COVID-19 CARES Act Updates – Paycheck Protection Program (PPP)

In Corporate Resources, Employer Resources by Porzio


Authored by: Pamela M. Kapsimalis, and Kwame O. Akuffo


On May 22, 2020, the Small Business Administration (“SBA”) released two interim rules regarding (i) the forgiveness process of the Paycheck Protection Program (“PPP”), and (ii) the SBA’s process for reviewing loan applications and loan forgiveness applications, as well as the responsibilities of borrowers and lenders (collectively, the “Interim Rules”). These Interim Rules raise a number of important issues for both borrowers and lenders which are summarized below: 


Summary: This interim final rule “supplements the previously posted interim final rules in order to help PPP borrowers prepare and submit loan forgiveness applications as provided for in the CARES Act, help PPP lenders who will be making the loan forgiveness decisions, inform borrowers and lenders of SBA’s process for reviewing PPP loan applications and loan forgiveness applications, and requests public comment.”  The general loan forgiveness process described in this rule “applies only to loan forgiveness applications that are not reviewed by SBA prior to the lender’s decision on the forgiveness application.”3 The intent of this interim final rule is to provide a “high degree of certainty to PPP borrowers” so PPP borrowers “will be able to take immediate steps to maximize their loan forgiveness amounts, for example, by either rehiring employees or not laying off employees during the covered period. This rule is being issued to allow for immediate implementation of the forgiveness component of this program.”

The Loan Forgiveness Process 

  • Borrowers must complete and submit the SBA Form 3508 Loan Forgiveness Application (or a lender equivalent, each referred to as the “Forgiveness Application”) to receive loan forgiveness. 
  • Lenders must review the application and make the initial decision regarding loan forgiveness within 60 days from receipt of a complete application.
  • If the lender determines that the borrower is entitled to forgiveness for some or all of the amount requested, the lender must submit a request for payment from the SBA at the time the lender issues its decision.

Payroll Costs Eligible for Loan Forgiveness 

  • Ratifies that payroll costs paid or incurred during the eight consecutive week covered period are eligible for forgiveness.
  • Payroll costs are considered paid either on the day that paychecks are disbursed or when the borrower originates an ACH credit transaction.
  • Incurred payroll costs must be paid on or before the next regular payroll date after the end of the covered period. 
  • The eight-week period is either the period starting on the date the loan was disbursed or the “alternative payroll covered period” as previously defined in the Forgiveness Application and now formally adopted.

Non -Payroll Costs Eligible for Loan Forgiveness 

  • Borrowers may seek forgiveness for non-payroll expenses incurred prior to the covered period if paid in the covered period.
  • Advance payments of interest on covered mortgage obligations are not eligible for forgiveness.4

Reductions to Loan Forgiveness Amount 

  • Reductions in full-time equivalent employees or in employee salary and wages during the covered period reduces the forgiveness amount.
    • Reduction in  FTE during the covered period reduces the forgiveness amount by the same percentage as the percentage reduction in FTE employees.
    • Borrower can choose from four reference periods in calculating the relevant number of FTE employees. 
    • Borrowers are required to document their average number of FTE employees during the covered period and their selected reference period. Borrowers have two options for calculating full-time equivalency: (1) calculate average number of hours a part-time employee was paid per week during the covered period, or (2) elect to use a full-time equivalency of 0.5 for each part-time employee. Due to the complexity and number of calculations required, many borrowers may elect for the second option—unfortunately this may lead many borrowers to qualify for less than the full potential forgiveness amount. 
    • A reduction in an employee’s salary or wages in excess of 25% results in a reduction of the loan forgiveness amount, unless an exception applies.
      • The reduction calculations are performed on a per employee basis, not in the aggregate.
      • If salary or wage reductions are restored to pre-February 15, 2020, levels, then the borrower may be exempt from any reduction in the loan forgiveness amount.
      • To ensure borrowers are not double penalized, the salary/wage reduction only applies to the portion of the decline in salary and wages that is not attributable to the FTE reduction. 
  • Clarification of safe harbor provision when an employee declines an offer for rehire or to restore the employee’s reduction in hours.
  • Borrower required to inform the applicable state unemployment insurance office of any employees who rejected offers of reemployment within 30 days of rejection of such offers.
  • Borrowers must show that they made a good faith, written offer to rehire a recently fired employee (or to restore hours/wages), that the offer was for the same salary or wages and number of hours, that the offer was rejected by the employee, and that the borrower has maintained records documenting the offer and its rejection. 
  • Employees that are fired for cause, voluntarily resign, or voluntarily request a reduction in hours, may be counted at same full-time equivalency level before the FTE reduction when calculating the FTE employee reduction penalty. 
  • Must maintain records demonstrating that each such employee was fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction. 

