SBA Releases New Rules on PPP Loan Forgiveness and SBA Review Process

COVID-19 Update

Date: May 27, 2020

Key Notes:

  • SBA has issued new interim final rules on PPP loan forgiveness.
  • No major changes to forgiveness requirements based on prior guidance but clarify some ambiguity and establish new deadlines for the forgiveness process.
  • SBA may review a loan at any time and will establish a process for borrowers to appeal adverse eligibility or forgiveness determinations.
  • Lender must return processing fees received for loan if borrower is determined to be ineligible.

The Small Business Administration (SBA) and Department of the Treasury have issued new interim final rules on Paycheck Protection Program (PPP) loan forgiveness and the SBA review process. While the interim final rules on forgiveness do not provide much new substantive information, they do answer some of borrowers’ common open questions and provide some clarification and confirmation of existing guidance and regulations. The SBA loan review process rules provide some new insights into how the SBA is planning to review these loans and confirm that an appeals process will be established for borrowers to contest certain adverse determinations. As discussed in detail below, those rules also contain an apparently new requirement for lenders to return processing fees if the borrower is ultimately determined to be ineligible.

The SBA’s newly issued rules on forgiveness build on the new guidance contained in the Loan Forgiveness Application and Instructions (Application), which was the subject of a recent COVID-19 Update.

Covered Periods and Cost Accrual Methods

The new rules confirm that a borrower may utilize an alternative covered period solely for payroll costs (as defined in the CARES Act and related FAQs) that coincides with the borrower’s existing payroll cycle, if that cycle is bi-weekly or more frequent. They also confirm that permitted costs paid, incurred and paid, and incurred but not paid during the covered period can be included in amounts to be forgiven so long as any incurred but not paid costs are paid on the next regular payment date. This applies to both payroll and nonpayroll costs. The rules also provide further explanation for treatment of caps on amounts paid to owner-employees and self-employed individuals. All of these provisions are consistent with prior guidance and the information provided in the Application.

75/25% Rule Clarified

The new rules also confirm that 75% of the amount forgiven must be for payroll costs and only 25% can be nonpayroll costs, including rent, mortgage interest and utilities. Importantly, the SBA confirmed that bonuses and hazard pay paid to employees during the covered period can be included as payroll costs, subject to the $100,000 pro rata wage limit (as we discussed in detail in a prior COVID-19 Update). The rules also provide that the 75/25% rule only applies to forgiveness and not to permitted use, which appears to run counter to language included in prior interim rules that at least 75% of PPP loan proceeds must be used for payroll costs. The CARES Act itself only requires use of the PPP loan funds for any permitted payroll costs or nonpayroll costs and does not require any percentage split. Accordingly, based on this new interim final rule, borrowers who use the PPP loans proceeds for permitted purposes but use more than 25% for nonpayroll costs should be in compliance with the CARES Act’s use requirements (but such use will have an impact on the amount of funds the borrower may have forgiven).

Forgiveness Is Not All or Nothing

The interim final rules on forgiveness clarify that a lender may approve some or all of the amount a borrower requests for forgiveness. The lender’s review of forgiveness is not to determine whether forgiveness was earned or not; it can determine that some portion of the amount the borrower requests for forgiveness is permitted while denying forgiveness for other amounts. While this appeared to be the case from prior guidance, this clarification is good news for borrowers and lenders.

Referrals Now Required for Exemption for Employees Refusing to Return

The new forgiveness rules installed a new requirement that a borrower seeking to avoid a reduction in loan forgiveness due to reduced headcount based on an employee’s rejection of a written offer to return to employment must notify the state unemployment insurance office within 30 days of such rejection. If an employee has rejected an offer to return to employment, more than 30 days have passed and a deficiency in headcount remains, a borrower should consider issuing a new written offer to return to employment, understanding that the employee may accept the new offer. While it is unclear how the SBA would view such a second offer/rejection because the rule is silent on the scenario where the 30 days has already elapsed prior to its issuance, this is a suggestion to address yet another new deadline imposed by the SBA. The rules expressly remind borrowers to keep documentation of all employee communications if the borrower intends to use any of the available exemptions to the reduction in employee headcount based on voluntary resignations or reductions in hours, terminations for cause or the rejection of a written offer to return to work.

