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Paycheck Protection Program

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PPP Litigation and Regulatory Risks

With assistance from some of my litigation colleagues, Bryan Cave Leighton Paisner has just published guidance on re-evaluating practices and considering some of the litigation risks that could arise with the Paycheck Protection Program.

Prior to the PPP going live on April 3, banks scrambled to assemble teams and online application in-take and processing protocols to handle the onslaught of applications.  Over 1.6 million small businesses were approved for relief, a small fraction of the total number of small businesses in the U.S. 

For many, the Program ground to a halt on April 16, 2020, a mere 13 days after it opened, when all of the $349 billion in funding was exhausted.  The abrupt and swift depletion of the Program left many small business owners in dismay and frustrated with their banks, and pondering what recourse they might have.  A few quickly filed lawsuits.  More lawsuits no doubt are coming.  

As Congress gets set to appropriate more than $300 billion in additional funding for the Program, and lenders prepare for ramping up their PPP operations for the second round of applications, it is smart to re-evaluate practices and consider some of the litigation risks that could arise. 

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PPP Refresh – $310 Billion More

Based on news reporting, we understand that Congress and President have collectively agreed on $300 billion in additional funding for the Paycheck Protection Program. The circulated draft of the “Paycheck Protection Program and Health Care Enhance Act” makes no changes to the eligibility or terms of the PPP, but does authorize an additional $310 billion in funds, raising the total funding level for PPP loans to $659 billion.

The Paycheck Protection Program and Health Care Enhance Act would also increase the amount authorized for the SBA to ultimately forgive to $670 billion, presumably recognizing an intent to also be in position to forgive interest in additional to principal.

While the Paycheck Protection Program and Health Care Enhance Act does not alter the eligibility or terms for either borrowers or lenders, it does provide some protected classes of lenders who are ensured a set aside of a portion of the expanded PPP authorization. Specifically, depository institutions and credit unions with between $50 billion and $10 billion in consolidated assets will be ensured the ability to issue, in the aggregate, at least $30 billion in loans guaranteed by the SBA under the PPP. Depository institutions and credit unions with less than $10 billion in consolidated assets, as well as community development financial institutions (CDFIs), minority depository institutions (MDIs), and certain state development companies certified under Title V of the Small business Investment Act will be ensured the ability to issue, in the aggregate, at least $30 billion in loans guaranteed by the SBA under the PPP.

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The Bank Account’s Introduction to the Paycheck Protection Program

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Joining all the (far more) popular podcasts, The Bank Account is now recording from the host’s home. This episode features Partners Karen Fries and Mike Royle joining me in a presentation about the basic terms of the SBA’s small business forgivable loan program, the Paycheck Protection Program.

As the Paycheck Protection Program is changing rapidly, it’s important to note that guts of this presentation were recorded on April 9, 2020. While the funds have currently been exhausted for new PPP loans (pending Congress deciding when and how to allocate additional funds), the key terms of the loans and the forgiveness functions discussed in this podcast episode remain accurate, at the least as of the time of posting.

While our initial approach was going to be to engage in a debate on the merits of this practice, none of us ultimately wanted to take the side of justifying the practice; for different reasons, many of which are expressed on the podcast, we all believe that it is a bad idea for bank directors to personally approve loans.

For those interested in hearing more information about the Paycheck Protection Program in audio form, I highly recommend the Big Small Business Rescue from Planet Money. And if you’re craving more content, and prefer the last financial crisis, I’d also suggest the FDIC “podcast” on the 2008 financial crisis.

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SBA PPP Loan Approval Statistics

From launch of the Paycheck Protection Program on April 3, 2020 through the exhaustion of the originally committed funds on April 16, 2020, 4,975 lenders approved loans to over 1.6 million small businesses for over $342 billion. On April 17, the SBA published a Paycheck Protection Program Report with additional statistics on the approved PPP loans.

