How Lenders Are Affected by PPP Forgiveness Changes Passed by Congress

Mary Ellen Biery
June 4, 2020
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Updated to include SBA and U.S. Treasury joint statement June 8 and other details.

Just when lenders were starting to get a handle on the Paycheck Protection Program’s loan-forgiveness process, much of it is changing.

Under the Paycheck Protection Program Flexibility Act signed June 5, PPP borrowers will have more time to incur forgivable expenses – 24 weeks vs. 8 – and will have to spend 60% of loan proceeds on payroll costs instead of 75% to get full forgiveness of the loan. Borrowers who already have loans retain the option to use the 8-week covered period ending June 30 (or alternative payroll period) allowed under the CARES Act and regulatory guidance.

Payments deferred until forgiven portion received by lender

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The new law also lets borrowers defer loan payments until lenders receive from the SBA whatever portion will be forgiven. If a borrower doesn’t apply for PPP forgiveness, they must begin paying on loans 10 months after the covered period ends. Under previous guidance, payments were deferred for six months from the forgiveness decision.

For lenders, the changes will mean waiting for the SBA and Treasury to issue new guidance, new PPP loan forgiveness application forms (SBA Form 3508), and new PPP loan application forms (SBA Form 2483). How long that will take is unclear. Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza said in a joint statement June 8 that their offices would issue new rules, guidance, and applications “promptly” but didn’t elaborate on the timing. They did, however, confirm that borrowers would be eligible for partial loan forgiveness despite the new changes to the PPP, saying at least 60 percent of the loan forgiveness amount must have been used for payroll costs. 

The changes will have other impacts for lenders as well, according to Paula King, CPA, Senior Advisor with Abrigo. “While flexible for the borrower, the increase in weeks for incurring expenses will mean a longer time that these loans remain on the lender’s books before it can be determined how much of the loans are forgiven for borrowers using the extended 24-week covered period," she said. “However, the probability that more of a loan will be forgiven is generally improved with the extension to 24 weeks and additional ‘FTE exemptions,’ which at this point, have not been quantified.”

Principal and interest payments will be deferred longer, too, so lender cash flows will be impacted accordingly, she noted. That’s especially the case for PPP loans originated after June 5, since they will have a 5-year repayment term under the new law. Lenders aren’t required to change existing loans, but borrowers and lenders could mutually agree to modify an existing loan to the 5-year term.

In addition, tracking expenses over 24 weeks rather than 8 weeks will mean more documentation for the lender to review, unless the “good faith review” guidance is loosened, King said. “We would anticipate the need for additional resources – time and personnel – devoted to this review,” she added.

While many borrowers will undoubtedly want to take the extra time to restore payrolls, others may not, King said.

“If the borrower has met the requirements of the 8-week covered or alternative payroll covered period for full or even partial forgiveness, there are benefits to going ahead and filing the forgiveness application,” she said. “For example, if the business situation deteriorates after June 30, the borrower will be in a better outcome if he/she files using the 8-week period."

At this point, however, lenders have not received instructions on how to submit their loan forgiveness decisions to the SBA in order to receive payments on the forgiven portion, so they would be unable to process them for borrowers. Lenders are encouraged to continue working with borrowers on what their financial institution's forgiveness process will be and on tracking eligible expenses under current guidance.

King said she was not surprised by the extended covered period. “Eight weeks at the beginning of this PPP process may have seemed sufficient, but with states opening back up at various paces and staging and delays of the businesses openings referred to as non-essential, the longer covered period is a welcome update.”

The legislation also includes additional “safe harbors,” or ways borrowers can gain exemption from cuts to their loan forgiveness amounts even if their workforces have decreased. One is that borrowers can demonstrate either an inability to rehire terminated employees or similarly qualified employees for unfilled positions by Dec. 31. Another, more vague exemption involves the borrower documenting an inability to return to the same level of business activity that the business was operating at before Feb. 15 due to compliance with requirements or guidance from the U.S. Secretary of Health and Human Services, the Director of the U.S. Centers for Disease Control and Prevention, or the U.S. Occupational Safety and Health Administration during the period beginning March 1 and ending Dec. 31. King adds, “It will be interesting to see how this will be quantified or otherwise supported for the forgiveness applications.”

September 22-23, 2020

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No mention of simplified application

Congress authorized $659 billion to be spent on loans for the Paycheck Protection Program, and through June 8, $511.5 billion has been approved for 4.5 million loans. Nearly 5,500 lenders have participated in the program, which has produced an average loan size of $112,730, according to the SBA.

Lenders have been pushing for Congress or the SBA to offer blanket forgiveness for loans under a certain size or at least to provide smaller borrowers with a simplified forgiveness application, but whether that will happen remains unclear. Rep. Andy Barr (R-KY) and 55 other lawmakers in late May sent a letter to the SBA and U.S. Treasury asking them to develop a streamlined forgiveness application, much like the IRS Form 1040EZ for taxpayers, for PPP loans under $350,000. A spokesperson for Barr said June 4 the offices had not officially responded to the letter.

The Paycheck Protection Program Flexibility Act didn’t include any such provision for blanket forgiveness for loans under a certain threshold. The SBA and Treasury statement on June 8 only mentioned that the agencies are implementing several specific “legislative amendments to the PPP” and did not mention any other planned changes to application forms or the forgiveness process.

About the Author

Mary Ellen Biery

Mary Ellen Biery is a Senior Writer and Content Specialist at Abrigo.

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Abrigo is a leading technology provider of compliance, credit risk, and lending solutions that community financial institutions use to manage risk and drive growth. Our software automates key processes — from anti-money laundering to fraud detection to lending solutions — empowering our customers by addressing their Enterprise Risk Management needs.

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