January 8, 2021
Less than or equal to $50,000—the lesser of 50% of the loan amount or $2,500;
Greater than $50,000 and less than or equal to $350,000—5% of the loan amount; and
Greater than $350,000—3% of the loan amount.
On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act) was signed into law.The Economic Aid Act revives the Paycheck Protection Program (PPP), extending the authority of lenders to make loans through March 31, 2021, and revises certain earlier PPP rules and guidance.
The Small Business Administration (SBA) issued two new interim final rules on January 6, 2021. The first (the Consolidated PPP Rule) incorporates the changes to the PPP made by the Economic Aid Act as well as consolidates and restates the 23 interim final rules released by the SBA and US Treasury during 2020.This is a welcome development as the 23 separate, but interrelated, PPP rules were becoming increasingly cumbersome to navigate.
The second new interim final rule outlines the requirements for PPP loans that may be made to borrowers that previously received a PPP loan (the Second Draw Loan Rule).In the rules, the first PPP loans made to borrowers are called “First Draw Loans” and loans to borrowers that previously received a PPP loan are called “Second Draw Loans.” Second Draw Loans are subject to the Consolidated PPP Rule as well as all other PPP loan requirements and guidance.
Because the first new interim final rule mostly consolidates the already existing PPP rules, this alert will focus primarily on the Second Draw Loans. We will highlight some of the key changes outlined in the Consolidated PPP Rule at the end of this alert.
I. Second Draw Loan Rule
A. Size Eligibility
The Economic Aid Act made eligibility requirements for Second Draw Loans narrower than the requirements for First Draw Loans. A borrower is generally eligible for a Second Draw Loan if it has 300 or fewer employees (as compared to 500 or fewer employees for First Round Loans). Business entities that are assigned a NAICS code beginning in 72, generally restaurants and hotels, are eligible to receive a Second Draw Loan if they employ no more than 300 employees per physical location and meet the revenue reduction and other eligibility criteria. This same standard also applies to eligible news organizations.
B. Reduction in Revenue Requirement
To be eligible for a Second Draw Loan, the borrower must have experienced a revenue reduction of 25% or more in 2020 relative to 2019. In general, the revenue reduction is calculated by comparing a borrower’s quarterly gross receipts for one quarter in 2020 with the borrower’s gross receipts for the corresponding quarter in 2019. Alternatively, a borrower that was in operation for all of 2019 may meet this revenue reduction test if it had a reduction in annual receipts of 25% or more in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating the revenue decline.
There are other methods to meet the revenue reduction requirement for businesses that were not in business for all of 2019. An applicant that was not in business during the first or second quarter of 2019, but was in business during the third and fourth quarters of 2019, will be deemed to meet the 25% reduction requirement if the borrower can demonstrate a 25% reduction in gross receipts in any quarter in 2020 as compared to the third or fourth quarter of 2019. Similarly, an applicant that was only in business during the fourth quarter of 2019 can meet the revenue reduction test if it experienced a 25% reduction in gross receipts in any quarter in 2020 as compared to the fourth quarter of 2019. Finally, an applicant that was not in business in any quarter in 2019, but was in business by February 15, 2020, can meet the test by showing a 25% reduction in revenue in the second, third, or fourth quarter of 2020 as compared to the first quarter in 2020.
The Second Draw Loan Rule defines “gross receipts” to include “all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.”Borrowers have to consider the gross receipts of affiliates in the revenue reduction calculation, including affiliates acquired during 2020.
The amount of any forgiven First Draw Loan does not have to be included in gross receipts.
C. Full Use of First Draw Loan
Additionally, Second Draw Loans may only be made to borrowers that received a First Draw Loan and have used, or will use, the full amount of the First Draw Loan for authorized expenses on or before disbursement of the Second Draw Loan.(But there is no requirement that a borrower has to apply for forgiveness for the First Draw Loan in order to be eligible to receive a Second Draw Loan.)
