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GAO Report Highlights Need for Additional PPP Forgiveness Guidance

On September 21st (do you remember?), the U.S. Government Accountability Office released a report on the Federal Government’s COVID-19 response, including with respect to the Paycheck Protection Program. The GAO report provides additional statistical breakdown of the PPP loans, addresses some of the SBA’s oversight plans, and then addresses the need for further guidance on the PPP forgiveness process.

Updated Statistics

The GAO Report notes that most of the largest PPP loans (those over $2 million), were made during the first phase of the program, between April 3rd and April 26th. 75% of the loans for more than $2 million were approved in the first phase, with the report noting that this may have been due to increased scrutiny from the public, Treasury and SBA.

The vast majority of PPP loans were made to borrowers with 10 or fewer employees (73.6% of the loans) while the majority of PPP loan dollars went to businesses with 100 or fewer employees (67.6%). While borrowers with more than 500 employees were granted limited access to participate in the program, less than 0.1% of borrowers had more than 500 employees.

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CSBS Streamlines Exam Process for Payments Firms

September 17, 2020

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On September 15, 2020, the Conference of State Bank Supervisors (“CSBS”) announced the launch of a new program intended to streamline the exam process required by state regulatory agencies for the nation’s payments firms and money transmitters.  Known as the MSB Networked Supervision, the state-initiated program seeks to make the examination process more predictable and consistent for the nation’s largest payments and cryptocurrency companies—whose transactions total more than $1 trillion each year.  The initiative was an outcome of the CSBS Fintech Industry Advisory Panel, which fielded suggestions from those in the industry who collectively called for multistate examination coordination of the nation’s payment firms and money transmitters.    

By making the exam protocol consistent among the more than forty member states, regulators will be able to better understand the risks associated in each company’s payments model and address compliance issues as they arise.  Increased state cooperation will decrease the likelihood of perpetual compliance pitfalls, as all regulators will be kept apprised of a payment firm’s regulatory status.  The single exam will be led by one state that will oversee a group of examiners sourced from regulatory bodies across the country. 

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PPP: Does a Borrower need its Lender’s Consent to a Change in Control Transaction?

Nothing in the CARES Act, Interim Final Rules, or Frequently Asked Questions currently requires Lender’s Consent in connection with a change in control transaction. However, the specific terms of the PPP Note signed by the borrower may require the Lender’s consent in a variety of situation.

(Note: This is one post in a series of posts regarding questions about the Paycheck Protection Program and Loan Forgiveness. A list of questions addressed so far is also available on our PPP Resources page. These questions and our answers are based on discussions with colleagues and clients, both lenders and borrowers. Our intention is to cover issues that, while potentially frequently asked, are not explicitly addressed in official FAQs or directly in Interim Final Rules. Our answers may ultimately be subject to change as additional guidance is provided, but reflect our view of the regulations at the time of posting.)

Consistent with SBA PPP FAQ #19, no specific form of PPP note was required to be used by lenders. Each lender was authorized to use their own promissory note or an SBA form of promissory
note. Many, but by no means all, PPP lenders ultimately used the SBA Standard Loan Note on Form 147 as the base of their PPP promissory notes.

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PPP: Who is subject to Owner-Employee Compensation Forgiveness Limitations?

Self-employed Schedule C (and Schedule F) filers, general partners, and other PPP borrowers that utilized 2019 IRS Form 1040 Schedule C line 31 net profit amount in calculating the amount of their PPP loan are clearly subject to these limitations. However, the SBA guidance also indicates that owner-employees of C-Corporations, S-Corporations and LLCs are subject to the owner-employee compensation limits, and the SBA guidance is silent on limited partners.

Update (8/24/20): The Treasury and SBA published a new Interim Final Rule that confirms the initial guidance did not include any exception based on the owner-employee’s percentage of ownership. However, the new rule also provides that “an owner-employee in a C- or S-Corporation who has less than a 5 percent ownership stake will not be subject to the owner-employee compensation rule.” While limited partners are not addressed in the new rule, we note the original Interim Final Rule which limited owner-employees only referenced general partners; accordingly presumably no formal exception for limited partners is necessary. This would also be consistent with the reasoning for less than 5% shareholders, as limited partners would generally “have no meaningful ability to influence decisions over how loan proceeds are allocated.”

(Note: This is the third in what we anticipate to be a series of posts regarding questions about the Paycheck Protection Program and Loan Forgiveness. A list of questions addressed so far is also available on our PPP Resources page. These questions and our answers are based on discussions with colleagues and clients, both lenders and borrowers. Our intention is to cover issues that, while potentially frequently asked, are not explicitly addressed in official FAQs or directly in Interim Final Rules. Our answers may ultimately be subject to change as additional guidance is provided, but reflect our view of the regulations at the time of posting.)

