period selected by the borrower. Section 1106(d)(5) of the
CARES Act waives this reduction in the forgiveness amount if the
borrower eliminates the reduction in full-time equivalent employees
occurring during a different statutory reference period \6\ by not
later than December 31, 2020. The Administrator and the Secretary
believe that the additional exemption set forth above is consistent
with the purposes of the CARES Act and provides borrowers
appropriate flexibility in the current economic climate. The
Administrator, in consultation with the Secretary, has determined
that the exemption is de minimis for two reasons. First, it is
reasonable to anticipate that most employees will accept the offer
of restored hours in light of current labor market conditions.
Second, to the extent this exemption allows employers to cure FTE
reductions attributable to reductions in hours that occurred before
February 15, 2020 (the start of the statutory FTE reduction safe
harbor period), it is reasonable to anticipate those reductions will
represent a relatively small portion of aggregate employees given
the historically strong labor market conditions before the COVID-19
emergency.
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\5\ Section 1106(d)(6) is the sole joint rulemaking authority
exercised in this interim final rule. All other provisions of this
interim final rule are an exercise of rulemaking authority by SBA,
except as expressly noted otherwise.
\6\ Section 1106(d)(5) specifies that this reference period is
between February 15, 2020 and 30 days after the date of enactment of
the CARES Act or April 26, 2020 (the safe harbor period).
In addition, Part III.5.b of the First Loan Forgiveness Rule (85 FR
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33004, 33007-08) is revised by adding the following at the end thereof:
Borrowers are exempted from the loan forgiveness reduction
arising from a proportional reduction in FTE employees during the
covered period if the borrower is able to document in good faith the
following: (1) An inability to rehire individuals who were employees
of the borrower on February 15, 2020; and (2) an inability to hire
similarly qualified individuals for unfilled positions on or before
December 31, 2020. Borrowers are required to inform the applicable
state unemployment insurance office of any employee's rejected
rehire offer within 30 days of the employee's rejection of the
offer.\7\ The documents that borrowers should maintain to show
compliance with this exemption include, but are not limited to, the
written offer to rehire an individual, a written record of the
offer's rejection, and a written record of efforts to hire a
similarly qualified individual.
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\7\ Further information regarding how borrowers will report
information concerning rejected rehire offers to state unemployment
insurance offices will be provided on SBA's website.
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Borrowers are also exempted from the loan forgiveness reduction
arising from a reduction in the number of FTE employees during the
covered period if the borrower is able to document in good faith an
inability to return to the same level of business activity as the
borrower was operating at before February 15, 2020, due to
compliance with requirements established or guidance issued between
March 1, 2020 and December 31, 2020 by the Secretary of Health and
Human Services, the Director of the Centers for Disease Control and
Prevention (CDC), or the Occupational Safety and Health
Administration related to the maintenance of standards for
sanitation, social distancing, or any other worker or customer
safety requirement related to COVID-19 (COVID Requirements or
Guidance). Specifically, borrowers that can certify that they have
documented in good faith that their reduction in business activity
during the covered period stems directly or indirectly from
compliance with such COVID Requirements or Guidance are exempt from
any reduction in their forgiveness amount stemming from a reduction
in FTE employees during the covered period. Such documentation must
include copies of applicable COVID Requirements or Guidance for each
business location and relevant borrower financial records.
The Administrator, in consultation with the Secretary, is
interpreting the above statutory exemption to include both direct
and indirect compliance with COVID Requirements or Guidance, because
a significant amount of the reduction in business activity stemming
from COVID Requirements or Guidance is the result of state and local
government shutdown orders that are based in part on guidance from
the three federal agencies.
