Paycheck Protection Program Flexibility Act eases loan forgiveness restrictions

On Friday, June 5, President Trump signed a Paycheck Protection Program (PPP) reform bill into law, which will ease the restrictions on PPP loan forgiveness. There has been bipartisan consensus building for the last several weeks that Congress needed to take action to amend the PPP program. The “Paycheck Protection Program Flexibility Act of 2020” amends sections of the Small Business Act (SBA) and CARES Act in several significant ways that will improve the loan forgiveness process for churches and religious organizations across the country. The PPP Flexibility Act is welcome news for faith-based groups that were struggling to maximize their loan forgiveness amounts under the old PPP restrictions. Here are five changes in the PPP Flexibility Act borrowers should know about.

1) Extension of covered period to 24 weeks

Under the PPP section of the CARES Act, the covered period was defined as the earlier of the day after eight weeks from the loan origination or June 30, 2020. Under the PPP Flexibility Act, however, the dates of the original covered period have been changed and the term “Covered Period” is now the earlier of the day after 24 weeks from the loan origination or December 31, 2020. This extension means that practically every church or religious organization that borrowed PPP funds will have ample time to exhaust those funds on eligible expenses and maximize their loan forgiveness. If borrowers desire to follow the original covered period of eight weeks, they may elect to do so.

2) New 60/40 rule

Though the CARES Act did not set a limit on what percentage of PPP funds must be used on payroll costs, the Small Business Administration did. In its Interim Final Rules, the SBA stated that costs for rent, interest, and utility payments “cannot exceed 25% of the loan forgiveness amount.” This meant that, previously, 75% of the total amount of loan forgiveness must be based on payroll cost expenses. 

Under the PPP Flexibility Act, the non-payroll portion of a forgivable covered loan amount is increased from the current 25% up to 40%. This means that borrowers, “shall use at least 60 percent of the covered loan amount for payroll costs…” Interest on a mortgage obligation, rent, and utilities are non-payroll expenses eligible for forgiveness under the PPP. The increase to the percentage of forgivable non-payroll expenses provides flexibility for how borrowers spend funds and eases the restrictions the SBA placed on the program.

3) Maturity date of loan increased to five years

Though the changes to the covered period and requirements on how the funds must be spent mean that most borrowers will have their loan amounts completely forgiven, some borrowers may still have a balance remaining to repay after a portion of the loan is forgiven. Previously, the maturity date for any unforgiven portion of the loan was two years. Under the PPP Flexibility Act, the maturity date for any unforgiven portion of the loan has been increased to five years.

4) An exception to Full-Time Employee (FTE) requirement

Loan forgiveness under the PPP is reduced for a borrower if the borrower averages fewer Full-Time Employees (FTE) during the covered period than the borrower had during the same time last year. This created complications for borrowers who had reduced their number of FTE as a result of stay-at-home orders prior to the CARES Act being passed. Under the PPP Flexibility Act, a borrower will not have its forgiveness amount reduced if despite having fewer FTE if it can show that either (1) it is unable to rehire it’s former employees or hire similarly qualified employees or (2) it is unable to return to its former number of FTEs because there are continuing restrictions on the borrower’s business as a result of COVID-19.

5) Deferral on Unforgiven Amount Increased

Borrowers may defer payments on any unforgiven portion of the loan. Under the PPP Flexibility Act, borrowers may defer payments on the unforgiven portion of the loan until the borrower (or the lender) receives payments for the forgiven part of the loan from the SBA. Additionally, the deferral period for borrowers who do not apply for forgiveness has been increased from six months to 10 months under the PPP Flexibility Act.

Continued Changes

This may not be the end of PPP reform. Currently, the SBA has 30 days to respond to an application for loan forgiveness. This is a nearly impossible task considering the number of PPP borrowers participating in the program and the sheer volume of loan forgiveness applications that will be submitted. Lending institutions of all sizes are lobbying Congress to “automatically” forgive loans of under $150,000 without the need for those borrowers to file an application. At the time of this writing, it’s unclear whether a bill with those provisions will be able to gain traction or whether Congress will consider the revisions made to the program by the PPP Flexibility Act sufficient. Additionally, the SBA will need to provide borrowers with a revised loan forgiveness application. As has been the case since the inception of the PPP, it is wise for borrowers to stay up to date on news surrounding the program as the regulations and guidance involving the program change almost daily. 

You can read the PPP Flexibility Act in its entirety here.

Attorney John Litzler directs the church law division of Christian Unity Ministries in San Antonio. He also serves as a BGCT legal consultant to assist Texas Baptist churches in understanding various legal issues.

Disclaimer: This article provides general information and a general understanding of the law and does not constitute specific legal advice. By utilizing the Texas Baptist website, you understand that there is no attorney/client relationship between you/your church and the author or between you/your church and the Baptist General Convention of Texas. This article should not be used as a substitute for competent legal advice from a licensed professional attorney in your state with the specifics of your situation.