The interplay of Economic Injury Disaster Loan (EIDL) Loan Advances and Paycheck Protection Program (PPP) Loan Forgiveness is broken. Maybe there’s further guidance to come that will make the existing application and guidances makes sense, but as I’m reading the current guidance, PPP lenders could be required to “eat” the EIDL advances received by their PPP borrowers. While that’s certainly not the intent of the PPP, the existing mechanics may make that a reality.

Background

Section 1102 of the CARES Act provided that PPP borrowers who had received an EIDL loan between January 31, 2020 and April 3, 2020, could (and in some circumstances had to) increase their PPP loan amount to refinance outstanding EIDL loans. Section 1110 of the CARES Act provided that if an EIDL applicant received an EIDL advance subsequently was approved for a PPP loan, the advanced amount would be reduced from the loan forgiveness amount. (Whether Section 1110 of the Cares Act makes sense or not is also beyond this post; for now, I’m simply assuming it means what it says, at least with regard to EIDL advances related to COVID-19 existing at the time of PPP loan forgiveness.)

Note: Section 1102 only applied for existing EIDL loans as of April 3, 2020, while Section 1110 applies to subsequent EIDL advances, even if those amounts were not rolled into PPP loans.

Under the first Interim Final Rule, outstanding EIDL loans, less the amount of any outstanding EIDL advance, were rolled forward into the maximum PPP loan amount. Proceeds from any advance up to $10,000 on the EIDL loan would be deducted from the loan forgiveness amount on the PPP loan. “For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness.”

Under the sixth Interim Final Rule, when disbursing loans, lenders were required to send any amount of loan proceeds designated for the refinance of an EIDL loan directly to SBA and not to the borrower.

Under the fourteenth Interim Final Rule, the 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 Application

The PPP Loan Forgiveness Application calls for, on the PPP Loan Forgiveness Calculation Form, the EIDL advance amount and application number to be entered, but it then does not affect the following calculation of the forgiveness amount.

Skipping the details (as this post is long enough without those details), the Loan Forgiveness Calculation Form ultimately provides three potential forgiveness amounts: (i) Line 8, which provides the modified total of forgivable expenses; (ii) Line 9, which provides the actual amount borrowed; and (iii) Line 10, which provides the maximum amount that could be forgiven while satisfying the 75% payroll requirement. None of these amounts factor in any reduction for EIDL advances.

Line 11 then presents the final Forgiveness Amount, which is calculated to be the smallest of Lines 8, 9, and 10. The instructions then go on to say, “Note: if applicable, SBA will deduct EIDL Advance Amounts from the forgiveness amount remitted to the Lender.”

Importantly, the instructions do not say that Line 11 should be reduced by the EIDL advance amount or that the amount forgiven by the lender to the borrower should be reduced by the EDIL advance amount. If a lender and/or borrower go ahead and reflect a reduction in Line 11 to reflect the EIDL advance amount (which would arguably be consistent with CARES Act Section 1110), will the SBA go ahead and deduct the EIDL advance amount again from the amount remitted to the lender?

To be crystal clear, I do NOT believe this reading of the regulation is what was intended by Congress, and should NOT be the final outcome. But absent corrective guidance, I’m hard pressed to see how the existing regulations and application correctly make the borrower, rather than the lender, responsible for ultimately covering the EIDL advance amount.

Examples

Assume borrower got an EIDL for $150,000 (inclusive of a $10,000 advancement) and, based on payroll, was entitled to a $300,000 PPP loan.  Accordingly, total loan was $300,000 + $150,000 – $10,000 = $440,000.  At funding, the lender provided $140,000 to the SBA to refinance the EIDL, and borrower received $300,000. Assume in all scenarios borrower satisfied FTE and salary/wage reduction tests resulting in no further adjustments to the forgiveness eligible payments.

Scenario #1 – Further assume borrower spent $250,000 on payroll and $50,000 on other forgivable expenses.

Line 8 would be $300,000, Line 9 would be $440,000, and Line 10 would be $250,000/0.75 or $333,000.  Accordingly, forgiveness would appear to be $300,000, and the borrower will owe the lender $140,000 under then note, but SBA will only remit to the lender $290,000. Under this scenario, the lender lend out $440,000 and will receive back (in SBA remittance and ultimate guarantee and/or note payments) $430,000. Origination fees and interest will add to the amount recovered (so it ultimately should be positive), but the lender will still take a principal loss on the 100% government guaranteed PPP loan.

Scenario #2 – Further assume borrower spent $300,000 on payroll and $100,000 on other forgivable expenses.

Line 8 would be $400,000, Line 9 would be $440,000, and Line 10 would be $300,000/0.75 or $400,000.  Accordingly, forgiveness would appear to be $400,000, and the borrower will owe the lender $40,000, but SBA will only remit to the lender $390,000. Under this scenario, the lender lend out $440,000 and will receive back $430,000, again reflecting a $10,000 principal loss.

Scenario #3 – Further assume borrower spent $100,000 on payroll and $100,000 on other forgivable expenses.

Line 8 would be $200,000, Line 9 would be $440,000, and Line 10 would be $100,000/0.75 or $133,333 (presumably, unless the first Interim Final Rule is read to say that you can include the EIDL amount, which would make it $240,000/0.75 or $320,000).  Accordingly, forgiveness would appear to be either $133,333 (based on PPP Forgiveness Application) or $200,000 (based on the Interim Final Rule), and the borrower will owe the lender either 306,667 or 240,000, but, in either case, the SBA will only remit to the lender the forgiven amount less $10,000. Regardless, the lender will have lend out $10,000 more in principal than it will receive back.

This scenario highlights the remaining ambiguity in the first Interim Final Rule, at least for those PPP borrowers who did refinance their EIDL into a PPP loan. What does it mean that “[f]or purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included”? Included in what?

Scenario #4 – Further assume borrower spent $500,000 on payroll.

Line 8 would be $500,000, Line 9 would be $440,000, and Line 10 would be $666,666.  Accordingly, forgiveness would appear to be $440,000, and the borrower will owe the lender $0, but SBA will only remit to the lender $430,000.

Conclusion

There are several ways to fix this, including an overall provision that I’m sure lenders would appreciate that ultimately the amount forgiven to the borrower shall equal the amount remitted by the SBA to the lender.

Alternatively, we either need an additional Line 12 that would reflect the deduction of any applicable EIDL advance amounts or the instructions to Line 11 should be revised to reflect that it should equal the smallest of lines 8, 9 or 10 and be reduced, if applicable, by the EIDL advance amount.

Clarity should also be provided with regard to how EIDL refinanced amounts are considered for purposes of the percentage of forgiveness amounts that were used for payroll costs.