Interim Final Rules Regarding SBA Loan Review Procedures and Related Borrower and Lender Responsibilities

Kimberly A. Kramer
Director, Corporate Department and Managing Director, Woburn Office
May 27, 2020

On May 22, 2020, the Small Business Administration posted two Interim Final Rules related to SBA Loan Review Procedures and Borrower and Lender Responsibilities and Loan Forgiveness.  The following is a summary of the key provisions of each document.

Interim Final Rule Regarding SBA Loan Review Procedures and

Related Borrower and Lender Responsibilities

The Interim Final Rule regarding SBA Loan Review Procedures and Related Borrower and Lender Responsibilities clarifies that the SBA may review individual Paycheck Protection Program (PPP) loans of any size to determine whether a borrower was eligible for the loan based on the CARES Act, the rules and guidance available at the time of the loan application, and the terms of the loan application.  The review may include confirmation that the calculation of the loan amount was correct, that the funds were used properly use of the loan funds, and that the borrower is entitled to forgiveness.

The loan review may be undertaken at any time in the SBA’s discretion.  If a loan is subject to review, the SBA will or will require the lender to contact the borrower to request additional information.  If the borrower fails to respond, an automatic determination in favor of the SBA may be entered.

Any borrower who is determined to have been ineligible for a PPP loan will be ineligible for forgiveness, even if the loan proceeds were used for permitted purposes.  In this instance, the SBA may seek repayment of the outstanding loan or pursue other available remedies.  It is not clear what additional remedies will be available to the SBA.  It is likely that they will vary depending on the whether the borrower made a mistake on the application or committed fraud or other intentional misconduct in connection with the loan.  If the SBA determines that the borrower was not eligible for the loan or not entitled to forgiveness for the amount claimed, the borrower will be given the opportunity to appeal this finding.  Additional guidance on the appeals process is forthcoming.

Note that borrowers must retain all loan documentation for six years after the date the loan is forgiven of paid in full.

Interim Final Rules Regarding Loan Forgiveness

The Interim Final Rule Regarding Loan Forgiveness outlines in greater detail the requirements for and steps required to obtain loan forgiveness.  The key takeaways are as follows:

Forgiveness Application Process:

1.     A borrower must submit the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) (the “Application”) to the lender in order to receive loan forgiveness.

2.     The lender will make a decision regarding loan forgiveness based on the Application within sixty (60) days of receipt.  The lender is responsible for notifying the borrower of the forgiveness amount.

3.     Subject to review, the SBA will fund the forgiveness amount to the lender plus interest within ninety (90) days of the lender’s decision regarding the amount of the loan eligible for forgiveness to the SBA.

4.     If some or all of the loan is not eligible for forgiveness, the balance must be repaid before the two (2) year maturity date.

Payroll Costs Eligible for Loan Forgiveness:

1.     Payroll costs paid OR incurred during the eight consecutive week (56) day covered period (the “Covered Period”) are eligible for forgiveness.

2.     The borrower can elect to have the Covered Period start on (a) the date of disbursement of the loan proceeds or (b) the first day of the first payroll cycle in the covered period (the “Alternative Payroll Covered Period or APCP”) if it has a payroll period that is bi-weekly or more frequent.

3.     Payroll costs are considered paid on the date that paychecks are distributed or the borrower originates an ACH credit transaction.

4.     Payroll costs incurred during the borrower’s last pay period of the Covered Period or APCP are eligible for forgiveness if paid on or before the next regular payroll date.

5.     Payroll costs are incurred on the date earned (the day of work).  If the employee is not performing work but is still on payroll, the payroll cost is incurred based on the day the employee would have performed the work.

6.     Wages paid to furloughed employees, bonuses, and hazard pay are eligible for loan forgiveness subject to the annualized $100,000 cap.

7.     Owner-employees’ and self-employed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019 compensation or $15,385 per individual in total across all businesses.

8.     Schedule C filers are capped by the amount of owner compensation replacement, calculated based on 2019 net profit.

9.     General partners are capped by the amount of 2019 net earnings from self-employment.

10.  No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners.

Non-Payroll Costs Eligible for Loan Forgiveness:

1.     A non-payroll costs is eligible for forgiveness if it was paid curing the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if that date is after the Covered Period.

Reductions to Loan Forgiveness Amount:

1.     If a borrower laid-off or reduced the hours of an employee and then offered to rehire the same employee for the same salary and same number of hours, and the employee declines the offer, a borrower may exclude any reduction in full-time equivalent (FTE) headcount resulting from the declination if (i) the borrower made a good faith written offer to rehire the employee or restore his or her hours during the Covered Period or APCP, (ii) the offer was for the same salary or wages and same number of hours earned by the employee in the last paid period prior to the separation or reduction in hours, (iii) the offer was rejected by the employee, (iv) the borrower maintained records of the offer and its rejection, and (v) the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer or reemployment within thirty (30) days of the rejection.  Further information regarding this reporting obligation is forthcoming.

2.     A “full-time equivalent employee” means an employee who works 40 hours or more, on average, each week.

3.     The average hours of employees who work less than 40 hours are calculated as proportions of a single FTE employee.

4.     To calculate FTE employees, the borrower divides the average number of hours paid for each employee per week by 40, capping the quotient at 1.0.  In essence, even if an employee averages more than 40 hours per week, a borrower can only count that employee once.

5.     If an employee work less than 40 hours per week on average, the borrower can calculate the FTE employees as follows:  (a) calculate the average number of hours a part-time employee was paid per week during the Covered Period or APCP (if the employee worked 20 hours he or she would be considered and FTE of 0.50) OR (b) each part-time employee may be assigned a FTE value of 0.5.  This election is at the option of the borrower.

6.     For each new employee in 2020 and each existing employee paid not more than the annualized equivalent of $100,000 in any pay period in 2019, the borrower must reduce the forgiveness amount by the total dollar amount of the salary or wage reduction in excess of 25% of base wages between January 1, 2020 and March 31, 2020 on a per employee basis, not in the aggregate.

7.     If a borrower is subject to a reduction in FTE employees, the salary or wages reduction penalty applies only to the portion of the decline in salary and wages not attributable to the FTE reduction.

8.     If a borrower restores wage or salary reductions no later than June 30, 2020, it will be exempt from any reduction in forgiveness that would otherwise have been applicable.

9.     If an employee is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction, the borrower may count that employee at the same FTE equivalency level before the reduction event.