Interim Final Rule – Paycheck Protection Program
The Department of Treasury has previously stated that covered loan applications under the Paycheck Protection Program would begin to be processed by participating lenders as early as today, Friday, April 3, 2020.
Many lenders have expressed concern over potential liability exposure for lenders participating in the Paycheck Protection Program as well as with the lack of specificity and guidance included in the text of either the CARES Act or the initial guidance provided by the Department of Treasury and the Small Business Administration. It is unclear whether this interim final rule, including the lender protections outlined and the questions and answers contained therein, will provide lenders with the comfort and all of the information needed to allow them to begin processing loan requests.
Some questions and concerns both borrowers and lenders have expressed were addressed in the interim final rule, while a number of questions remain.
Interest Rate: In response to lender concerns, the interim final rule increases the interest rate on covered loans under the Paycheck Protection Program to 1% (up from 0.5% provided in the initial guidance). Additionally, while interest will begin to accrue when the loan is made, the interim final rule states “the amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest…” (emphasis added). If a borrower expends all borrowed funds for forgivable purposes, including following the requirements to spend at least 75% of such funds on payroll costs and maintaining employee and payroll levels as outlined under the program, upon requesting and receiving loan forgiveness it is possible that no payment of either principal or interest by the borrower will be due.
Independent Contractors: The interim final rule does make it clear that independent contractors do not count for purposes of a borrower’s covered loan calculation. An independent contractor will have the ability to apply for a covered loan under the Paycheck Protection Program on its own behalf.
SBA Affiliation Rules: The CARES Act contains waivers of the SBA Affiliation Rules for certain business concerns (e.g., certain businesses in the hospitality industry, a franchise assigned a franchise identifier code by the SBA, and a business that receives financial assistance from certain small business investment companies). A number of questions remain regarding the applicability and interpretation of the SBA Affiliation Rules in connection with the Paycheck Protection Program. The interim final rule includes a statement the “SBA intends to promptly issue additional guidance with regard to the applicability of the affiliation rules at 13 CFR 121.103 and 121.301 to the Paycheck Protection Program.”
Average Monthly Payroll Costs: The measurement period for purposes of calculating the average monthly payroll still contains ambiguity, with the guidance stating that borrowers should use the “aggregate payroll costs from the last twelve months” while lenders are instructed to “confirm the dollar amount of average monthly payroll costs for the preceding calendar year”.
We recommend that if you are interested in a covered loan under the Paycheck Protection Program, you reach out to your lender to determine what information and documentation the lender will require in order to review and process your loan application.