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SBA Issues Additional PPP Rules on Effect of State and Local COVID-19 Orders and Other Items on Loan Forgiveness

June 29, 2020

Overview

The Small Business Administration (“SBA”) issued another Interim Final Rule (SBA-2020-0038) on June 22, 2020 (“IFR”) clarifying certain issues surrounding the forgiveness of Paycheck Protection Program (“PPP”) loans. For the most part, the IFR merely conformed previous SBA guidance to the changes that were part of the recently enacted Paycheck Protection Program Flexibility Act (“PPPFA”). However, it also covered the following areas:

  • State and local COVID-19 orders: can be relied upon for an exemption (see discussion below);
  • Applying for forgiveness before the end of the 24 weeks: the borrower can apply before the end of the period if the borrower has used all of the loan proceeds, but if the borrower has reduced an employee’s salary or wage by more than 25%, the borrower must account for the excess salary reduction for the full 8- or 24-week period;
  • Forgiveness process: the forgiveness process, timelines, and documents were set out;
  • Maximum amounts for owner-employee, self-employed, and independent contractors: there was some clarification; and
  • Deferral explained: for a borrower that does not apply for loan forgiveness within 10 months after the last day of the coverage period, or if the SBA determined that the loan is not eligible for forgiveness, the PPP loan no longer is deferred and the borrower must begin paying principal and interest.

State and Local COVID-19 Orders

The SBA interpretation that the FTE reduction exemption includes “both direct and indirect compliance” with state and local shutdown orders as well as federal guidance may well be relevant to businesses in the healthcare and life sciences, hospitality, construction, manufacturing, food and beverage, agriculture, transportation, maritime, forest products, distribution, retail, energy, real estate, and technology industries. For assistance in these areas, please contact us and our industry groups.

Background. Under the original CARES Act, the amount of forgiveness would be proportionately reduced by the percentage that the average number of full-time equivalent employees (“FTEs”) for the covered period bears to the number of FTEs for the chosen base period (either that period from February 15 to June 30, 2019, or January 1 to February 29, 2020, at the borrower’s election). In all cases, the FTEs during the relevant periods are measured as a weekly average based upon a 40-hour workweek. 

The Business Activity Exemption. The PPPFA offered some relief from this by exempting loan forgiveness reduction owing to the inability of the borrower to return to the same level of business activity that existed prior to February 15, 2020, due to compliance with requirements or guidance established or 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—all federal agencies—regarding sanitation standards, social distancing, or other worker or customer safety requirements related to COVID-19 (the “COVID Requirements”). Curiously, the COVID Requirements referenced in the PPPFA include only those issued by federal entities, and there has yet to be any federal requirements imposed during this time; what was issued were mostly recommendations but not mandates. Many businesses were more directly impacted by compliance with state and local mandatory orders. Thankfully, the IFR has made clear for purposes of this exemption that the COVID Requirements also include the requirements and guidance imposed or issued by state and local governments to the extent they are based at least in part on the federal COVID Requirements. So compliance with any COVID-19 order issued by the state or any locality that references the COVID Requirements and applies to the business location, and where such compliance negatively affected the business or its operations at that location, could make a borrower eligible for this loan forgiveness reduction exemption. 

Need to Document. Bear in mind that to qualify for this exemption, the PPP borrower must document in good faith its inability to return to the same level of business activity where it was operating prior to February 15, 2020, because of its compliance with the COVID Requirements. For the FTE Reduction Safe Harbor 1, documents must include copies of the applicable COVID Requirement or guidance for each business location (such as any local government’s shutdown orders that reference a federal COVID Requirement or guidance described above) and any relevant borrower financial records that document that the reduction in business activity during the covered period stems directly or indirectly from compliance with the COVID Requirement or guidance.

Schwabe is closely monitoring developments related to the PPP and other legal implications of COVID-19. We encourage you to visit Schwabe’s COVID-19 and CARES Act resource pages for the most up-to-date information as it becomes available.

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