As discussed further below, certain borrowers may increase the amount of their First Draw Loan if they are eligible for a higher loan amount due to changes in the rules or for other limited reasons. The requirement to have used the full amount of the First Draw Loan before disbursement of the Second Draw Loan applies to any increased loan amount received on a First Draw Loan. Thus, it is important to consider whether it makes sense for a borrower to increase the amount of a First Draw Loan if it may mean the borrower won’t be able to use the full amount of the First Draw Loan and receive the Second Draw Loan before the program expires on March 31, 2021.
D. Affiliation Rules
The same affiliation rules that applied to First Draw Loans apply to Second Draw Loans.The affiliation rules with respect to eligibility for a Second Draw Loan are waived for accommodation and food services businesses and eligible news organizations. The SBA previously adopted a religious exemption to the affiliation rules, which also applies to Second Draw Loans.
E. Excluded Entities
Any business that is ineligible to receive a First Draw Loan is also ineligible for a Second Draw Loan. The Economic Aid Act expanded the categories of prohibited borrowers to include the following:
The SBA also clarifies that a business that has permanently closed is prohibited from obtaining a Second Draw Loan. Any borrower that has temporarily closed or suspended its business remains eligible for a Second Draw Loan.
F. Payroll Calculations—Maximum Loan Amounts
In general, the maximum loan amount for a Second Draw Loan is the lesser of $2 million or 2.5 months of the borrower’s average monthly payroll costs. (Businesses in the accommodation and food services sector are eligible for a loan of up to 3.5 months of average monthly payroll costs.)
The Economic Aid Act also provided specific tailored methodologies for calculating the maximum loan amount for certain categories of borrowers. These categories include borrowers that are seasonal employers, borrowers that did not exist during the one-year period before February 15, 2020, farmer or ranchers, self-employed borrowers, and partnerships.
Businesses that are part of a single corporate group may not receive more than $4 million of Second Draw Loans in the aggregate. For purposes of the PPP, businesses are part of a single corporate group if they are majority owned, directly or indirectly, by a common parent. It is the responsibility of an applicant to notify the lender if the applicant has applied for or received PPP loans in excess of the permissible amount. Failure to do so will be considered an unauthorized use of PPP funds and the loan will not be eligible for forgiveness.
G. Application and Documentation Requirements
Applicants will be required to submit SBA Form 2483-SD, which is the new application form for Second Draw Loans.
The documentation required to substantiate an applicant’s payroll cost calculations is generally the same as the documentation required for First Draw Loans. Applicants are not required to submit any documentation to substantiate payroll costs if the applicant used the same payroll information to calculate its Second Draw Loan as it used for the First Draw Loan and the lender is the same.
Revenue Reduction Documentation
For loans with a principal amount greater than $150,000, the applicant must also submit documentation that allows the lender to verify the revenue reduction requirement described above. Such documentation may include relevant tax forms, including annual tax forms. If relevant tax forms are not available, the borrower may submit quarterly financial statements or bank statements.
For loans with a principal amount of $150,000 or less, the applicant is not required to submit any documentation with the application to support the revenue reduction requirement. Instead, the applicant will only have to certify that it meets the revenue reduction requirement under any of the permissible methodologies. However, borrowers will be required to submit the documentation to substantiate the revenue reduction certification when submitting an application for loan forgiveness. If a borrower does not submit an application for loan forgiveness, the documentation must be provided upon the SBA’s request.
H. Lender Requirements
Lenders approved to make First Draw PPP Loans are authorized to make Second Draw Loans under the same terms and conditions applicable to First Draw Loans.Though this is addressed in the Consolidated PPP Rule, lenders are required to register in SAM.gov within 30 days from the first PPP loan disbursement made by the lender after December 27, 2020.We encourage all lenders to register early to avoid any delays due to system issues.
