New Liberalized Rules for Paycheck Protection Plan Loans (Maybe)

New Liberalized Rules for Paycheck Protection Plan Loans (Maybe)

       Last Thursday evening the House on a bi-partisan basis approved changes to the Paycheck Protection Program.  Set forth in H.R. 7010,  the proposed changes will significantly liberalize certain aspects of PPP. There are five substantive points made in the legislation that will be of interest to borrowers.

First, under a Treasury regulation, in order for a PPP loan to be forgiven, 75% of the amount borrowed must be spent on payroll expenses with the balance spent on other permitted expenses.  Under the proposed changes that 75% threshold would be reduced to 60%. Section 3(b)(8).

Second, the “covered period” or the “alternative payroll covered period” during which the PPP funds must be deployed is eight (8) weeks.  Under the proposed changes that period would be increased to twenty-four (24) weeks. Section 3(b).

Third, to the extent a PPP loan is not forgiven, it will have a term of five (5) years rather than the two (2) years of the current law.  Section 2(b).  But see below as to effective date; this change does not apply to existing loans.

Fourth, the deferral of the obligation to pay principal and interest on a PPP loan will not begin until a determination on forgiveness has been made.  Section 3(c)

Fifth, two changes are made as to the reduction in forgiveness that are based upon the borrower’s reduction inn full time equivalent employees (“FTEE”).  While reducing to statute the regulatory relief already afforded when an employee rejects an offer to return from being furloughed or terminated, there is additional relief for companies that are unable to return to pre-pandemic employment levels consequent to compliance with certain “standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”  Section 3(b)(7).  This provision, if enacted into law, will provide relief to for example restaurants that may open but with fewer tables, requiring fewer wait staff and fewer employees in the kitchen to cook fewer meals.

The provisions of Section 3 are all retroactive to the adoption of the CARES Act, and as such apply to all existing loans. Section 3(d). The change in Section 2 extending the term of PPP loans that are not forgiven from 2 years to 5 years applies only to new loans, but lenders and borrowers may agree to modify existing loans to extend the maturity date to five years.  Section 2(b).

These are proposed changes to Paycheck Protection Program, and they are not law unless and until approved by the Senate and signed by the President. The fate in the Senate is at this point unknown.  While there are informed predictions that it will pass, there are no guarantees.  In addition, the House utilized proxy voting in approving this bill, and Senate Majority Leader McConnell has stated reservations as to the Constitutionality of bills so passed, and may be unwilling to bring them before the Senate.

As with all things PPP, if you do not like it, just wait a few minutes.