June 4, 2020
Stroock Special Bulletin
Richard L. Fried, Kerry T. Cooperman
On June 3, 2020, by unanimous voice vote, the Senate passed the House version of a bill to amend certain provisions of the Paycheck Protection Program (“PPP”). This bill, called the Paycheck Protection Flexibility Act (the “Flexibility Act”), was passed by the House on May 28 by a vote of 417-1, and now goes to the President, who is expected to sign it.
The following is a summary of the main features of the Flexibility Act.
- Loan maturity (for the portion not forgiven) is increased from two years to five years. Note: This change applies only to PPP loans originated on or after the enactment of the Flexibility Act. For existing loans (which is every outstanding PPP loan), the Flexibility Act states that “[n]othing in this Act … shall be construed to prohibit lenders and borrowers from mutually agreeing to modify the maturity terms of a covered loan … to conform with requirements of this section.” Accordingly, while they are not required to do so, participating PPP lenders may agree to extend (up to five years in the aggregate) the maturity date of loans that originated before enactment of the Flexibility Act. The other features of the Flexibility Act described below apply to all PPP loans, regardless of when originated.
- Borrowers may elect to extend from eight weeks to 24 weeks (but not later than December 31, 2020) the period during which they can use the PPP loan proceeds. Borrowers with an existing PPP loan may elect to continue using the eight-week covered period. The express terms of the Flexibility Act also appear to extend from June 30, 2020, to December 31, 2020, the date by which an eligible business may apply for a PPP loan. This caused Sen. Ron Johnson to block passage of the bill until Sen. Mitch McConnell agreed to add a letter to the Congressional Record clarifying that June 30 remains the application deadline.
- Reduces to 60% (from 75%) the portion of the PPP loan proceeds that must be used for payroll costs to qualify for loan forgiveness. Up to 40% of the loan proceeds may be used for interest on mortgage debt, rent and utilities. The types of permitted uses of loan proceeds were not expanded. (Note: The language of the Flexibility Act appears to suggest that no portion of the loan will be forgiven unless borrowers spend at least 60% of the PPP loan proceeds on payroll. Prior to enactment of the Flexibility Act, the amount eligible for forgiveness was reduced — but not eliminated — if less than 75% of the PPP loan proceeds was used for payroll costs. However, Rep. Chip Roy, who co-sponsored the bill in the House, stated that the intent is that the Flexibility Act preserves the preexisting sliding scale at 60%. Sens. Marco Rubio and Susan Collins added that technical tweaks could be made to the bill to restore the sliding scale.)
- Borrowers have until December 31, 2020, to restore their workforce levels and wages to requisite levels in order to qualify for full loan forgiveness. The prior deadline was June 30, 2020.
- Borrowers may achieve full loan forgiveness even if they do not fully restore their workforces if they can document in good faith that, during the period from February 15, 2020, to December 31, 2020, (i) they could not rehire individuals who were employees on February 15, 2020, or hire similarly qualified employees for unfilled positions on or before December 31, 2020, or (ii) they were unable to return to the same level of business activity at which such business was operating before February 15, 2020, because of COVID-19-related operating restrictions.
- Payments due on a PPP loan are deferred until the date on which the loan forgiveness amount is remitted to the lender (previously, payments were deferred for six months following the origination of the loan). If a borrower does not apply for loan forgiveness within 10 months after the last day of the covered period for loan forgiveness, the borrower must then start making payments of principal and interest on its loan. The Flexibility Act does not address when a borrower must repay its PPP loan if it applies for loan forgiveness and such request is denied.
- The Flexibility Act allows businesses that took a PPP loan to delay payment of their payroll taxes, which previously was prohibited.
For More Information:
Richard L. Fried
Kerry T. Cooperman
This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.