In terms of underwriting, the lender’s obligations are limited to the following:
Lender Hold Harmless
Lenders may rely on any certification or documentation submitted by an applicant for a PPP loan that is submitted pursuant to all PPP rules and guidance where the applicant attests that it has accurately provided the certification or documentation in accordance with all statutory requirements and guidance related to PPP loans. With respect to a lender that relies on such a certification or documentation related to a Second Draw Loan, an enforcement action may not be taken against the lender and the lender will not be subject to any penalties relating to loan origination or forgiveness if: (i) the lender acts in good faith relating to loan origination or forgiveness of the Second Draw Loan based on that reliance; and (ii) all statutory and regulatory requirements applicable to the lender are satisfied with respect to Second Draw Loans.
While the statutory lender hold harmless is certainly welcome, it is mostly a repetition of the same general hold harmless provision that was contained in earlier interim final rules rather than the broader lender hold harmless that many were anticipating.
The SBA will pay lenders fees for processing Second Draw Loans in the following amounts:
I. Loan Forgiveness
Second Draw Loans are eligible for forgiveness on the same terms and conditions as First Draw Loans. The only difference with respect to the forgiveness process for Second Draw Loans relates to loans for less than $150,000, where borrowers will be required to provide documentation to satisfy the revenue reduction requirement.
The SBA intends to issue a third interim final rule consolidating all requirements for the loan forgiveness and the loan review process.
J. Loans to Borrowers with PPP Loans Under SBA Review
If the SBA is conducting a review of a First Draw Loan, the lender will receive notice from the SBA when the lender submits an application for a guaranty of a Second Draw Loan. The SBA will not issue a loan number until the issue related to the First Draw Loan is resolved. Borrowers are not disqualified from applying for a Second Draw Loan if their First Draw Loan is under review, but will have to wait until the SBA resolves the issue to receive their loan funds. The SBA will set aside funds for potential Second Draw Loans where borrowers have unresolved First Draw Loans, so borrowers are encouraged to apply early in order to avoid missing out on Second Draw Loans.
II. Consolidated PPP Rule
This section describes some of the significant changes outlined in the Consolidated PPP Rule. The standard loan terms were not changed by the Economic Aid Act, both First Draw Loans and Second Draw Loans carry a 1% interest rate with a maturity of 5 years. Treasury exercised its authority under the CARES Act to allow borrowers of First Draw Loans to use 2019 or 2020 to calculate their maximum loan amount—this ensures new borrowers are able to obtain funding on terms commensurate with borrowers that obtained PPP loans in 2020.Because most of the rules remain the same, we do not repeat those here.
D. Increased Loan Amount Due to Rule Changes
As mentioned above, there are situations where a borrower may request that its First Draw Loan amount be increased as a result of changes in the rules. Borrowers may request to have their First Draw Loan amount increased if:
Borrowers are required to provide lenders with the necessary documentation to support the calculation of the loan increase. Any request for an increase must be submitted on or before March 31, 2021, and approval is subject to the availability of funds, like all First and Second Draw Loans.
What is not clearly addressed in the Consolidated PPP Rule is whether lenders are required to assist borrowers with increasing First Draw Loan amounts. Due to the operational burden placed on lenders and the significant uncertainty created by constantly changing program requirements, many lenders are considering not participating in the new round of PPP or to participate in a more limited capacity. Arguably, the SBA cannot force lenders to make new loans or increase First Draw Loan amounts, but lenders may want to make a good faith effort to do so in order to assist their small business customers as well as to avoid potential borrower disputes. Lenders are required to submit the SBA Form 1502 information within 20 calendar days after a PPP loan increase is approved, following the standard reporting process.
E. Eligible Payroll and Non-Payroll Expenses
There are several new categories of eligible non-payroll expenses, including:
The Consolidated PPP Rule also clarifies that covered payroll expenses includes group life, disability, vision, or dental insurance—which should be aggregated with other payroll costs when determining whether a borrower meets the 60% threshold required to obtain full forgiveness of its PPP loan.
Borrowers are specifically prohibited from using PPP proceeds for lobbying activities or expenditures.
