Client Update – Coronavirus Aid, Relief, and Economic Security Act (“Cares Act”)

On March 30, 2020, DarrowEverett LLP issued a client alert on the new Payroll Protection Loan. On April 2, 2020, the U.S. Small Business Administration (SBA) issued in advance of publication an Interim Final Rule providing additional guidelines and requirements under the Paycheck Protection Loan Program.

SBA Interim Final Rule

The Interim Final Rule is immediately effective upon publication in the federal register, without advance notice and comment, the SBA will consider public comments received within thirty days of publication and the need for making any revisions as a result of such comments. The Interim Final Rule may be found at: https://home.treasury.gov/system/files/136/PPP–IFRN%20FINAL.pdf

Significantly, the Interim Final Rule clarifies that the interest rate on unforgiven debt is 1%, the loan term 2 years, payment of principal and interest will be deferred for 6 months, not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs; and that independent contractors do not count as employees for purposes of loan amount calculation and loan forgiveness (since independent contractors have the ability to apply for a Paycheck Protection Loan on their own). Examples of how to calculate the loan amount are also provided.

The Interim Final Rule additionally provides that the following are not eligible for a Paycheck Protection Loan: those engaging in any activity illegal under federal, state, or local law; individual household employers who employ household employees such as nannies or housekeepers; applicants with an owner of 20 percent or more of the equity of the applicant who is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years; or if the applicant or any business owned or controlled by the applicant or any of its owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.

However, the Interim Final Rule then goes one step further directing applicants to the list of business entities ordinarily not eligible for Section 7(a) loans, namely those identified in 13 CFR 120.110 (https://www.law.cornell.edu/cfr/text/13/120.110),

as further described in SBA’s Standard Operating Procedure (SOB) 50 10, Subpart B, Chapter 2 (https://www.sba.gov/document/sop-50-10-5-lender-development-company-loan-program), as likewise not being eligible for a Paycheck Protection Loan (carving out only nonprofit organizations authorized under the CARES Act). Notably, the entities thereby referenced include certain financial businesses primarily engaged in the business of lending, and life insurance companies, despite the fact that the CARES Act provides that any eligible business concern meeting certain thresholds would be eligible for a Payroll Protection Loan. Arguably, the SBA may have exceeded its regulatory authority by doing so, and it is unclear whether the SBA actually intended to blanketly exclude certain lenders and life insurance companies from obtaining Paycheck Protection Loans. Nevertheless, this may result in certain lenders and life insurance companies being denied Paycheck Protection Loans, and resultant reconsideration requests and judicial review.

SBA Paycheck Protection Loan Program,
Frequently Asked Questions (FAQs)

The SBA has also provided further guidance in the form of Frequently Asked Questions (last updated on April 7, 2020) clarifying that (among other things):

• small business concerns can have more than 500 employees and be eligible for a Paycheck Protection Loan, so long as they meet the size standards corresponding to its primary industry (or the alternate size standard) set forth under the Small Business Act and its implementing regulations;
• the exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits;
• borrowers can calculate their aggregate payroll costs using data from the previous 12 months or from the calendar year 2019;
• payroll costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees;
• for applicants with wage and other data reported on the Employer Identification Number of a third-party payer such as a payroll provider or a Professional Employer Organization (PEO), payroll documentation reported to the IRS by that entity for the applicant’s employees is acceptable payroll documentation for the applicant; and
• borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application (i.e., the date the application was filed by the borrower or approved by the lender), but that borrowers who previously submitted loan applications that have not yet been processed may revise their applications based on clarifications reflected in this latest guidance of the SBA.

This guidance may be found at: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequenty-Asked-Questions.pdf

The attorneys at DarrowEverett LLP are ready to assist you as you navigate these challenging times brought upon us all by the COVID-19 crisis, including guidance on relief and loans available under various federal, state, and local COVID-19 related programs.