New FTEE Calculation Methodology and Forgiveness Formulas

As noted in the prior alert, the Application provides guidance on how to calculate full-time equivalent employees (FTEEs) and how to treat part-time employees. The new rules provide further details confirming that FTEEs are those who work at least 40 hours per week, explicitly rejecting a 30-hour week. Consistent with the Application, fractional FTEE figures can and must be used to capture employees working on a less than 40-hour workweek basis. Borrowers can count part-time employees as fractional FTEEs in any method they choose, including counting a part-time employee as .5 FTEE, so long as the method used is consistent for both the covered period and the prior payroll lookback period used to determine whether there has been a reduction in headcount. The rules also explain that any reduction in headcount will not also be counted as a reduction in wages. Reduction in wages paid is to be determined on a per-employee basis and not in the aggregate.

Document Retention Requirements

The new SBA review process rules begin by affirmatively stating that the SBA may review a PPP loan at any time, noting the requirement in the Application that a borrower must keep all documentation relating to its use of the PPP loan proceeds for six years from the date of forgiveness or repayment. While prior guidance indicated the SBA would be auditing loans of $2 million or more, this makes clear that the SBA intends to review others as well, including to determine eligibility, accurate calculation of loan amount, proper use of proceeds and loan forgiveness calculations. The SBA can initiate a review of a loan at any time and will notify the lender, which must in turn notify the borrower of the pending review within five business days.

Lender Review Process

To obtain forgiveness, a borrower must submit the Application to the lender, who has 60 days from submission of a complete application to provide a decision to the borrower and need only review the information included in the Application to determine accuracy of calculations and confirm that proper documentation of costs and employee headcount and wages are provided. The forgiveness decision will be to approve forgiveness in whole or in part, to deny forgiveness or, if the SBA is in the process of reviewing a loan, to deny forgiveness without prejudice pending completion of that review. A lender may not approve forgiveness while a loan is subject to a pending SBA review. A borrower may request that the lender reconsider its forgiveness request upon completion of the SBA review so long as the SBA determined the borrower was eligible for the PPP loan.

SBA Review and Borrower Appeal Process

The SBA will have 90 days to review the lender’s forgiveness decision (and may undertake its own review at any time). If the lender denies forgiveness, the borrower may request that the SBA review that decision, but it must do so within 30 days of the lender’s notice of the adverse decision. While the rule does not expressly address what happens if the lender approves forgiveness and the SBA reverses that determination, presumably the borrower will be subject to that determination and be required to repay any amounts deemed not forgivable. If the SBA determines that the borrower was not eligible, it may seek repayment of any unpaid loan amount and “pursue other available remedies.” The SBA will establish a procedure to permit borrowers to appeal any adverse determination made by the SBA as a result of its review.

Clawback of Lender Fees for Ineligible Borrowers

Lenders also received what appears to be a new twist to their otherwise heavily protected and limited role in the PPP process. Although their potential liability has been severely limited through regulations, lenders’ processing fees, which ranged from 1% to 5% depending on the amount of the loan, are now subject to disgorgement if a borrower is ultimately determined to be ineligible for the PPP loan it received. Despite prior guidance expressly providing that lenders may rely on borrowers’ certifications, including for eligibility, lenders are now subject to clawback of substantial amounts of fees if the SBA determines a borrower was not eligible.


For more information, please contact:

Jennifer L. Maffett-Nickelman

Riccardo M. DeBari

Lindsay Karas Stencel

Keep Abreast of What’s Next

Thompson Hine is staying abreast of continuing developments related to the CARES Act and the PPP. Please visit our COVID-19 Task Force page for details on this and other information and resources.

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