Example: A PPP borrower is in the business of selling beauty
products both online and at its physical store. During the covered
period, the local government where the borrower's store is located
orders all non-essential businesses, including the borrower's
business, to shut down their stores, based in part on COVID-19
guidance issued by the CDC in March 2020. Because the borrower's
business activity during the covered period was reduced compared to
its activity before February 15, 2020 due to compliance with COVID
Requirements or Guidance, the borrower satisfies the Flexibility
Act's exemption and will not have its forgiveness amount reduced
because of a reduction in FTEs during the covered period, if the
borrower in good faith maintains records regarding the reduction in
business activity and the local government's shutdown orders that
reference a COVID Requirement or Guidance as described above.
g. Documentation Requirements
Because SBA has issued an alternative loan forgiveness application,
SBA Form 3508EZ, the parenthetical in the first sentence of Part III.6
of the First Loan Forgiveness Rule (85 FR 33004, 33009) is revised to
read as follows: ``(SBA Form 3508 or SBA Form 3508EZ, as applicable, or
lender equivalent)''.
2. Changes to the First Loan Review Rule
a. Alternative Loan Forgiveness Application
The First Loan Review Rule informs borrowers and lenders of SBA's
process for reviewing PPP loan applications and loan forgiveness
applications. Because SBA has issued an alternative Loan Forgiveness
Application, SBA Form 3508EZ, the following changes are necessary.
Parts III.1.b and III.1.e are revised by striking each reference in
those sections to ``SBA Form 3508 or lender's equivalent form'' and
replacing it with ``SBA Form 3508, 3508EZ, or lender's equivalent
form''.
b. The Loan Forgiveness Process for Lenders
As noted above, SBA has issued an alternative Loan Forgiveness
Application Form, SBA Form 3508EZ. Further, Section 3(b)(2) of the
Flexibility Act reduced, from 75 percent to 60 percent, the portion of
PPP loan proceeds that must be used for payroll costs for the full
amount of the PPP loan to be eligible for forgiveness. As set forth
below, these developments necessitate several revisions to Part III.2
of the First Loan Review Rule.
Part III.2.a. is revised to read as follows:
a. What should a lender review?
When a borrower submits SBA Form 3508 or lender's equivalent form,
the lender shall:
i. Confirm receipt of the borrower certifications contained in
the SBA Form 3508 or lender's equivalent form.
ii. Confirm receipt of the documentation the borrower must
submit to aid in verifying payroll and nonpayroll costs, as
specified in the instructions to the SBA Form 3508 or lender's
equivalent form.
[[Page 38310]]
iii. Confirm the borrower's calculations on the borrower's SBA
Form 3508 or lender's equivalent form, including the dollar amount
of the (A) Cash Compensation, Non-Cash Compensation, and
Compensation to Owners claimed on Lines 1, 4, 6, 7, 8, and 9 on PPP
Schedule A and (B) Business Mortgage Interest Payments, Business
Rent or Lease Payments, and Business Utility Payments claimed on
Lines 2, 3, and 4 on the PPP Loan Forgiveness Calculation Form, by
reviewing the documentation submitted with the SBA Form 3508 or
lender's equivalent form.
iv. Confirm that the borrower made the calculation on Line 10 of
the SBA Form 3508 or lender's equivalent form correctly, by dividing
the borrower's Eligible Payroll Costs claimed on Line 1 by 0.60.
When the borrower submits SBA Form 3508EZ or lender's equivalent
form, the lender shall:
i. Confirm receipt of the borrower certifications contained in
the SBA Form 3508EZ or lender's equivalent form.
ii. Confirm receipt of the documentation the borrower must
submit to aid in verifying payroll and nonpayroll costs, as
specified in the instructions to the SBA Form 3508EZ or lender's
equivalent form.
iii. Confirm the borrower's calculations on the borrower's SBA
Form 3508EZ or lender's equivalent form, including the dollar amount
of the Payroll Costs, Business Mortgage Interest Payments, Business
Rent or Lease Payments, and Business Utility Payments claimed on
Lines 1, 2, 3, and 4 of the SBA Form 3508EZ or lender's equivalent
form, by reviewing the documentation submitted with the SBA Form
3508EZ or lender's equivalent form.
iv. Confirm that the borrower made the calculation on Line 7 of
the SBA Form 3508EZ or lender's equivalent form correctly, by
dividing the borrower's Eligible Payroll Costs claimed on Line 1 by
0.60.
