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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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Georgia Passes Legislation Creating Immunity for COVID-19 Liabilities

On June 26, 2020, Georgia’s Legislature passed the “Georgia COVID-19 Pandemic Business Safety Act” (the “Act”). The Act provides Georgia businesses with certain defenses and immunities for potential liability from claims related to the spread of COVID-19. These immunities apply broadly to the health care facilities and providers as well as other business entities and individuals.

Under the Act, no covered entity or individual will “be held liable for damages in an action involving a COVID-19 liability claim . . . unless the claimant proves that the actions . . . showed: gross negligence, willful and wanton misconduct, reckless infliction of harm, or intentional infliction of harm.” 

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CFPB Issues CARES Act Credit Reporting FAQs

On June 16th, the CFPB issued a Compliance Aid Frequently Asked Questions (FAQs) addressing the CARES Act changes to the Fair Credit Reporting Act (FCRA) and clarifying furnisher reporting obligations regarding consumers who have received payment assistance or forbearance. In public remarks in connection with Consumer Data Industry Association webinar released June 19, 2020 Director Kraninger highlighted the CFPB’s commitment to consumers:  “I do want to stress that we are telling struggling borrowers to reach out to their servicers to see what options are available to them. Under CFPB regulations, servicers are required to have policies and procedures in place to ensure the disclosure of the availability of CARES Act mortgage forbearance to consumers. If a consumer has an issue with their servicer, we encourage them to submit a complaint to us if the consumer can’t first resolve the matter with the servicer.” Here are few of the highlights in the FAQ that address issues which may prove the most challenging for lenders, services and furnishers and agencies.

FAQ #5 “Constructive Work” With Borrowers Encouraged.

“Even if accommodations are not required by the CARES Act or by other applicable law, the Bureau and other Federal and State agencies have encouraged financial institutions in prior guidance (the March 22, 2020 Federal Reserve Intragency Statement) to work constructively with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19.” This guidance goes to the spirit of the CARES Act to help consumers impacted by the pandemic, but also asks servicers use their best judgment in offering assistance beyond that required. Understanding borrower’s specific circumstances will be critical in assessing the reasonableness of efforts. Where personnel are applying judgment, having internal servicer guidelines for escalation to ensure uniformity and consistency may prove beneficial. Tracking and monitoring metrics and other characteristics of those loans and borrowers may also help ensure fairness.  

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The Unsafe Waters of the PPP Purported FTE Reduction Safe Harbors

On June 17, 2020, the SBA and U.S. Treasury published an updated form of application and instructions for borrowers seeking forgiveness of their Paycheck Protection Program loans, as well as a new “EZ” form of application and instruction. In both cases, these applications generally implement the statutory changes required by the Paycheck Protection Program Flexibility Act.

While the improved likelihood of full forgiveness due to the 24-week covered period is likely to draw the most attention, potential compliance with two of the safe harbors provided to avoid a loss of forgiveness in the event of a reduction in the number of Full Time Equivalent (FTE) employees comparing the applicable “covered period” with the applicable reference period. Under the CARES Act, while borrowers are generally eligible for loan forgiveness for certain expenditures during the covered period, actual loan forgiveness must be reduced if the borrower’s weekly average number of FTE employees during the covered period was less than during the borrower’s chosen reference period (generally, February 15, 2019 through June 30, 2019 or January 1, 2020 and February 29, 2020; or, for seasonal employers, any consecutive 12-week period between May 1, 2019 and September 15, 2019).

However, under the revised PPP loan forgiveness application, there are certain FTE reduction exceptions and two safe harbors. Each of these provide potential relief from a decrease in forgiveness due to a reduction in FTE levels… but they also provide enhanced risk for borrowers needing to rely on them. In addition, general eligibility for the use of the Form EZ loan forgiveness application is conditioned on compliance with the reduction exceptions or one of the safe harbors.

FTE Forgiveness Reduction Exceptions

As provided in the original forgiveness application, in calculating the average number of FTE employees during the covered period, borrowers are permitted to effectively add back the FTEs for: (1) any positions for which the employer made a good-faith, written offer to rehire, which was rejected, (2) any employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours. (If the positions were re-filled during the covered period, than borrowers are required not to double-count such positions.)

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PPP Loan Statistics Through June 6, 2020

From the launch of the Paycheck Protection Program (“PPP”) on April 3, 2020, through June 6, 2020, 5,458 lenders have approved loans to over 4.5 million small businesses for over $511 billion dollars. On June 7, 2020, the SBA published an updated Paycheck Protection Program Report with additional details.

