The SBA’s Paycheck Protection Program, a $349 billion loan guaranty program established by the CARES Act to provide deferrable, forgivable loans up to $10 million to small business owners addressed in more detail in prior Mayer Brown posts regarding the statutory provisions and the SBA’s Interim Final Rule, launched April 3, 2020. In the initial days after the program launch, hundreds of thousands of applications were submitted, but borrowers and lenders alike continued to have questions about key aspects of the program.
On April 6, 2020, the SBA clarified certain issues in new FAQs addressing borrower eligibility, affiliation rules, underwriting requirements, and updates to applications for PPP loans submitted before issuance of the new SBA guidance.
- Borrower Eligibility Basics—The FAQ clarifies that, in addition to qualifying for PPP loans under the CARES Act’s 500 employee standard (or any alternative industry-specific/NAICS Code employee standard established by the SBA), borrowers also qualify if they are “small business concerns” of a size normally eligible for SBA 7(a) loans. That means borrowers may qualify based on industry-specific revenue-based tests (more information available here or the SBA’s “alternative size standard” for small business concerns, which require that the maximum tangible net worth of the business is not more than $15 million and the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million. That said, borrowers that are not “small business concerns” under SBA’s normal requirements may qualify under the CARES Act’s additional employee-based tests without reference to any revenue or asset limitations. For employee-based tests, borrowers may use either their average number of employees over defined time periods (see underwriting, below) or the SBA’s usual calculation methodology.
The FAQ also reiterates the SBA rule that employee-based tests are based on the number of employees whose “principal place of residence is the United States,” though applicants will have to grapple with the fact that the PPP application requires a certification that: “The Applicant (1) is an independent contractor, eligible self-employed individual, or sole proprietor or (2) employs no more than the greater of 500 or employees or, if applicable, the size standard in number of employees established by the SBA in 13 C.F.R. 121.201 for the Applicant’s industry.” (i.e., a certification that does not expressly reference the place of residence of the counted employees.)
- Affiliation—Under normal SBA 7(a) procedures, application of size standards requires that the borrower consider the aggregate size of the set of all companies affiliated with the applicant. Affiliation exists when a company controls, is controlled by, or is under common control with, another company—and the SBA applies several tests to assess affiliation. For now, the SBA has indicated that the normal affiliation standards for SBA 7(a) loans, as set out in 13 C.F.R. § 121.301(f) and summarized by the SBA in prior guidance, apply to PPP loans, other than as expressly waived by the CARES Act and/or SBA guidance for the Accommodation and Food Services industry, certain franchise companies, companies receiving financial assistance from Small Business Investment Companies, and faith-based organizations. With respect to affiliation based on ownership, however, the FAQ indicates that minority owners, who normally may be viewed as still controlling a company through negative control rights (i.e., certain rights to prevent a quorum or otherwise block action by the board of directors or shareholders) may relinquish control for SBA affiliation purposes by irrevocably waiving or relinquishing such rights. Borrowers must certify to program eligibility (including affiliation-related issues by implication), but lenders do not have an independent obligation to verify the borrower’s affiliation status.
These affiliation clarifications are not the relaxation of affiliation standards for which certain businesses, including those owned by private equity or venture capital funds, have been hoping, though they do provide short-term clarification as to how affiliation standards apply to PPP loan applications submitted at this time.
- Application Process—The FAQs provide that a lender may take an application through its own online portals and electronic forms (i.e., that they do not have to receive an actual copy of SBA Form 2483), provided that the lender’s forms ask for the same information (using the same language) as the SBA form. In addition, lenders may rely on a single signature from the “authorized representative of the applicant” (a signer authorized to make the required certifications on behalf of the applicant and each of its 20% owners).
- Underwriting—The FAQ provides several clarifications as to underwriting standards, including with respect to the lender’s due diligence requirements and the substantive standards for obtaining documentation and calculating payroll costs. Clarifications include:
o Independent Contractors and Sole Proprietors—That a borrower’s payments to independent contractors or sole proprietors may not be included in payroll costs. Independent contractors and sole proprietors may be eligible to apply for their own relief under the PPP.
o Time Period for Determining Payroll Costs—That borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019 (with alternate dates applying to seasonal employers).
- Seasonal Employers—That seasonal borrower’s eligibility may be determined based on whether the borrower was in operation on February 15, 2020 or for an eight-week period between February 15, 2019 and June 30, 2019. Payroll costs may be measured from February 15, 2019 or March 1, 2019 to June 30, 2019, except that a seasonal employer not in business from February 15, 2019 to June 30, 2019 may use the range from January 1, 2020 to February 29, 2020 instead.
o Employees Making Over $100,000—The exclusion of compensation in excess of $100,000 per employee from “payroll costs” for PPP purposes applies only to cash compensation and does not limit non-cash benefits.
o Treatment of Federal Taxes—That “payroll costs” are calculated on a gross basis without regard to federal taxes imposed or withheld. Payroll costs are not reduced by taxes imposed on an employee. Payroll taxes imposed on the employer are, however, excluded from payroll costs.
o Treatment of Sick Leave—That PPP loans cover sick leave, but exclude qualified sick and family leave wages for which a credit is allowed under certain other CARES Act provisions.
o Professional Employer Organizations (“PEOs”)—That a borrower using a PEO or similar payroll provider that results in payroll or payroll tax data being reported in the name of the PEO or payroll provider (rather than the name of the borrower), may substantiate PPP eligibility and payroll costs using payroll documentation provided by the PEO or payroll provider that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees.
o Lender Verification of Average Monthly Payroll Costs—That, in verifying the borrower’s average monthly payroll costs, a lender is not required to replicate all of the borrower’s calculations, but must instead perform a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents. If lenders identify 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 error.
o Bank Secrecy Act Compliance (BSA)—That a lender making a PPP loan to an existing customer is not required to re-verify borrower identification information or obtain new beneficial ownership information for PPP purposes, unless otherwise indicated by the lender’s risk-based approach to BSA compliance. Note, however, that the PPP FAQs are not binding on enforcement of BSA requirements as a general matter. They only address whether a lender has met the SBA’s PPP requirements.
- Updates to Applications—Borrowers who applied prior to issuance of the FAQs are not required to resubmit applications, though those whose previously submitted applications are still being processed may revise their application if they want to do so.
The SBA has provided rolling guidance through the Treasury’s “Assistance for Small Business” page. Lenders and potential borrowers under the PPP may want to keep an eye on that page for additional developments as the SBA continues to clarify the program.