Paycheck Protection Program: SBA Issues Limited Guidance for Borrowers and Lenders

April 1, 2020

By Robert T. SmithBlake D. Lewis and Katherine C. Campbell

The SBA has issued limited guidance for borrowers and lenders implementing provisions of the Paycheck Protection Program (PPP) as recently enacted. This alert summarizes that guidance. 

 Application Form

The guidance includes a much-anticipated application form. Applicants are instructed to complete the form and return it to their chosen lender. The form includes basic information that any lender would request, in addition to certifications specific to the Paycheck Protection Program as well as any SBA guaranteed loan. 

Points to consider about the application: 

  • Any owner of 20 percent or more of the equity interests of an applicant is required to join with the borrower in making several certifications and disclosures, including: 
  • That neither party is presently involved in any bankruptcy proceeding or ineligible to participate in transactions with the Federal government
  • That no party has defaulted on a government guaranteed loan during the preceding 7-year period 
  • Whether the applicant has also received an SBA Economic Injury Disaster Loan
  • Whether any owner is currently on probation or parole
  • That the borrower will purchase only American-made equipment and products “to the extent feasible” – a provision not contained in the CARES Act
  • That loan funds will be used only for payroll costs, rent, utilities and mortgage interest payments
  • The application further requires the borrower and owners to certify that they “anticipate” that not more than 25 percent of the forgiven loan amount will be used for non-payroll costs. While we expect that most borrowers will satisfy this provision given high payroll costs, this requirement is not included in the CARES Act.

    Information for Borrowers

The SBA has issued an “Information Sheet” for borrowers under the Paycheck Protection Program. 

While much of the information included is simply a restatement of general provisions of the legislation, a few points should be considered: 

  • The information sheet states that “All loan terms will be the same for everyone.”  
  • While the CARES Act establishes certain parameters for PPP loans (for example, a maximum interest rate of 4 percent and maximum loan term of 10-years), it does not specifically require that all lenders offer the same terms. This guidance clarifies that the SBA will require that all terms are identical, regardless of which lender a borrower chooses.
  • The guidance states that “Payroll costs are capped at $100,000 on an annualized basis for each employee.”  This addresses an ambiguity in the CARES Act as to whether the $100,000 cap applies only to “salary” (as stated in the act) or to all payroll costs (which would include salary, wages, benefits and retirement). Based on this guidance, it appears that the SBA will require that borrowers include no more than $100,000 in total costs (salary, commission, benefits, etc.) for any single employee.
  • Note, however, that later in the guidance there is a reference seeming to indicate that the $100,000 cap applies to “Salary, wages, commissions, or tips” but not other benefits. We are seeking clarification on this point.
  • The information sheet repeats the statement anticipating that not more than 25% of the forgiven loan amount will be used for non-payroll costs.
  • Applications by small businesses and sole proprietorships can be made beginning April 3, 2020.
  • Applications by independent contractors and self-employed individuals can be made beginning April 10, 2020 (note that there is no clarification on the distinction between a “sole proprietorship” and a “self-employed individual”). 
  • Applications may be submitted through any existing SBA lender or any other bank that has been approved to participate in the PPP.
  • Requests for loan forgiveness are to be submitted to the lender and a decision must be communicated to the borrower within 60 days of that request.  
  • The interest rate on all PPP loans will be a fixed rate of 0.50 percent.  
  • The term of all PPP loans will be 2 years.  

Information for Lenders

The SBA also issued a separate Information Sheet for lenders. 

The pertinent portions are as follows: 

  • In addition to existing SBA-certified lenders, all federally insured depository institutions and credit unions are eligible to participate, in addition to Farm Credit System institutions.
  • Non-SBA lenders that wish to participate should submit an application to the SBA at [email protected]
  • The guidance references the limited underwriting required, to include verification that the borrower was in business as of February 15, 2020, had employees and paid payroll taxes, and verification of average monthly payroll costs.  
  • All Bank Secrecy Act requirements must be followed. 
  • Processing fees will be as follows, based on the balance of the loan at the time of final disbursement:
    • Loans $350,000 and less:  5.00 percent
    • Loans greater than $350,000 to $2 million:  3.00 percent
    • Loans above $2 million:  1.00 percent
  • Lenders are prohibited from collecting any fees from the borrower.
  • “Agents” may be compensated but only by the lender – agents may not collect fees from the borrower.
    • For this purpose, “agents” include any (i) attorney, (ii) accountant, (iii) consultant, (iv) anyone assisting the borrower in preparing the loan application, (v) anyone assisting the lender in originating, disbursing, servicing, liquidating or litigating any SBA loan, or (vi) loan broker.
    • Agent fees are listed as follows: 
  • §  Loans $350,000 and less:  1.00 percent
  • §  Loans greater than $350,000 to $2 million: 0.50 percent
  • §  Loans above $2 million:  0.25 percent

We are actively advising clients in the interpretation of the CARES Act and related legislation. Please contact one of the attorneys listed above should you need any assistance on these or any other legal matters. 

Blake D. Lewis is an associate in the firm's Mergers and Acquisitions Practice Group. Blake's practice focuses on taxation, mergers and acquisitions, real estate transactions, tax controversies, entity formation and governance, and franchising.

Katherine C. Campbell is an associate in the Litigation Practice Group at Friday, Eldredge & Clark. She serves as litigation counsel for individuals and businesses in complex business and commercial disputes. 

Robert T. Smith heads the Finance and Commercial Transactions Practice Group.His diverse corporate practice focuses on representing companies and financial institutions in general business, transactional, securities and regulatory matters. 

Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.