Excluding weekends (which probably isn’t fair, as I know a lot of bankers that worked non-stop the last two weekends), this amounts to over 160,000 applications approved each day, or more than $34 billion in loan proceeds each day.

The Report indicates the overall average loan size approved was $206,000. Assuming each applicant applied for the maximum PPP loan it was entitled to, this indicates that the average applicant’s monthly payroll costs were approximately $82,400.

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SBA PPP Eligibility Requirements

The SBA has made clear that businesses with 500 or fewer employees can apply for PPP funds, with certain exceptions. The number of employees for a business is generally determined by the average number of people employed for each pay period over the business’s latest 12 calendar months. For this determination, any person on the payroll must be included as one employee regardless of hours worked or temporary status.

However, for businesses with greater than 500 employees, there are still three possible ways qualify for PPP funds. This post analyzes the three additional methods for a business to qualify for PPP funds, based on the latest guidance from the SBA as of April 15, 2020.

Method 1: SBA Employee-Based Size Standards

Under the CARES Act, the SBA requires borrowers to have 500 or fewer employees or the number of employees specified per the SBA’s Size Standards table. Thus, a business with greater than 500 employees may still be eligible if it meets applicable SBA employee-based size standards for its primary industry. A business’s primary industry is denoted by its North American Industry Classification System (NAICS) Code. A list of all NAICS codes is available here.

For example, a business in the in the primary industry of natural gas extraction (NAICS Code 211130) with 1,000 employees would still be eligible for PPP funds because the applicable SBA employee-based size standard is 1,250.

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SBA PPP April 14 Interim Final Rule Guidance

On April 14, 2020, the SBA published an interim final rule that provides additional guidance regarding topics of confusion among both Payroll Protection Program (“PPP”) lenders and borrowers. This new rule supplements the first interim final rule, which was issued by the SBA on April 2, 2020, and specifically addresses the eligibility of self-employed individuals, partnerships, director-owned businesses, and legal gambling businesses. This post covers the updates detailed in the new interim final rule, based on the latest guidance from the SBA as of April 16, 2020.

Self-Employed Individuals

Eligibility

The new interim final rule makes clear that an individual may be eligible for a PPP loan if the individual:

  1. was in operation as a business on February 15, 2020;
  2. is an individual with self-employment income (such as an independent contractor or a sole proprietor);
  3. has a principal place of residence in the United States; and
  4. filed or will file a Form 1040 Schedule C for 2019.

The SBA has communicated that it will issue additional guidance for those individuals with self-employment income who: (i) were not in operation in 2019 but who were in operation on February 15, 2020, and (ii) will file a Form 1040 Schedule C for 2020.

We note that individuals should be aware that participation in the PPP may affect eligibility for state-administered unemployment compensation or unemployment assistance programs.

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PPP: Affiliation Guidelines

PPP: Affiliation Guidelines

April 9, 2020

Authored by: Jim Havel and Robert Klingler

In determining eligibility under the Paycheck Protection Program, the SBA will aggregate “affiliates” of the borrower. This post further explores what the SBA considers “affiliate” of the borrower, based on the latest guidance from the SBA as of April 9, 2010.

How does the SBA Define “Control” for Aggregation Purposes?

The SBA’s standard definition of “control” for affiliation and aggregation purposes is a facts-heavy analysis similar to a totality of the circumstances standard. The SBA generally goes as high up and across the ultimate ownership group and its controlled companies when it comes to the entity deemed to control for aggregation/ affiliation purposes.

Control is both affirmative and negative best understood through use of examples:

  • For examples of affirmative control, see all of the tests below.
  • For examples of negative control, see Example 3 of Test 1 below.

Four tests will generally apply for affiliation based on control for PPP Loans.

Test 1 – Affiliation based on ownership:

Example 1 – Equity control: The classic and easiest example to understand is equity control. If an entity controls a majority of the equity (50%+1) of another business (or multiple businesses), the SBA will aggregate all of the employees of those companies together under PPP.