The current Paycheck Protection Program Forgiveness Application asks all borrowers to certify as follows:

  • if a 24-week Covered Period applies, the forgiveness amount requested  does not exceed 2.5 months’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $20,833 per individual; and
  • if the Borrower has elected an 8-week Covered Period, the forgiveness amount requested does not exceed 8 weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.

While the concept of owner-employee compensation was initially used by the SBA to calculate the amount that a small business with no employees was eligible for, with the expansion of the eligible covered period, the Treasury and SBA have also added restrictions on the use of compensation to “owner-employees” in calculation of the amount of payroll costs eligible for forgiveness. See, for example, the “Interim Final Rule on Revisions to Loan Forgiveness Interim Final Rule and SBA Loan Review Procedures Interim Final Rule” and the Frequently Asked Questions about Loan Forgiveness.

Unfortunately, to date, neither the Treasury nor the SBA has meaningfully defined what constitutes an “owner-employee” or provided any guidance as to whether borrowers need to limit W-2 compensation paid to an employee that happens to have an ownership interest (however small) in the borrower. The Frequently Asked Questions “defines” an owner-employee as “an owner who is also an employee.”

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PPP: Does the Size of the Loan Affect Eligibility for Form 3508EZ?

No. PPP borrowers of any size may use Form 3508EZ, assuming they otherwise meet the eligibility requirements of that form.

(Note: This is the second in what we anticipate to be a series of posts regarding questions about the Paycheck Protection Program and Loan Forgiveness. A list of questions addressed so far is also available on our PPP Resources page. These questions and our answers are based on discussions with colleagues and clients, both lenders and borrowers. Our intention is to cover issues that, while potentially frequently asked, are not explicitly addressed in official FAQs or directly in Interim Final Rules. Our answers may ultimately be subject to change as additional guidance is provided, but reflect our view of the regulations at the time of posting.)

The U.S. Treasury Department and Small Business Administration have provided two forms for applying for forgiveness from Paycheck Protection Loans, and lenders have the further ability to develop their own comparable forms. Both the standard form, Form 3508, and the “simplified” form, Form 3508EZ, are available on the Treasury’s website, along with instructions.

Note: At this time, there appears to be bipartisan support in Congress for additional forgiveness relief for borrowers of $150,000 or less, potentially indicating a pathway for seeking forgiveness without completing Form 3508 or Form 3508EZ. While action on such relief appears tied up in the debate on other issues, there is no current urgency to seek forgiveness, as all payments under the PPP loan are deferred until the earlier of the SBA reimbursing the lender the amount of loan forgiveness or 10 months after the end of the relevant covered period if no forgiveness application is filed. Accordingly, smaller PPP borrowers may desire to delay filing any forgiveness application at this time.

Form 3508 and From 3508EZ are very similar, but are different in two ways: eligibility and the support information required. Notably, one area in which they are different is that both forms require a borrower to indicate if they, along with any affiliates, received PPP loans in excess of $2 million. This question would appear to flag the loan for further SBA review, consistent with FAQ 39, which indicated that the SBA would review all such loans independently. Accordingly, filing using Form 3508EZ will not avoid such review, and is presumably permitted for borrowers with loans in excess of $2 million. However, in connection with such a review, the borrower may be required to submit additional information.

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FinCEN Clarifies Customer Due Diligence Requirements

The Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department recently issued clarifications of requirements for Customer Due Diligence (CDD) under the Customer Due Diligence Requirements for Financial Institutions (CDD Rule) and related Bank Secrecy Act regulations. The guidance, FIN-2020-G002, was issued August 3, 2020 and includes three Frequently Asked Questions. These new FAQs supplement prior comprehensive FAQs issued in advance of the May 2018 CDD Rule compliance effective date. April 2018 and July 2016 FAQs answered 37 and 26 questions respectively (See FIN-2018-G001 and FIN-2016-G003).

The CDD Rule requires that, among other things, covered institutions identify information about customers to assess potential financial crime risks, including identifying the beneficial owners (natural persons) of legal entity customers who own, control or profit from companies’ accounts. Both 25% entity owners and entity controlling persons must be identified, subject to certain limited exceptions. In addition to requiring effective written policies and procedures to identify and verify customers and beneficial owners, the CDD Rule requires covered institutions to develop customer risk profiles and to monitor and report on suspicious transactions.  Earlier this year in April 2020, the FFIEC released updates to a number of sections of the Bank Secrecy Act / Anti-Money Laundering (BSA/AML) Examination Manual clarifying mandatory requirements or supervisory expectations, including highlighting customer risk profile development and testing relating to potential customer money laundering, terrorist financing and other illicit financial activities. (SR 2011).

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(Final?) PPP Loan Approval Statistics through 8/8/2020

Barring further legislative action, the approval window for new Paycheck Protection Program Loans came to a close on August 8, 2020. Since the original launch on April 3rd following the CARES Act, 5,212,128 small businesses have borrowed $525 billion under the Paycheck Protection Program. On August 11th, the SBA published a Paycheck Protection Program Report with additional details.