Providing an accurate calculation of the loan forgiveness amount is
the responsibility of the borrower, and the borrower attests to the
accuracy of its reported information and calculations on the Loan
Forgiveness Application Form. Lenders are expected to perform a good-
faith review, in a reasonable time, of the borrower's calculations and
supporting documents concerning amounts eligible for loan forgiveness.
For example, minimal review of calculations based on a payroll report
by a recognized third-party payroll processor would be reasonable. By
contrast, if payroll costs are not documented with such recognized
sources, more extensive review of calculations and data would be
appropriate. The borrower shall not receive forgiveness without
submitting all required documentation to the lender.
As the First Interim Final Rule \8\ indicates, lenders may rely on
borrower representations. If the lender identifies errors in the
borrower's calculation or material lack of substantiation in the
borrower's supporting documents, the lender should work with the
borrower to remedy the issue. As stated in paragraph III.3.c of the
First Interim Final Rule, the lender does not need to independently
verify the borrower's reported information if the borrower submits
documentation supporting its request for loan forgiveness and attests
that it accurately verified the payments for eligible costs.
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\8\ 85 FR 20811, 20815-20816 (April 15, 2020).
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Part III.2.b. is revised to read as follows:
b. What is the timeline for the lender's decision on a loan
forgiveness application?
The lender must issue a decision to SBA on a loan forgiveness
application not later than 60 days after receipt of a complete loan
forgiveness application from the borrower. That decision may take
the form of an approval (in whole or in part); denial; or (if
directed by SBA) a denial without prejudice due to a pending SBA
review of the loan for which forgiveness is sought. In the case of a
denial without prejudice, the borrower may subsequently request that
the lender reconsider its application for loan forgiveness, unless
SBA has determined that the borrower is ineligible for a PPP loan.
The Administrator has determined that this process appropriately
balances the need for efficient processing of loan forgiveness
applications with considerations of program integrity, including
affording SBA the opportunity to ensure that borrower
representations and certifications (including concerning eligibility
for a PPP loan) were accurate. When the lender issues its decision
to SBA approving the application (in whole or in part), it must
include the following:
i. For applications submitted using the SBA Form 3508 or
lender's equivalent form:
(1) the PPP Loan Forgiveness Calculation Form;
(2) PPP Schedule A; and
(3) the (optional) PPP Borrower Demographic Information Form (if
submitted to the lender).
ii. For applications submitted using the SBA Form 3508EZ or
lender's equivalent form:
(1) the SBA Form 3508EZ or lender's equivalent form; and
(2) the (optional) Borrower Demographic Information Form (if
submitted to the lender).
The lender must confirm that the information provided by the lender
to SBA accurately reflects lender's records for the loan, and that the
lender has made its decision in accordance with the requirements set
forth in 2.a. If the lender determines that the borrower is entitled to
forgiveness of some or all of the amount applied for under the statute
and applicable regulations, the lender must request payment from SBA at
the time the lender issues its decision to SBA. SBA will, subject to
any SBA review of the loan or loan application, remit the appropriate
forgiveness amount to the lender, plus any interest accrued through the
date of payment, not later than 90 days after the lender issues its
decision to SBA. If applicable, SBA will deduct EIDL Advance Amounts
from the forgiveness amount remitted to the Lender as required by
section 1110(e)(6) of the CARES Act. The lender is responsible for
notifying the borrower of remittance by SBA of the loan forgiveness
amount (or that SBA determined that no amount of the loan is eligible
for forgiveness) and the date on which the borrower's first payment is
due, if applicable.
