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SBA Substantially Improves PPP Loan Forgiveness Process for Loans of $150,000 or Less
(Parker Tax Publishing August 2021)
The Small Business Administration (SBA) has issued favorable new guidance relating to the forgiveness of loans made under the Paycheck Protection Program (PPP). The guidance provides that (1) for Second Draw PPP Loans of $150,000 or less, where the borrower is required to provide revenue reduction documentation at the time of loan forgiveness, a COVID Revenue Reduction Score developed by SBA's contractor may be used by lenders as an optional method to document a borrower's revenue reduction; (2) a direct borrower forgiveness process is now available for lenders that choose to opt-in as an alternative method for processing borrower loan forgiveness applications for all PPP loans of $150,000 or less; and (3) an extension of the loan deferment period is available for those PPP loans where the borrower files a timely appeal of a final SBA loan review decision with the SBA Office of Hearings and Appeals. SBA-2021-0015.
Background
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. 116-136) was enacted to provide emergency assistance and health care response for individuals, families, and businesses affected by the COVID-19 pandemic. The CARES Act temporarily permitted the Small Business Administration (SBA) to guarantee 100 percent of certain business loans under a new program titled the "Paycheck Protection Program," (PPP) pursuant to Section 7(a)(36) of the Small Business Act (First Draw PPP Loans). The CARES Act also provided for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP.
Generally, PPP loan forgiveness is available if proceeds of the loan are only spent during the covered period on specified expenses such as payroll, mortgages, rent, utilities, and interest. The amount of loan forgiveness is reduced where an employer reduces full-time equivalent (FTE) employees and/or reduces employee salaries and wages by more than 25 percent during the covered period, subject to certain exemptions.
The SBA has posted numerous interim final rules relating to the PPP. These interim final rules provide guidance on the various criteria that must be met to receive a PPP loan as well as the procedures to be followed in obtaining a PPP loan and in receiving tax-free forgiveness of such loans. The SBA also maintains a list of PPP Frequently Asked Questions (PPP FAQs), which it periodically updates.
While PPP borrowers originally had until June 30, 2020, to apply for such loans, numerous changes and enhancements were subsequently made to the program, including an extension to August 8, 2020, to apply for a PPP loan. PPP borrowers are required to submit their loan forgiveness applications to their PPP lenders and the lenders are required to issue a decision on loan forgiveness to SBA within 60 days of receipt of the application. PPP lender decisions on forgiveness are submitted through the SBA's Paycheck Protection Platform (Platform).
In December of 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act) (Pub. L. 116-260) was enacted as part of the Consolidated Appropriations Act, 2021. The Economic Aid Act reauthorized lending under the PPP through March 31, 2021. The Economic Aid Act authorized the SBA to guarantee additional PPP loans (Second Draw PPP Loans) to certain eligible borrowers that previously received a First Draw PPP Loan. Among other things, to be eligible for a Second Draw PPP Loan, the borrower had to have experienced a revenue reduction of not less than 25 percent in at least one quarter of 2020 compared to the same quarter in 2019. The Economic Aid Act also provided for a simplified forgiveness application process for PPP loans of $150,000 or less.
In March of 2021, the American Rescue Plan Act (ARPA) (Pub. L. 117-2) was enacted. It expanded eligibility for First Draw PPP Loans and Second Draw PPP Loans. On March 30, 2021, the PPP Extension Act of 2021 (Pub. L. 117-6) was enacted, extending SBA's PPP program authority through June 30, 2021.
Observation: The total number of PPP loans guaranteed by SBA exceeds 11.8 million. The total dollar amount of the PPP loans guaranteed by SBA exceeds $806 billion.
Complexity of Loan Forgiveness Slows Down Forgiveness Process
Borrowers and lenders alike have expressed concerns about the complexity of the loan forgiveness process for the smallest of borrowers. In October of 2020, the SBA and the Department of the Treasury jointly issued an interim final rule revising the loan forgiveness and loan review procedures to simplify the forgiveness process for PPP loans of $50,000 or less. Among other things, the rule exempted borrowers with loans of $50,000 or less from the full-time equivalent employee (FTE) and salary/wage reduction penalties that applied to reduce the borrowers' loan forgiveness amount. In conjunction with that rule, the SBA issued a new loan forgiveness application, SBA Form 3508S, for use by borrowers with loans of $50,000 or less.
In early 2021, the SBA (1) revised SBA Form 3508S to increase the loan amount for which the form could be used from $50,000 to $150,000; (2) implemented a simplified forgiveness application process for loans of $150,000 or less; (3) revised certain loan amount calculations and eligibility provisions for PPP; and (4) published an interim final rule implementing the PPP provisions of ARPA.
Observation: According to the SBA, loans of $150,000 or less represent 93 percent of the outstanding PPP loans.
Despite these changes, many smaller PPP lenders have continued to express concerns to the SBA that they do not have the technology or human resources to develop efficient electronic loan forgiveness platforms to process the new streamlined loan forgiveness application. Additionally, because lenders are overwhelmed by the volume of PPP loans and are mindful of the statutory 60-day requirement for lenders to issue a forgiveness decision to the SBA, lenders have been limiting when loan forgiveness applications are accepted from borrowers, creating uncertainty among borrowers that they are going to have to start making payments on their PPP loans while they are waiting for their lenders to accept and process their loan forgiveness applications. Additionally, the SBA has been hearing concerns from PPP lenders of all sizes that the requirement for borrowers to submit and lenders to review, at the time of forgiveness, the revenue reduction documentation for Second Draw PPP Loans of $150,000 or less is delaying the forgiveness process for these borrowers.