F. New Eligible Entities
Certain new organizations are now specifically eligible for First and Second Draw Loans, including housing cooperatives, eligible 501(c)(6) organizations, and eligible destination marketing organizations, as long as the business employs no more than 300 employees.
G. Loan Forgiveness
The SBA is expected to release a comprehensive rule covering the loan forgiveness and loan review process, but the Consolidated PPP Rule does outline the streamlined forgiveness process for loans of $150,000 or less. In general, an eligible borrower that received a loan for less than $150,000 will not be required to submit any application or documentation in addition to the one-page forgiveness application. Pursuant to the Economic Aid Act, the SBA is required to release the streamlined forgiveness application within 24 days of enactment.The documentation retention requirements were also lowered, where borrowers are only required to retain employment records for four years and all other records for three years after submission of the forgiveness application.
H. Agent Fees
The Economic Aid Act and the Consolidated PPP Rule did not change the amount of agent fees, but they do clarify that lenders are only responsible for paying fees to an agent for services for which the lender directly contracts with the agent. Additionally, the references to agent fees are maximum amounts and are not minimums which lenders are required to pay if they do decide to contract with an agent.
III. Closing Considerations
The new interim final rules create a number of significant changes, the fact that lenders and borrowers can now rely on two rules instead of twenty-three rules (or what would now be twenty-five rules) is certainly a step in the right direction. We expect to see a number of updates to the various Frequently Asked Questions that have been issued by the SBA and Treasury in order to comply with the Economic Aid Act and new interim final rules. It remains to be seen how much demand there is from borrowers for PPP loans, both First and Second Draw, as well as how many lenders are interested in dipping their toes back in the PPP pool.
While not specifically related to the newly issued interim final rules, the FDIC recently released a Financial Institution Letter regarding the FDIC’s interim final rule granting temporary relief from the Part 363 Audit and Reporting requirements for banks experiencing asset growth as a result of their participation in pandemic-related stimulus programs.The FIL reminds lenders that the FDIC reserves the right to require a bank to comply with one or more Part 363 requirements if the FDIC determines that asset growth was related to merger or acquisition transactions. Banks that have been actively involved in the PPP that are considering, or have recently undergone, a merger or acquisition should be mindful that the FDIC may decide to rescind the temporary relief as it applies to the bank.
The SBA will only accept PPP loan applications from community financial institutions for at least the first two days when the PPP loan portal re-opens. For purposes of early access, community financial institutions includes community financial depository institutions, minority deposit institutions, certified development companies, and microloan intermediaries with assets of less than $10 billion. Additional information is available here: https://home.treasury.gov/system/files/136/Guidance-on-Accessing-Capital-for-Minority-Underserved-Veteran-and-Women-Owned-Business-Concerns%20.pdf.
Pub. L. 116-260, available at: https://www.congress.gov/bill/116th-congress/house-bill/133/text.
The Consolidated PPP Rule is available at: https://home.treasury.gov/system/files/136/PPP-IFR-Paycheck-Protection-Program-as-Amended-by-Economic-Aid-Act.pdf.
The Second Draw Loan Rule is available at: https://home.treasury.gov/system/files/136/PPP-IFR-Second-Draw-Loans.pdf.
Eligible news organizations include those that are majority owned or controlled by a NAICS code 511110 or 5151 business or a nonprofit public broadcasting entity with a trade or business under NAICS code 51110 or 5151.
This method is intended to provide some relief to small borrowers that may not have quarterly revenue information readily available.
The definition of gross receipts is consistent with the definition of receipts in 13 C.F.R. 121.104 of the SBA’s size regulations. For an eligible nonprofit organization, veteran organization, or destination marketing organization, gross receipts has the meaning in section 6033 of the Internal Revenue Code. Gross receipts does not include the following: taxes collected for and remitted to a taxing authority; proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.