To put some scale around the size of the program, for the last five years, the SBA has averaged annual total personal loans approved under its 7(a) small business loan program (the same umbrella under which PPP loans fall) of roughly $17.4 billion. Accordingly, in April and May of 2020, the SBA has processed roughly 29 years worth of SBA loans. While the rate of PPP loans being improved has slowed greatly, as discussed more below, this still highlights the size of the program and the strain under which the SBA has been operating.

Average Loan Size

The overall average size of a PPP loan is now approximately $113 thousand. This is down significantly from the first round of PPP funding, where the average approved PPP loan was $206 thousand. Based on the formula for PPP lending, this means the average borrower likely had monthly payroll costs of approximately $45 thousand.

Of course, the average size of PPP loan is certainly affected by a relatively small number of larger loans. As reflected above, the majority of loans made were for loans of less than $50 thousand (reflecting monthly payroll costs of less than $20 thousand). Over 85% of the total PPP loans made were for less than $150 thousand, and over 93% of the total PPP loans made were for less than $350 thousand. While significant ink (digitally and otherwise) has been spilled on larger PPP borrowers, less than 2% of the PPP loans made were for more than $1 million.

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PPP Flexibility Act Provides Additional Flexibility (and Potential Traps) for Borrowers and Lenders

H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”), was passed by the House of Representatives by a vote of 417-1 on May 28, 2020.  The Senate passed H.R. 7010 unanimously by voice vote on June 3, 2020.  President Trump signed the PPP Flexibility Act into law on June 5, 2020, making effective several modifications to the Paycheck Protection Program.

The PPP Flexibility Act causes a number of changes to the Paycheck Protection Program, including:

  • An extension of the forgiveness period from eight weeks to twenty-four weeks (optional for existing PPP borrowers), which will also presumably affect the relevant covered period for measuring reductions in employees or salary and wages;
  • A requirement for forgiveness to use 60% (rather than 75%) of the PPP loan proceeds on permissible payroll costs;
  • An extension of the deadline to re-hire employees for an exemption to the forgiveness limitation to December 31, 2020 (from June 30, 2020);
  • An additional statutory exemption for re-hiring employees based on a reduction in level of business activity due to COVID-19 and the government’s response;
  • An extension of the payment deferral period until loan forgiveness is granted or a loan forgiveness application is not filed in a timely manner;
  • A five-year loan maturity term for all new PPP loans (although existing loans will stay at two years unless borrower and lender mutually agree to extend; and
  • Permission for all PPP recipients to take advantage of the CARES Act provision permitting deferred payment of the employer’s share of Social Security taxes due on wages paid through the end of the year.

Our Bryan Cave Leighton Paisner LLP Client Alert on the PPP Flexibility Act goes into further details on each of these changes. We anticipate further regulations and guidance from the Treasury and Small Business Administration shortly, but the PPP Flexibility Act provides a number of choices for PPP borrowers to consider.

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Paycheck Protection Program and EIDL Advances

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.”

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PPP Forgiveness Guidance

PPP Forgiveness Guidance

May 28, 2020

Authored by: Robert Klingler

We are still working on a few specific pieces of guidance for lenders as they process PPP forgiveness applications,  particularly with regard to minimizing the bank’s liability and with regard to EIDL advances. But in the meantime, I thought I would share some of the thought leadership that we’ve published from a PPP borrower perspective, since I suspect banks will also get a lot of questions from their borrowers as well.

In our view, the Paycheck Protection Program Loan Forgiveness Application answered many questions, but certainly not all of them.

The additional Loan Forgiveness And Loan Review regulations answered additional questions (but of course left more questions as well).

Another potential resource is the AICPA Loan Forgiveness Calculator available here. Given the continuing flow of ongoing guidance, the Calculator is updated regulatory. (Note: we have not verified any of the assumptions/calculations made by the AICPA calculator, but believe it can be a useful comparison tool regardless.)

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Analyzing Borrower Certification Risks under the Paycheck Protection Program

As the editor of BankBCLP.com, I tend not to write a lot of posts for other blogs hosted by Bryan Cave Leighton Paisner LLP. However, the Paycheck Protection Program(PPP) has affected small business clients throughout the firm.

The shifting narratives around the government’s interpretations regarding eligibility for participation in the PPP has caused many borrowers to reconsider their own applications and to consider exiting the program by returning PPP funds by the government’s current safe harbor return deadline of May 14th.

In this post on the BCLP US Securities and Corporate Governance Blog, I describe the history and background of the PPP certification process, and suggest a three bucket risk framework for analyzing one’s certification. In discussions with corporate clients, we have found this framework to be useful for public and private companies.

As recognized in FAQ 31, this remains primarily a risk for PPP borrowers, and not PPP lenders, as “lenders may rely on a borrower’s certification regarding the necessity of the loan request.” In our experience, this has also made many lenders reasonably constrained from providing any further advice to borrowers regarding analysis of the borrower’s certification.

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