House passes bill aiming to increase flexibility in PPP loan program
The Paycheck Protection Program (PPP) continues to evolve at a pace that would be unthinkable for other government programs. After the release of guidance and new rules by Treasury within the past two weeks that altered many aspects of loan forgiveness under the PPP, Congress is now tackling its own changes to the program.
On Thursday, May 28, the House of Representatives passed the Paycheck Protection Program Flexibility Act of 2020, which contains the following important proposed amendments to the PPP. The Senate would still need to pass the legislation for these changes to be implemented.
The repayment term for any amount not forgiven would be extended from two years to five years. This change would only apply to loans made on or after the date of enactment of the Paycheck Protection Program Flexibility Act, but the statute does not prohibit lenders from voluntarily extending the maturity of outstanding loans.
- The “Covered Period,” which constitutes the period during which expenses count toward the forgiveness amount, would be significantly extended to the earlier of Dec. 31, 2020, or 24 weeks after the date of loan funding. This is a significant extension beyond the current covered period, which ends on the earlier of June 30 or eight weeks after funding.
- The reduction in loan forgiveness based on reduction in FTEs would undergo major revision as well. Treasury had already provided a safe harbor to prevent reduction of the forgiveness amount if a borrower was unable to rehire employees or terminated employees for cause. The House bill creates new safe harbors that prevent a reduction in loan forgiveness:
- If the borrower cannot rehire specific terminated employees,
- If the borrower cannot hire a similarly qualified employee, or
- If the borrower cannot reopen at the same level of business activity due to COVID-19 safety requirements imposed by regulators.
While the first two appear to be substantively similar to safe-harbors provided by Treasury, the third is entirely new. This will clearly benefit restaurants and other personal service businesses that will be permanently affected by COVID-19. It is unclear if these safe harbors will replace or supplement Treasury’s regulatory safe harbors.
- The House bill takes direct aim at Treasury’s regulatory requirement that at least 75 percent of the forgiveness amount must consist of payroll costs. Under the House bill, this requirement is reduced to 60 percent.
- The deadline for applying for forgiveness could be as late as Oct. 31, 2021 (10 months after the end of the extended covered period, which could end as late as Dec. 31, 2020). Additionally, the deferral period for repayment of any unforgiven amount has been changed from six months from the date of loan funding to the date that SBA remits the forgiveness amount to the lender. Under the current statute, the deferral period could end as early as October 2020, since many loans were funded in April. The House bill could effectively extend the deferral period until 2022.
- As an example: Assume a borrower received a loan on April 15, 2020. The House bill allows the borrower to take advantage of the new, extended covered period, which would now run until Oct. 15, 2020 (24 weeks after the date of loan funding). The borrower waits 10 months after that date to apply for loan forgiveness, putting the borrower’s forgiveness application submission at Aug. 15, 2021. Lenders then have 60 days to review forgiveness applications and the SBA has 90 days to remit funds to lenders after that review, which means the deferral period is effectively extended until roughly Jan. 15, 2022.
- The amendments to the forgiveness provisions of the PPP would be retroactively effective, allowing businesses that have already received loans to take advantage of the more favorable terms.
Payroll tax deferral
The provision of the CARES Act preventing businesses that receive loan forgiveness under the PPP from also taking advantage of delayed payment of payroll taxes would be eliminated under the House bill. This is another significant improvement to the PPP program for businesses. This change would be retroactively effective.
The Senate leadership floated a bill with similar provisions before Memorial Day, but it did not pass, and the Senate adjourned for its holiday recess with no further action. The unsuccessful Senate bill was similar to the House bill, but less generous with the changes to the forgiveness provisions.