When the lender issues its decision to SBA determining that the
borrower is not entitled to forgiveness in any amount, the lender must
provide SBA with the reason for its denial, together with the
following:
i. For applications submitted using the SBA Form 3508 or
lender's equivalent form:
(1) the PPP Loan Forgiveness Calculation Form;
(2) PPP Schedule A; and
(3) the (optional) PPP Borrower Demographic Information Form (if
submitted to the lender).
iii. For applications submitted using the SBA Form 3508EZ or
lender's equivalent form:
(1) the SBA Form 3508EZ or lender's equivalent form; and
(2) the (optional) Borrower Demographic Information Form (if
submitted to the lender).
The lender must confirm that the information provided by the lender
to SBA accurately reflects lender's records for the loan, and that the
lender has made its decision in accordance with the requirements set
forth in 2.a. The lender must also notify the borrower in writing that
the lender has issued a decision to SBA denying the loan forgiveness
application. SBA reserves the right to review the lender's decision in
its sole discretion. Within 30 days of notice from the lender, a
borrower may notify the lender that it is requesting that SBA review
the lender's decision by reviewing the loan in accordance with 2.c.
below. Within 5 days of receipt, the lender must notify SBA of the
borrower's request for review. SBA will notify the lender if SBA
declines a request for review. If the borrower does not request SBA
review or SBA declines the request for review, the lender is
responsible for notifying the borrower of the date on which the
borrower's first payment is due. If SBA accepts a borrower's request
for review, SBA will notify the borrower and the lender of the results
of the review. If SBA denies forgiveness in whole or in part, the
[[Page 38311]]
lender is responsible for notifying the borrower of the date on which
the borrower's first payment is due.
Enabling SBA to use the statutory 90-day period to review the PPP
loan and forgiveness documentation is an appropriate procedural
protection to prevent fraud or misuse of PPP funds, ensure that
recipients of PPP loans are within the scope of entities that the CARES
Act is intended to assist, and confirm compliance with the PPP
requirements set forth in the statute, rules, and guidance. This
protection is also important in light of the large number and diverse
types of PPP lenders, many of which were not previously SBA
participating lenders and which were approved rapidly in order to
enable financial assistance to be provided as rapidly as feasible to
millions of small businesses. SBA will use the 90-day period to help
ensure that applicable legal requirements have been satisfied.
Part III.2.c.ii. is revised to read as follows:
ii. The Loan Forgiveness Application (SBA Form 3508, 3508EZ, or
lender's equivalent form), and all supporting documentation provided
by the borrower (if the lender has received such application). If
the lender receives such application after it receives notice that
SBA has commenced a loan review, the lender shall transmit
electronic copies of the application and all supporting
documentation provided by the borrower to SBA within five business
days of receipt.
The lender must also request that the borrower provide the
lender with the applicable documentation that the instructions to
the Loan Forgiveness Application Form (SBA Form 3508, 3508EZ, or
lender's equivalent) instruct the borrower to maintain but not
submit (documentation listed under ``Documents that Each Borrower
Must Maintain but is Not Required to Submit''). The lender must
submit documents received from the borrower to SBA within five
business days of receipt from the borrower.
3. Additional Information
SBA may provide further guidance, if needed, through SBA notices
which will be posted on SBA's website at www.sba.gov. Questions on the
Paycheck Protection Program may be directed to the Lender Relations
Specialist in the local SBA Field Office. The local SBA Field Office
may be found at https://www.sba.gov/tools/local-assistance/districtoffices.
Compliance With Executive Orders 12866, 12988, 13132, 13563, and 13771,
the Paperwork Reduction Act (44 U.S.C. Ch. 35), and the Regulatory
Flexibility Act (5 U.S.C. 601-612)
Executive Orders 12866, 13563, and 13771
This interim final rule is economically significant for the
purposes of Executive Orders 12866 and 13563, and is considered a major
rule under the Congressional Review Act. SBA, however, is proceeding
under the emergency provision at Executive Order 12866 Section
6(a)(3)(D), based on the need to move expeditiously to mitigate the
current economic conditions arising from the COVID-19 emergency. This
rule's designation under Executive Order 13771 will be informed by
public comment.