As a result of these concerns, the SBA issued interim rule SBA-2021-0015 on July 28, 2021. This interim final rule further streamlines the forgiveness process for PPP loans of $150,000 or less (1) by allowing lenders to use a COVID Revenue Reduction Score at the time of loan forgiveness to document the required revenue reduction for Second Draw PPP loans of $150,000 or less, and (2) by establishing a direct borrower forgiveness process for lenders that choose to opt-in as an alternative method of processing loan forgiveness applications for PPP loans of $150,000 or less. SBA-2021-0015 also extends the loan deferment period for those PPP loans where the borrower timely files an appeal of a final SBA loan review decision with the SBA Office of Hearings and Appeals.
COVID Revenue Reduction Score
In order to be eligible for a Second Draw PPP loan, a PPP borrower had to have experienced a revenue reduction of 25 percent or more during one quarter of 2020 compared to the same quarter in 2019 and provide documentation to that effect. Where a borrower with a Second Draw PPP Loan of $150,000 or less does not provide documentation of revenue reduction with the loan application, the lender must perform a good faith review of the documents provided by the borrower at or before forgiveness, including the borrower's calculations and supporting documents, to determine that this 25 percent reduction criteria has been met.
To streamline forgiveness of Second Draw PPP Loans of $150,000 or less where the borrower did not submit documentation of revenue reduction at the time of the loan application, an independent third-party SBA contractor has developed a COVID Revenue Reduction Score (score) based on a variety of inputs including industry, geography, and business size. The score uses current data on economic recovery and return of businesses to operational status. Each Second Draw PPP Loan of $150,000 or less will be assigned a score, which will be maintained in the Platform and will be visible to lenders to use on an optional basis as an alternative to documenting a borrowers revenue reduction. Additionally, the score will be visible to those borrowers that submit their loan forgiveness applications through the Platform using the direct borrower forgiveness process.
When the score meets or exceeds the value required for validation of the borrower's revenue reduction, use of the score will satisfy the requirement for the borrower to document revenue reduction. When the score does not meet the value required for validation of the borrower's revenue reduction, and if the borrower has not already provided documentation to the lender that validates the borrower's revenue reduction, the borrower must provide documentation either directly to the lender (for those lenders that do not opt-in to the direct borrower forgiveness process described below) or provide documentation to the lender by uploading it to the Platform.
The COVID Revenue Reduction Score process applies to all Second Draw PPP Loans for which the lender has not yet issued a loan forgiveness decision to the SBA as of July 28, 2021.
Direct Borrower Forgiveness Process
The direct borrower forgiveness process is an optional technology solution that SBA is providing to PPP lenders that, according to the SBA, will leverage SBA's existing and proven Platform and align with and seamlessly integrate the streamlined forgiveness application for loans of $150,000 or less.
When a PPP lender opts-in to the direct borrower forgiveness process, the Platform will provide a single secure location for all of its borrowers with loans of $150,000 or less to apply for loan forgiveness through the Platform using the electronic equivalent of SBA Form 3508S. Upon receipt of notice that a borrower has applied for forgiveness through the Platform, lenders will review the loan forgiveness application in the Platform and issue a forgiveness decision to SBA inside the Platform.
Observation: The SBA believes that lenders that opt-in to using the direct borrower forgiveness process will benefit with reduced costs, increased efficiency, and more timely remittance of forgiveness payments from SBA, while borrowers will benefit from the ability to submit loan forgiveness applications directly through the Platform and reduce the wait time and uncertainty associated with submission through their lender.
This process applies to all PPP loans for which a loan forgiveness application has not been submitted by the borrower to the lender as of July 28, 2021.
Deferment Extension for OHA Appeals
Currently, the rule for appeals of final SBA loan review decisions on PPP loans provides that because a PPP borrower must begin making payments of principal and interest on the remaining balance of its PPP loan when the SBA remits the loan forgiveness amount to the PPP lender (or notifies the lender that no loan forgiveness is allowed), an appeal by a PPP borrower of any final SBA loan review decision does not extend the deferment period of the PPP loan. SBA is amending this appeals rule to, among other things, provide that a borrower's timely appeal of a final SBA loan review decision will extend the deferment period for the PPP loan until SBA's Office of Hearings and Appeals (OHA) issues a final decision on the appeal. The revised OHA rule will provide that the borrower should notify the lender of the appeal so that the lender can extend the deferment period. Under the revised OHA rule, an appeal petition must be filed with OHA within 30 calendar days after the appellant's receipt of the final SBA loan review decision.
The SBA has determined that, in order to avoid the potential administrative burden of having to reverse implementation of the final SBA loan review decision, including the refund of borrower payments by the lender and the processing of forgiveness payments by SBA, a timely appeal by a PPP borrower of a final SBA loan review decision should extend the deferment period of the PPP loan. SBA believes that allowing for continued deferment is in the best interest of the borrower. For these reasons, SBA is conforming the applicable PPP rules to provide that a timely appeal by a PPP borrower of a final SBA loan review decision extends the deferment period of the PPP loan until OHA's decision becomes final. This deferment rule applies to PPP appeals filed after July 28, 2021, for which a notice and order has not been issued.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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