- The $900 billion COVID relief package brings opportunity to financial institutions — and raises questions.
- Second draw loans are now available to eligible borrowers.
- New rules apply to existing, new, and second draw PPP loans.
- Lender provisions are generally favorable.
The long awaited $900 billion COVID relief package was signed into law on December 27, 2020. The Consolidated Appropriations Act, 2021 (the Act) provides nearly $285 billion in Paycheck Protection Program (PPP) forgivable loans. On January 6, 2021, the Small Business Administration (SBA) published interim final rules (IFRs) and other guidance related to the PPP provisions contained in the Act.
The PPP extension provides $35 billion for eligible borrowers that never obtained a PPP loan, but, more importantly, allows some borrowers with significant revenue reduction to obtain a second PPP loan (second draw loan). Changes to PPP rules for existing loans, new loans, and second draw loans include:
- Expansion of eligible expenditures
- Simplified forgiveness process for loans of $150,000 or less
- Resolution of open tax issues
While the new law creates opportunities for your institution, it also brings new complexities. The SBA’s recently released IFRs provide needed guidance on administration of the revised PPP; however, the window of time to understand the new rules and prepare your financial institution for accepting applications is short, given that the SBA may reopen the PPP loan application portal as soon as mid-January. In addition, while preparing to accept the next round of PPP loan applications, many institutions may still be engulfed in processing borrower loan forgiveness applications from prior rounds of the PPP.
The Act includes significant changes impacting the loan forgiveness rules, as highlighted below. As a result of these changes, lenders may need to make near-term processing decisions related to forgiveness applications while awaiting new forms and further guidance from the SBA.
Second draw loans
Borrowers who previously obtained a PPP loan can obtain a second draw loan if they meet certain eligibility requirements. First, in order to qualify for a second draw loan, the borrower must utilize the full amount of their original PPP loan prior to the funding of a second draw loan. Other eligibility requirements for second draw loans include:
- Borrowers must have 300 or less employees (500 employees for restaurants, hospitality businesses, and news broadcast businesses with multiple locations).
- Borrowers must have a reduction in gross receipts of at least 25% for 2020 compared to 2019 or in any quarter in 2020 compared to the same quarter in 2019.
- Borrowers must have been an operating business on February 15, 2020 and must not be traded on a national exchange.
The maximum second draw loan that a borrower can obtain is 2.5 times average monthly payroll up to $2 million. Special provisions for restaurants and hospitality businesses allow these borrowers to receive larger loans equal to 3.5 times average monthly payroll up to $2 million. The maturity period for second draw loans is five years and the interest rate is 1%. Second draw loans may be fully forgiven, so long as payroll costs comprise at least 60% of the loan amount.
New rules applicable to all PPP loans
The COVID-19 relief package contains multiple changes lenders and borrowers have lobbied for over the past several months that now apply to existing, new, and second draw PPP loans. These changes include a simplified loan forgiveness process for loans of $150,000 or less, whereby lenders can solely rely on the borrower’s certifications and need not obtain supporting documents. PPP loans will remain forgivable to the extent of eligible expenditures made during a borrower-selected covered period ranging from 8 weeks to 24 weeks from the origination date of the loan.
Importantly, the new law eliminates the requirement to deduct economic injury disaster loan (EIDL) advances from the forgivable amount of the PPP loan. Further, eligible expenditures for all PPP loans are expanded to include certain business operations costs, property damage costs, supplier costs, and COVID-19 worker protection costs, such as expenditures related to drive-up and outdoor dining operations. And, the new law clarifies that all eligible expenditures are tax deductible.
The new PPP provisions also prospectively expand the eligible loan amount for many farmers and ranchers operating as sole proprietorships, independent contractors, or self-employed individuals. Under the revised rules, the maximum loan amount will be equal to 2019 gross income (rather than net income) up to $100,000 divided by 12 and multiplied by 2.5.
For second draw loans, PPP lenders will receive higher processing and service fees for smaller loans. Under these rules, lenders will receive a loan processing and servicing fee from the SBA equal to:
- The lesser of 50% of the original loan balance or $2,500 for loans of $50,000 or less;
- 5% of the original loan balance for loans of more than $50,000 but not more than $350,000; or
- 3% of the original loan balance for loans of more than $350,000.
Further, the new law provides that lenders will only be responsible for paying fees to agents for services if the lender directly contracted with the agent. In addition, lenders are held harmless for relying on borrower certifications and documentation.
Open questions and important next steps
The extended impact of the COVID-19 crisis on our national economy and the delay in enactment of this third round of economic stimulus have created strong demand for the next round of PPP loan relief. Planning time is short: you may benefit from addressing the matters below in the near-term.
Implementation of extended PPP loan program
To avoid the same issues that hampered the original program, ongoing timely guidance from the SBA will be important. Such guidance will help lenders successfully implement the program and provide the critical financial assistance needed by so many small businesses and organizations across the country.
The reality of a constant stream of new guidance makes it critical for lenders to establish processes that enable them to evaluate and adjust to in a timely manner.
Similarly, establishing processes and controls for implementation of the next round to foster program compliance, timely and quality customer responsiveness, and strong risk management are important near-term initiatives.
Loan forgiveness processing
Numerous questions remain related to ongoing processing of borrower loan forgiveness applications.
One open question as a result of the new law relates to handling borrowers that already received forgiveness, but their EIDL advances were subtracted in arriving at the forgiveness amount. Whether borrowers paid back the unforgiven balance of these loans quickly or entered into longer payment arrangements with lenders, we hope for guidance that will make these borrowers whole via reimbursement of principal and interest payment(s).
For loans of $150,000 or less, the path forward is even less clear. In addition to the EIDL advance issue, lenders are faced with the question of whether to continue to process forgiveness applications for these loans when new forms are on the horizon. Also, how much should lenders counsel borrowers toward using (or to at least consider using) the new simplified form when it arrives, particularly if the borrower has already submitted a forgiveness application under a prior form?
- Charlie Cameron, Managing Principal of Industry
- Todd Sprang, Principal
Compliments of CliftonLarsonAllen – a member of the EACCNY.