Executive Order 12988
SBA and Treasury have drafted this rule, to the extent practicable,
in accordance with the standards set forth in section 3(a) and 3(b)(2)
of Executive Order 12988, to minimize litigation, eliminate ambiguity,
and reduce burden. The rule has no preemptive or retroactive effect.
Executive Order 13132
SBA and Treasury have determined that this rule will not have
substantial direct effects on the States, on the relationship between
the National Government and the States, or on the distribution of power
and responsibilities among the various layers of government. Therefore,
SBA has determined that this rule has no federalism implications
warranting preparation of a federalism assessment.
Paperwork Reduction Act, 44 U.S.C. Chapter 35
SBA and Treasury have determined that this rule modifies existing
information collection. The amendments to the PPP made by the
Flexibility Act and implemented in this interim final rule require
conforming revisions to the Paycheck Protection Program--Loan
Forgiveness Application (SBA Form 3508), for use in collecting the
information required to determine whether a borrower is eligible for
loan forgiveness. In addition, SBA has developed a streamlined Paycheck
Protection Program--PPP Loan Forgiveness Application Form 3508EZ (SBA
Form 3508 EZ), which is available for borrowers meeting criteria
described in the instructions accompanying the form. SBA has obtained
OMB approval of the modification to the existing information
collection, which is currently approved as an emergency request under
OMB Control Number 3245-0407 until October 31, 2020.
Regulatory Flexibility Act (RFA)
The Regulatory Flexibility Act (RFA) generally requires that when
an agency issues a proposed rule, or a final rule pursuant to section
553(b) of the APA or another law, the agency must prepare a regulatory
flexibility analysis that meets the requirements of the RFA and publish
such analysis in the Federal Register. 5 U.S.C. 603, 604. Specifically,
the RFA normally requires agencies to describe the impact of a
rulemaking on small entities by providing a regulatory impact analysis.
Such analysis must address the consideration of regulatory options that
would lessen the economic effect of the rule on small entities. The RFA
defines a ``small entity'' as (1) a proprietary firm meeting the size
standards of the Small Business Administration (SBA); (2) a nonprofit
organization that is not dominant in its field; or (3) a small
government jurisdiction with a population of less than 50,000. 5 U.S.C.
601(3)-(6). Except for such small government jurisdictions, neither
State nor local governments are ``small entities.'' Similarly, for
purposes of the RFA, individual persons are not small entities. The
requirement to conduct a regulatory impact analysis does not apply if
the head of the agency ``certifies that the rule will not, if
promulgated, have a significant economic impact on a substantial number
of small entities.'' 5 U.S.C. 605(b). The agency must, however, publish
the certification in the Federal Register at the time of publication of
the rule, ``along with a statement providing the factual basis for such
certification.'' If the agency head has not waived the requirements for
a regulatory flexibility analysis in accordance with the RFA's waiver
provision, and no other RFA exception applies, the agency must prepare
the regulatory flexibility analysis and publish it in the Federal
Register at the time of promulgation or, if the rule is promulgated in
response to an emergency that makes timely compliance impracticable,
within 180 days of publication of the final rule. 5 U.S.C. 604(a),
608(b). Rules that are exempt from notice and comment are also exempt
from the RFA requirements, including conducting a regulatory
flexibility analysis, when among other things the agency for good cause
finds that notice and public procedure are impracticable, unnecessary,
or contrary to the public interest. SBA Office of Advocacy guide: How
to Comply with the Regulatory Flexibility Act, Ch.1. p.9. Accordingly,
SBA and Treasury are not
[[Page 38312]]
required to conduct a regulatory flexibility analysis.
Jovita Carranza,
Administrator,Small Business Administration.
Michael Faulkender,
Assistant Secretary for Economic Policy Department of the Treasury.
[FR Doc. 2020-13782 Filed 6-24-20; 8:45 am]
BILLING CODE 8026-03-P