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In Praise of Community and Regional Banks

Last week my partner Rob Klingler posted an impassioned plea to the SBA and bank regulators to allow banks with less than 500 employees to be borrowers under the Paycheck Protection Program, or PPP as it has become known. Rob joined a chorus of voices across the country pointing out that community banks are small businesses too, and if the jobs of employees at a community bank can be saved isn’t that as helpful to the economy as any other small business? Unfortunately, the overhang of TARP appears to continue to cloud decisions in Washington and banks were excluded from receiving loans under the PPP. Irony drips from that decision. At the beginning of the last financial crisis, when the business fortunes of some of the largest banks appeared at risk, Washington rushed to their aid with TARP. Now, at the beginning of a financial crisis that is hitting small business hard, community banks are being told they are the only small businesses in America which must soldier on without government financial assistance.

In that context, isn’t it remarkable that small and mid-sized businesses across the country are flocking to community and regional banks for responsive assistance in the PPP process? My practice has always been a mix of corporate finance and advisory work for middle market businesses and consulting and board advisory work for banks. I like the balance and the perspective that mix brings. Over the past two weeks this view into two worlds has revealed to me the true nature of relationship banking, and the absolute commitment to that concept at most community and regional banks. My clients and contacts in the middle market business world have been frequently asking for updates on the roll out of the PPP program. That was understandable and to be expected. What I did not expect was the volume of calls I’ve been receiving for referrals to smaller banks from customers of large banks. Those calls often begin with expressions of frustration at the inability to get anyone from the larger bank on a call or even to respond to an email regarding the PPP process, and that the most frequent communication received is “you need to visit our website for assistance.” In an environment where hundreds of thousands and likely millions of small to medium sized businesses across the country are suddenly struggling, and with no sense of the near term path, it really matters to the persons running those businesses that they receive support, encouragement and, if possible, assistance from their bankers. It is in the difficult times when relationship banking really matters, not the boom times.

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Tax Effects on Paycheck Protection Program Borrowers

With regard to the interplay of various tax provisions of the CARES Act and the Paycheck Protection Program (PPP), we note the following:

  • If a borrower takes a PPP loan, they are restricted from claiming the employee retention credit, even if the PPP loan is not forgiven.
  • If any portion of a borrower’s PPP loan is forgiven, the borrower is restricted from taking advantage of the deferred payment of the employer portion of Social Security tax obligations.
  • If all or a portion of borrower’s PPP loan is forgiven, the statute provides that such forgiven amount shall be excluded from gross income.

Employee retention credit. The CARES Act provides certain eligible employers a refundable credit with respect to the employer’s share of Social Security tax for due in an amount equal to 50% of qualified wages paid after March 12, 2020 and before January 1, 2021 (up to $10,000 per employee for all calendar quarters). Eligible employers generally include those required to fully or partially suspend operations due to a COVID-19 related government order or that have a 50% decrease in gross receipts for a calendar quarter when compared to the same quarter in 2019.  Generally, all employee wages paid by employers with up to 100 full-time employees in 2019 are eligible for the credit. However, if an employer had more than 100 full-time employees in 2019, only wages paid to employees who are not providing services due to the suspension of operations or significant decrease in gross receipts are credit-eligible. If an employer takes a PPP loan, they are not eligible to take advantage of the employee retention credit.

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Lender Obligations under Paycheck Protection Program

Pursuant to the Interim Final Rule published this evening, the SBA has confirmed that banks participating as lenders will have limited liability for the bad acts of their borrowers. This assumes, however that Form 2484, when ultimately published by the SBA, will not contain additional problematic certifications required to be made by the lender.

“SBA will allow lenders to rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness. Lenders must comply with the applicable lender obligations set forth in this interim final rule, but will be held harmless for borrowers’ failure to comply with program criteria; remedies for borrower violations or fraud are separately addressed in this interim final rule.”

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