PPP Regulations Released

January 7, 2021

Late Wednesday evening, Jan. 6, 2021, the U.S. Small Business Administration (SBA) and Department of the Treasury released  an interim final rule implementing changes to the PPP as passed in the Economic Aid Act late December. SBA also published at the same time a separate interim final rule governing second draw PPP for prospective borrowers who received a PPP loan in 2020. SBA also underscored its plan to release a separate consolidated rule governing forgiveness, which was not outlined in these rules.

The regulations essentially authorize banks to start lending immediately under the new PPP authority and re-opens the program through March 31, 2021. While lenders will need some time to make needed changes to their processes, it is likely the turn-around will be quick given that this is the second round of PPP and most lenders already have in place the structure and staff resources needed to restart the program.

The two rules establish two tracks by which someone could get a PPP loan: a) 2021 first-draw PPP loans which are very similar and have many the same qualifications and limits as the first round (those processed in 2020); and 2) second-draw PPP loans which include key changes that were outlined in the Economic Aid Act.

Those second-draw PPP loan changes, as outlined in the legislation and the second-draw regulations include:

  • Reduced the cap on second-draw PPP loans from $10 million to $2 million; (2021 first-draw loans can still qualify for up to $10 million)
  • The definition of eligible small businesses was dropped to firms with fewer than 300 employees and have at least a 25 percent drop in revenues between at least one quarter in 2020 and a comparable quarter in 2019;
  • Maximum loan size is 2.5 times the monthly payroll of the business with a maximum of $2M, however businesses in the accommodation and food services can get 3.5 times payroll;
  • PPP loan recipients can get full forgiveness if at least 60 percent of the loan is spent on payroll costs (this is true for both first-draw and second-draw PPP loans made in 2021);
  • Set-asides were carved out for both new and second-time borrowers with fewer than 10 employees;
  • $15 billion for loans issued by mission-lenders, including community development financial institutions (CDFIs), minority-depository institutions (MDIs), and SBA 504 and Microlenders, as well as another $15 billion set-aside for certain smaller depository institutions, such as credit unions and farm credit institutions.
  • $35 billion for borrowers who were unable to apply for an initial PPP loan, of which $15 billion is for smaller borrowers with up to 10 employees or loans of up to $250,000 in low-income areas; and $25 billion for second PPP loans for the same small borrower category;
  • Full deductibility for otherwise allowable expenses using PPP funds, regardless of loan forgiveness (this is true for ALL PPP loans, first-draw 2020 or 2021 and second-draw);
  • Simplified forgiveness process for loans of up to $150,000
  • Expands the allowable expenses for the loan to include existing supplier contracts and equipment and expenses related to COVID (first- and second-draw);
  • Includes 501(c)6 non-profits for 2021 first-draw PPP loans (which were excluded from the first round of PPP); and
  • Eliminates the requirement that EIDL loan advances be subtracted from PPP forgiveness.

Among some of the key items clarified in the PPP changes rule (which covers 2021 first-draw loans):

  • New PPP borrowers will be allowed to use either 2019 or 2020 for purposes of calculating their maximum loan amount;
  • Lenders will be given a safe-harbor of sorts on penalties if the borrower fails to fully comply with the rules on lending or forgiveness and the lender acted in good faith;
  • Businesses must have been in business on Feb. 15, 2020 in order to be eligible;
  • Seasonal businesses (defined as not operating for more than 7 months in a calendar year) who were dormant on Feb. 15, 2020 are eligible of they can demonstrate they were in operation for any 12-week period between Feb. 15, 2019 and Feb. 15, 2020;
  • Self-employed individuals are eligible and can apply at the same time as all other businesses;
  • Businesses who are in bankruptcy proceedings are NOT eligible;
  • First-draw PPP loans can still be up to $10 million, however second-draw loans are capped at $2 million;
  • Borrowers can only receive ONE first-draw loan, but may apply for a second-draw loan also;
  • Forgiveness applications must be submitted to the lender by the borrower within 10 months and the covered forgiveness period is up to 24 weeks after disbursement of the PPP loan;
  • PPP loans can be used for:
    • Payroll costs
    • Employee benefits and leave
    • Mortgage interest, rent, utility and other interest payments
    • Refinancing a 2020 EIDL loan
    • Business operations such as software, cloud computing, product/service delivery, payroll services, etc…
    • Property damage as a result of looting or vandalism in 2020
    • Supplier costs that are essential to operations, pursuant to a contract or in effect prior to the loan
    • PPE or other worker protection expenses
  • Full forgiveness is only available if at least 60 percent of the loan is for payroll costs, otherwise forgiveness will be prorated to match payroll spending ratios;
  • Payroll costs that are qualified wages taken into account in determining the Employer Retention Tax Credit (ERTC) are NOT eligible for loan forgiveness;
  • For loans under $150,000, borrowers will not have to submit any documentation beyond the application for forgiveness, but simply must retain relevant documents for 4 years; and
  • LLC’s are only eligible for one PPP loan—partners cannot apply separately.

Any current SBA 7(a) bank is an considered an approved PPP lender and non-bank lenders can be approved if they have serviced more than $10 million in business loans in any 12-month period over the past 3 years – this can be a CDFI, credit union or other alternate lenders.

NSBA will continue to read through and analyze these rules and recommends interested borrowers begin the process now of reaching out to available lenders.