This means borrowers must have used all First Draw Loan funds on forgivable expenses, which arguably also means that no less than 60% of the First Draw Loan funds should have been used for eligible payroll expenses.
The existing affiliation rules are summarized in Section 3 of the Consolidated PPP Rule.
These are newly eligible businesses that were not eligible in the previous round of the PPP.
“Publicly traded company” is defined as an issuer, the securities of which are listed on an exchange registered as a national securities exchange under section 6 of the Securities and Exchange Act of 1934.
The specific methodologies for calculating the maximum loan amount for these types of entities are outlined in Section IV(f) of the Second Draw PPP Loan Rule.
This is specifically noted Section B.3(f) of the Consolidated PPP Rule.
The SBA has not yet released the new application form as of the release of this alert.
Lenders that are currently designated in Troubled Condition by their primary Federal regulator or are subject to a formal enforcement action with their primary Federal regulator that addresses unsafe or unsound lending practices are not eligible to make PPP loans. See, Section C.1.c. of the Consolidated PPP Rule.
For loans of $150,000 or less where the applicant does not provide the documentation to substantiate the revenue reduction calculation, the lender will have to perform the good faith review when the borrower applies for forgiveness. If the lender identifies errors in the borrower’s calculation or a material lack of substantiation in the supporting documents, the lender should work with the borrower to remedy the issue.
Specific BSA requirements are outlined in subsection (C)(3)(d) of the Consolidated PPP Rule. Banks are generally expected to continue following existing PPP protocols when making PPP loans to new customers. PPP loans for existing customers will not require re-verification under the applicable BSA requirements, unless otherwise indicated by the institution’s risk-based approach to BSA compliance.
The hold harmless does expand the language from the first interim final rule with respect to not limiting the language that no enforcement actions may be taken by the SBA, which now seems to be more intended to cover any governmental body.
The Consolidated PPP Rule also created a change allowing farmers and ranchers to elect 2019 or 2020 as their base period.
Lenders should submit a requests electronically through the SBA’s E-Tran Servicing website.
Previous guidance issued for seasonal employers stated as follows: “Under section 1102 of the CARES Act, a seasonal employer may determine its maximum loan amount for purposes of the PPP by reference to the employer’ average total monthly payments for payroll ‘the 12-week period beginning February 15, 2019, or at the election of the eligible [borrower], March 1, 2019, and ending June 30, 2019.’ Under this interim final rule issued pursuant to section 1109 of the Act, a seasonal employer may alternatively elect to determine its maximum loan amount as the average total monthly payments for payroll during any consecutive 12-week period between May 1, 2019 and September 15, 2019.” 85 Fed. Reg. 23917 (April 30, 2020).
This relates to requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration (OSHA), or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020, and ending on the date on which the national emergency with respect to the COVID-19 expires.
 This includes: (i) lobbying activities, as defined in section 3 of the Lobbying Disclosure Act of 1995 (2 U.S.C. 1602); (ii) lobbying expenditures related to a State or local election; or (iii) expenditures designed to influence the enactment of legislation, appropriations, regulation, administrative action, or Executive order proposed or pending before Congress or any State government, State legislature, or local legislature or legislative body.
Certain additional restrictions apply to these types of businesses, including: (i) the organization should not receive more than 15% of receipts from lobbying; (ii) lobbying activities may not comprise more than 15% of overall activities; (iii) the cost of lobbying activities did not exceed $1 million during the most recent tax year that ended before February 15, 2020 (this is limited to 501(c)(6) organizations); and (iv) the organization is registered as a 501(c) organization, a quasi-governmental entity or a political subdivision of a state or local government (this applies specifically to destination marketing organizations). Professional sports leagues and organizations with the purpose of promoting or participating in a political campaign or other political activity are not eligible.
The new forgiveness application will likely look substantially similar to the current Form 3508S.
 Agent fees may not exceed 1% for loans of up to $350,000; .5% for loans of more than $350,000 and less than $2 million; and .25% for loans of at least $2 million.