The overall average loan size under the Paycheck Protection Program was $101 thousand, and this average steadily fell during the lifetime of the Paycheck Protection Program. But even that average number emphasizes the statistical differences between median and mean. While the average loan was just over $100 thousand, over 68% of the loans were for $50 thousand or less (and over 81% of PPP loans were smaller than the average PPP loan).

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PPP: Can Forgivable Payroll Costs Exceed Loan Amount?

Yes, in completing a Paycheck Protection Program loan forgiveness application, we believe a borrower can appropriately report actual payroll costs during the applicable covered period in excess of the original PPP loan amount. While actual forgiveness is ultimately limited to the amount of the PPP loan, the calculations provided for in the loan forgiveness application allow payroll costs to exceed the amount of the PPP loan, thereby permitting borrowers to potentially obtain full forgiveness even if the borrower is subject to FTE and/or salary/hourly wage reductions.

(Note: This is a first in what we anticipate to be a series of posts regarding questions about the Paycheck Protection Program and Loan Forgiveness. A list of questions addressed so far is also available on our PPP Resources page. These questions and our answers are based on discussions with colleagues and clients, both lenders and borrowers. Our intention is to cover issues that, while potentially frequently asked, are not explicitly addressed in official FAQs or directly in Interim Final Rules. Our answers may ultimately be subject to change as additional guidance is provided, but reflect our view of the regulations at the time of posting.)

In light of the 24-week covered period and the PPP loan amount being based on effectively 10 weeks of payroll costs, we believe most PPP borrowers will ultimately have payroll costs that significantly exceed the amount of their PPP loan principal. This should not only facilitate full loan forgiveness, but also may ease the calculations under the forgiveness application and reduce the need to be aggressive with regard to questionable forgivable expenses, FTE calculations, or safe harbor certifications. (As reflected in the Forgiveness API FAQ, so long as lenders agree with the final total forgiveness amount, such applications can be submitted as being approved in full, even if there is disagreement on certain line items.)

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Analysis of PPP Borrowers: Who Returned Funds?

While a lot has been written and said about the “need” certification when it comes to the Paycheck Protection Program, particularly for public companies, the SBA and Treasury have been relatively quiet about how many borrowers that received PPP funds elected to to take advantage of the government’s subsequent safe harbor to return funds. In connection with the forgiveness process, the SBA has indicated that it will review all loans in excess of $2 million, but will deem all borrowers of $2 million or less to have made the required certification concerning the necessity of the loan request in good faith.

Based on our analysis below, 88% of public borrowers that received PPP loans elected to retain their PPP proceeds, and 75% of borrowers approved for PPP loans of between $5 and $10 million did the same. Based on our discussions with PPP borrowers throughout the country, we think this is consistent with the economic uncertainty that was created by the coronavirus.

SEC Filings

Based on a review of SEC filings, Bryan Cave Leighton Paisner identified over 850 borrowers who indicated that they had received PPP loan approvals. 107 of these borrowers, or roughly 12 percent, subsequently indicated that they either ultimately did not accept the loan, or returned the loan proceeds. About 25% of public companies who returned their loans had PPP borrowings that were less than the $2 million threshold for review indicated above.

Of the 759 public companies that elected not to return their PPP funds, approximately 73% received $2 million or less, while the remaining 27% had PPP loans of more than $2 million. About 8% of the public company recipients received less than $100,000, while over 55% received less than $1 million.

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CFPB Requests Information on Fair Lending Practices

On July 28, 2020, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued a request for information (“RFI”) seeking public and industry input related to the Equal Credit Opportunity Act (“ECOA”) and Regulation B.  The CFPB submitted this RFI in an effort to create a regulatory regime that expands consumer access to credit while ensuring that consumers remain protected from credit transaction discrimination.  The RFI signals a renewed regulatory focus on fair lending in the wake of the broader societal focus on racial equality in the U.S. 

The Bureau presented 10 questions in its RFI related to: disparate impact; Limited English Proficiency products, special purpose credit programs; affirmative advertising to disadvantaged groups; small business lending; sexual orientation and gender identity discrimination; scope of federal preemption of state law; public assistance income; the use of artificial intelligence and machine learning; and ECOA adverse action notices.  We have chosen to highlight a select few below. 

The CFPB’s first question asked whether the Bureau should “provide any additional clarity regarding its approach to disparate impact analysis under ECOA and Regulation B.”  The Supreme Court’s decision in Texas Dept. of Housing and Comm. Affairs v. Inclusive Comm. Project, Inc., 135 S. Ct. 2507 (2015), in which the Court affirmed the cognizability of disparate impact theory under the Fair Housing Act (“FHA”), did not address ECOA.  Likewise, the contours of the Court’s limits on the disparate impact claims left open questions for industry and regulators alike.  Guidance on whether disparate impact theory is cognizable under ECOA and if so what limits might apply would have significant impacts on creditors’ fair lending obligations going forward.        

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