Treasury Market Guidance on Paycheck Protection Program Loans

On Tuesday, the Treasury Department released guidelines to the market in the form of a Top-Line Overview of the Paycheck Protection Program (PPP), Lender Information Sheet, Borrower Information Sheet and Application Form, which can be found here: https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses. This guidance is not firmly established and we expect additional guidance, clarification or reconsideration of interpretations to come. For now, however, the market guidance is noteworthy for several reasons as it is informative, clarifies and even contradicts the statutory provisions contained in the CARES Act. Specifically, below are the notable points of information, clarification and contradiction:

• The loan application period starts Friday, April 3, 2020 for small businesses and sole proprietorships and Friday, April 10, 2020 for independent contractors and self-employed individuals.
  • All borrowers are encouraged to apply early due to the cap on the amount of funding available for the PPP program overall.
  • The application form is published online at https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf
• The market guidelines streamlined underwriting for lenders.
• The maximum amount calculation of a PPP loan has been clarified to be up to two months of a potential borrowers average monthly payroll costs from the last year plus an additional 25 percent of that amount. (This wording differs from the language in the CARES Act and the application, which says the loan amount is “2.5 times” payroll costs; but the math appears to work out the same.)
• The Treasury has set forth a term of two years for PPP loans (down from a maximum of a four year term).
• The Treasury has set a deferment term of 6 months and no longer (the CARES Act contemplated deferment up to one year)
• Finally, the guidelines seem to contradict the express language of the CARES Act by ambiguously stating: “it is anticipated that not more than 25 percent of the forgiven amount may be for non-payroll costs.” Possibly, this statement is merely an indication of an estimate of how much they expect borrowers to capture in forgiveness with mortgage/debt interest, payments on rent obligations and utility expenses. The CARES Act itself does not contain any such limitations on the forgivable use of funds but does have a reduction in the amount forgiveness triggered by any reduction of 25 percent or more in salaries of employees paid less than $100,000 per year. 

The Department must still issue formal implementing regulations for the PPP loan program. This guidance makes clear that payroll maintenance is likely to be a key requirement in determining how much of the loan is forgiven. It is also clear the Department expects demand for these loans to be high and it is attempting to expedite implementation of this massive emergency relief program for eligible small businesses. We will continue to monitor all actions by the Department as this program is implemented.