Congress Provides Borrowers Flexibility by Passing PPP Flexibility Act

Posted on June 4th, 2020 by Derek P. Hartman

Borrowers who participated in the Paycheck Protection Program (the “PPP”) have been given more flexibility to pay eligible expenses, such as mortgage interest, rent payments, and utilities, without jeopardizing their forgiveness amount. The President is expected to sign this change, among others described below, into law following the Senate’s passage of the Paycheck Protection Program Flexibility Act (the “Act”) late last night.

One of the most important features of the Act is the reduction of the mandatory payroll-to-expense ratio from 75%-25% to 60%-40%. This change was made retroactively effective, meaning the new ratio applies not only to loans that are issued in the future, but also to loans that have already been funded.

Borrowers are now permitted to use their loan proceeds over a longer period and still receive forgiveness. Under the Act, PPP funds that are used by the borrower during the first 24 weeks after they received the loan or until the end of the year, whichever comes first, are now forgivable. This is a significant change to the eight-week covered period set forth in the CARES Act. As a result of this change, borrowers will now have much more flexibility to use the funds when they are needed.

New PPP loans will come with a five-year payback period for any portion of their PPP loan that is not forgiven. While not retroactive, the Act does not prohibit lenders and borrowers from mutually agreeing to extend the payback period for loans that are already in effect.

The SBA promise, made in their FAQ publication, that borrowers will not be penalized if they are unable to maintain the same number of employees that they had pre-COVID-19 due to no fault of their own, will be the law once the President signs the bill. A borrower will not be subject to a reduction on the forgivable portion of the loan if the borrower is able to document, in good faith: (1) its inability to rehire the same number of employees it had on February 15, 2020; and (2) an inability to hire similarly qualified employees on or before December 31, 2020. A borrower can also avoid a reduction of the forgivable portion of the loan if the borrower is unable to return to the same level of business activity occurring on February 15, 2020 because of governmental restrictions, such as the removal of tables or limitations on the number of customers. Borrowers in the restaurant, entertainment, and service industries will benefit greatly from this change.

Finally, the Act makes it clear that borrowers will not be required to make payments on any portion of the PPP loan that is not forgiven until a decision on the amount of forgiveness is made. Under the original version of the law, borrowers were to start to make payments on the unforgivable portion of the loan starting six months after it was issued. In addition, borrowers now have 10 months after the last date of the covered period to apply for forgiveness.

A copy of the Act can be found here.