It hasn’t been an easy ride for those applying for or administering Paycheck Protection Program loans since the program went into effect on April 15. A lightning-fast rollout, differing interpretations of the rules, a steady stream of updates, warnings to recipients about audits and penalties, and negative press about public companies that received money while small business applications were held up in lender logjams frustrated many potential borrowers to the point that some withdrew their applications or returned the money.

In fact, in early May, an Associated General Contractors of America (AGC) survey revealed that 18% of its members that had received PPP loans were thinking about returning them. This uncertainty among small business owners could be why, as of the end of May, there remained almost $150 billion left untapped in the PPP.

There has, however, been some progress to make the program more user friendly through the issuance of new rules and a bill passed in the House that awaits action in the Senate.

New federal guidance

In previous guidance, the Treasury Department and the SBA said that all PPP loans of $2 million or more, upon an application for forgiveness, would be audited. The implication was that those businesses that did not provide the correct information on their requests for forgiveness or on their loan applications or that did not perform due diligence could be referred to the Department of Justice or other agencies for further review and, possibly, an investigation.

On May 13, however, the federal government issued an important clarification (FAQ 46) dealing with loans both above and below $2 million. The new guidance is that is companies taking PPP loans less than $2 million would be “automatically deemed” to have acted in good faith when making their economic need certifications, according to attorney Mana Lombardo of Crowell & Moring. 

Loans in excess of $2 million, she said, would still be reviewed, but if the SBA determines that the loan does not meet the economic need requirements, the company would have to pay the loan back but without the penalty of enforcement action or a referral to the DOJ or another agency.

“That one was the most important development in terms of … having safe harbor language,” Lombardo said.

New SBA rule

The SBA also issued a new interim final rule on PPP loan review procedures, which includes more details about lenders' duties.

During an AGC webinar last month, attorney Amy O’Sullivan, also with Crowell & Moring, said borrowers, even though they typically rely on lender input when filling out loan applications, were on their own as far as PPP eligibility. Even being approved for a loan, she said, did not guarantee eligibility.

In the interim final rule, however, the SBA clarifies that the lender has an obligation in several areas including:

• Confirmation it received a borrower’s loan forgiveness application form.
• Verification it has received the borrower’s documentation in support of payroll and nonpayroll costs.
• Checking the borrower’s calculations on the forgiveness application.

“The lender has a good faith review duty,” she said, “and to do so in a reasonable time. And to the extent they determine that the borrower has not provided sufficiently substantial documentation to back up (its) file, the guidance instructs the lenders to assist the borrower with that process and try to remedy the situation with them.”

Ultimately, though, the accuracy of the information in the loan application is still the borrower’s responsibility.

Potential program expansion

The House passed legislation last week that has the potential to have the most impact on the PPP, an amendment to CARES called the Paycheck Protection Program Flexibility Act of 2020.

If the Senate approves the bill as is, it would:

• Extend the “covered period” for PPP loans from eight to 24 weeks.
• Change the use of funds forgiveness requirement from 75% payroll costs/25% non-payroll costs to 60% payroll costs/40% non-payroll costs.
• Create a safe harbor for employers that made a good faith effort to hire or rehire qualified employees.
• Extend the maturity of PPP loans from two to five years.
• Allow PPP loan recipients to defer payroll taxes through the end of 2020.

The extension of the covered period, said Jimmy Christianson, vice president of government relations at the AGC, is the most important potential change “because timing is everything.” He said this element of the bill is most important for those companies that were early participants in the PPP because their covered period is set to expire soon, if it hasn’t already done so. 

“But the reality is in any economic downturn, the worst for construction [industry] always comes towards the latter part of the downturn,” he said. “And we have a lot of members that still [have] backlog and are doing their best to continue to secure that backlog. ... So the ability to extend that eight-week period to 24 weeks is extremely helpful.”

Changing the payroll/nonpayroll expense ratio, allowing some flexibility when it comes to keeping employees on the payroll or rehiring them in an environment where they might not want to return to work, extending the repayment period from two years to five, and letting contractors defer payroll taxes are all things that will give them the best chance of survival, Christianson said.

As the Senate takes on the work of trying to reconcile the House bill with its proposals, attorney Paul Pollock with Crowell & Moring said the program might also see a revamp in the loan forgiveness application, which is complicated and burdensome in the way that companies calculate how much of their loan is forgivable.

“We can probably expect,” he said, “that this whole forgiveness application is going to get reinvented at some point in the next couple of weeks.”

However, Lombardo said, unless relevant changes are made to the forgiveness decision timeline, between the approvals needed from the SBA and the lender, it will still take up to 150 days before the SBA approves forgiveness of PPP loans.

The bottom line, Christianson said, is that the legislation will help contractors stay in business, as long as the Senate acts in a timely manner.

“My biggest fear is that by the time they decide it’s time to deal with infrastructure,” he said, “the [contractors] they need to deal with are not going to be there.”