Small businesses that accepted SBA Paycheck Protection Program (PPP) loans to help survive the COVID-19 pandemic are now submitting applications for PPP Loan forgiveness to their lenders. As banks scramble to transition from loan origination to loan deferment and forgiveness, they face new challenges and many questions.
PPP launched on April 3, 2020, as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Since then, Congress has made many amendments to the program, most notably the Paycheck Protection Program Flexibility Act. Signed into law on June 5, 2020, this Act eased many of the initial requirements of the PPP program, which closed on August 8, 2020.
Our Answers to Banks’ and Credit Unions’ FAQs About the Paycheck Protection Program Loan Forgiveness Process
What is the SBA PPP forgiveness application process?
To receive loan forgiveness, a borrower initiates the process by completing and submitting the Loan Forgiveness Application (SBA Form 3508, 3508EZ, 3508S or lender equivalent) to its lender (or the lender servicing its loan). The lender will review the application and make a decision regarding loan forgiveness.
The lender has 60 days from receipt of a complete application to review it and issue a decision to SBA. If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for under the statute and applicable regulations, the lender must request payment from SBA at the time the lender issues its decision to SBA.
SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to SBA. If applicable, SBA will deduct EIDL Advance Amounts from the forgiveness amount remitted to the lender.
Are there any special forms or paperwork?
SBA Form 3508EZ or your bank’s equivalent paperwork should be used by:
- Self-employed individuals, independent contractors, or sole proprietors who had no employees at the time of the PPP loan application can use SBA Form 3508EZ
- Employer small businesses that did not reduce employee salaries or wages by more than 25% and did not reduce employee hours
- Employer small businesses that did not reduce employee salaries or wages by more than 25% and whose business activity has been reduced because of COVID-19 related health directives.
SBA Form 3508S should be used by:
- Borrowers who received a PPP loan of $50,000 or less and who, together with their affiliates, received PPP loans totaling less than $2 million.
Borrowers who do not qualify to use the simpler EZ and S forms should use SBA Form 3508.
Each loan forgiveness application form specifies the documentation borrowers are required to submit along with the application. This includes documents that verify the number of full-time equivalent employees, their pay rates, and payments made on mortgages, leases and utilities during the covered period.
How much of the PPP loan can be forgiven?
PPP loans can be forgiven up to 100% of principal, with no interest charges added, if they meet the qualifications below.
What are the qualifications for PPP Forgiveness?
In order to qualify for 100% forgiveness, PPP borrowers must prove funds are used 60% for payroll expenses and 40% for other eligible expenses during their covered period, which may include rent, mortgage interest and utilities. Borrowers who don’t follow those guidelines, or who use the PPP funds for other purposes, may have their loans only partially forgiven.
The rest of the loan will convert into an amortizing loan subject to SBA 7(a) reporting requirements and become subject to the accrual of interest, which must be recomputed upon forgiveness.
What is the maximum interest rate on a PPP Loan?
All PPP loans have a 1% interest rate.
What is the maximum term on a PPP loan?
Loans issued before June 5, 2020 mature in 2 years; loans issued after that date mature in 5 years. For loans made before June 5, 2020, lenders can decide how to handle loan maturity and share a determination with the borrower: either 2-year or 5-year terms. Many banks are choosing to simply convert all borrowers to the 5-year term.
When does the deferment period start?
After the borrower’s covered period ends, the borrower has 10 months before payments are required, and can apply for PPP loan forgiveness at any time during this deferment as long as all the loan proceeds have been used.
When does PPP loan forgiveness begin?
Forgiveness is based on an eight-week (56-day) or 24-week (168-day) “covered period” depending on whether the loan was received before June 5, 2020, or on or after that date. There is a regular covered period that starts on the date of loan disbursement, and an “alternative covered period” for employers that want to align the start of the covered period with their payroll schedule. The alternative covered period starts on the first day of the first pay period following the date of PPP loan disbursement.
What is the difference between covered periods?
For borrowers who received their loans on or after June 5, 2020 the covered period is either (1) the 24-week (168-day) period beginning on the PPP loan disbursement date, or (2) the 24-week (168-day) Alternative Payroll covered period starting on the first day of their first pay period following their PPP loan disbursement date.
Borrowers who received their loans before June 5, 2020 can elect either of the two covered periods above or choose from two additional options: (3) an eight-week (56- day) covered period that begins on the PPP loan disbursement date or (4) an eight-week (56-day) Alternative Payroll covered period that begins on the first day of their first pay period following their PPP loan disbursement date.
Must headcount be maintained?
Loans will be forgiven based on Full Time Employees (FTEs). FTE levels must match those prior to February 15, 2020. Borrowers do not need to rehire the same employees in order to meet the headcount threshold. If the borrower makes an offer in writing to rehire an employee who refuses the offer, the borrower will not be penalized for reductions in headcount, and forgiveness can still be processed. Borrowers will also not be penalized if they can document that they are not able to restore headcount because COVID-19 health and safety requirements prevent the business from returning to the same level of activity it operated at before February 15, 2020.
How is headcount determined?
Employee-level reporting requested in the loan forgiveness application will be used to determine whether the borrower has met the headcount requirement. Payroll history during the covered period for each employee will be used to determine any headcount reductions.
Is level of payroll a consideration?
Yes. If the borrowing business reduces salaries and wages by more than 25% for any employee who made less than $100,000 annualized in 2019, loan forgiveness will also be reduced in an amount corresponding to the amount of payroll reduction beyond the 25% mark for each employee.
What is the deadline for rehiring?
Businesses have until December 31, 2020 to restore full-time employment and salary levels for any workforce changes made between February 15, 2020 and April 26, 2020.
Can the lender request forgiveness for the borrower?
Banks and credit unions may not complete or submit loan forgiveness applications for their clients. Borrowers must request forgiveness from the financial institution and complete, attest and sign all forgiveness applications themselves.
How long do banks and credit unions have to grant forgiveness?
Upon receiving a completed loan forgiveness application, lenders have 60 days to determine the borrower’s forgiveness eligibility.
What is pre-purchase?
PPP Loan pre-purchase is a provision within the PPP program that allows the SBA to purchase the loan from an originator up to the amount that may be reasonably forgiven. Pre-purchase of loans may begin 7 weeks after loan disbursement. In order to benefit from this provision, banks may need to develop their own standards for assessing how much of a loan may be reasonably forgiven.
PPP Loan Forgiveness Process
The PPP loan forgiveness process promises to bring many of the same challenges as the initial application process. Simplifying your institution’s review process via digital automation can not only make application processing more efficient, but also facilitate more accurate decisioning.
Federal guidelines associated with PPP loan forgiveness are subject to change. FAQs within this article will be updated with new information as it becomes available. You should also consult the official PPP resources below to monitor changes to federal guidance.
Treasury Department Guidelines for CARES Act Assistance to Small Businesses
Small Business Administration Paycheck Protection Program Guidelines
Paycheck Protection Program Forgiveness Application
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