June 12, 2020

The End of PPP: 5 Changes to Consider


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The second round of the Paycheck Protection Program (PPP) has lasted longer than what many had initially assumed. After the first round of funding was exhausted in a matter of days, the Small Business Administration (SBA) and Congress went back to the drawing board with new financing and requirements for the program. An interim final rule was issued by the SBA on June 11 that clarified the remaining time to apply and implemented adjustments to the program timelines.

The PPP closes to new borrowers on June 30, 2020, and the SBA has issued new application forms to be used for all borrowers who are applying, or have applied, for a loan since June 5, 2020.

Additionally, the interim final rule contains many changes that both lenders and borrowers will want to consider:

      1. Borrowers that use less than 60% of their PPP loan amount for payroll costs during the forgiveness covered period will still be eligible for partial loan forgiveness. As a reminder, 60% of the PPP loan amount must be used to cover payroll costs to be eligible for total loan forgiveness, assuming that the balance of the loan was used for other covered expenses such as rent payments, mortgage interest, or utility payments. Early borrowers who based projections on the prior need to use 75% of their loan proceeds for payroll may wish to re-evaluate the use of their proceeds and begin work on a fresh forgiveness calculation.
      1. The end date of the “covered period” for a PPP loan was extended from June 30, 2020 to December 31, 2020. The “covered period” refers to the time during which the borrower must utilize the loan proceeds to qualify for forgiveness.
      1. New legislation extends the loan forgiveness period from eight to 24 weeks. Borrowers may opt to keep the forgiveness period at eight weeks for loans made prior to June 5, 2020. This change may prove onerous for both borrowers and lenders: Lenders will now process forgiveness applications based on different covered periods (8 or 24 weeks), but under revised forgiveness guidelines, while borrowers will need to re-baseline their forgiveness calculations based upon new percentages and/ or the revised timeline. We expect most borrowers to take advantage of the longer covered period to ensure maximum loan forgiveness.
      1. Loans made on or after June 5, 2020 will have a five-year maturity period, and the SBA provided an option to extend the maturity date of loans made prior to that from two to five years at the mutual agreement of the borrower and lender. The change in maturity date applies to loans with unforgiven balances, and the interest rate on the loan stays fixed at 1%. While it appears that changing loan terms may be the most impactful modification to the program to date and is currently overlooked, some outstanding questions remain:
          • Will lenders be receptive to extending the term of unforgiven loans made earlier in the PPP process, or will they stick to the two-year term?
          • With respect to extensions, will lenders treat current customers differently than new borrowers?
          • How will the secondary market react to the change – will a longer term be attractive to those looking to purchase these loans on the secondary market?
      1. If a borrower submits its forgiveness application within 10 months of the end of the loan forgiveness period, they will not have to make any payments on the loan before the date the SBA remits the forgiven amount to the lender. The SBA effectively provides borrowers with forbearance until the forgiveness process is played out in full and lenders have been reimbursed. This change serves to protect borrowers from delays in SBA processing timelines but will likely cause these loans to trade below par, and perhaps significantly below par, on the secondary market.

 

The PPP program is massive in size and scope; processing forgiveness applications and ensuring an appropriate control environment is paramount. For lenders looking to “stay out of the headlines,” our “SOOTHE” program combines a robust control environment with automation to ensure that lenders can optimize their performance in a well-controlled environment. For more details, click here.

 

Our latest guidebook provides leaders with a roadmap to enhance resiliency plans, simplify operations, address new financial requirements, and more. To download, please click the link below.