Documentation Requirements 

  • Borrowers must submit the required documentation in order to obtain forgiveness.
  • Borrowers are required to submit all payroll, FTE, and non-payroll documentation used to complete the Forgiveness Application (or the lender’s equivalent of the application).
  • Borrower must retain such documentation for 6 years after the date the loan is forgiven or repaid in full.


Summary:  This Interim Rule details the procedures and criteria by which the SBA review PPP loan applications and loan forgiveness applications and the significant role of the lender in this process. 

Forgiveness Process for Borrowers 

  • The SBA may review any PPP loan of any size, at any time, in the SBA’s sole discretion.
  • Review includes whether a borrower is eligible for the loan based on the provisions of the CARES Act, the rules and guidance available at the time of the borrower’s PPP loan application, and the terms of the borrower’s loan application.
  • Review includes whether a borrower calculated the loan amount correctly and used the loan proceeds for the allowable uses.
  • Review includes whether a borrower is entitled to the claimed loan forgiveness amount. It appears that the SBA intends to communicate with borrowers through the lenders, but the SBA may also request information directly from borrowers. The lender is responsible for contacting the borrower in writing to request additional information and to provide such information to the SBA when requested. 
  • Borrowers may provide additional information in response to a review and the SBA will consider all information provided by borrowers in response to such inquiries.  

Forgiveness Process for Lenders 

  • Review by lenders must include (i) confirmed receipt of the borrower certifications contained in the Loan Forgiveness Application; (ii) confirmed receipt of the documentation borrowers must submit to aid in verifying payroll and non-payroll costs; (iii) confirmation the borrower’s calculations on the Loan Forgiveness Application, and (iv) confirmation the borrower made the calculation on line 10 of the Loan Forgiveness Application. 
  • Good-faith review in reasonable time, of the borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness.” 
    • No clarification of definition of “good-faith review”.
    • Minimal review of calculations based on a payroll report by a “recognized third-party payroll processor” is considered reasonable.
    • Lenders are also responsible for working with borrowers when errors are identified in borrower calculations or supporting documents.
    • Lenders must decide within 60 days after receipt of borrower’s Loan Forgiveness Application on loan forgiveness and notify the SBA and the borrower of its decision.
    • Decision may be any outcome between approval of the full amount applied for forgiveness to a rejection of the full amount. Reduction is forgiveness is also a possibility.
    • Lender submits request to SBA for amount forgiven, if any, and the SBA to remit the loan forgiveness amount to lender (plus accrued interest through the date of payment) no later than 90 days after lender submitted its decision to the SBA.
    • Lender must provide the SBA with the reason for its denial.
      • Lender must also notify the borrower in writing that the lender has issued a decision to the SBA denying the forgiveness application.

Lender Fees 

If the SBA determines that a borrower is ineligible for the PPP loan, then the lender is not eligible for a processing fee for that loan. All processing fees are subject to clawback for a period of one year after the loan was disbursed based on the rules and guidance available at the time of the borrower’s loan application, or the terms of the loan application. 

  • A determination of borrower eligibility will have no effect on the SBA guaranty if the lender has complied with its obligations under existing rules and guidance. 
  • If a lender fails to satisfy any of its obligations under the PPP loan rules and guidance, then the lender’s processing fees are subject to clawback. 

 1This article does not address the recently adopted PPPFA.

 2SBA-2020-0032 was issued by both the SBA and the Department of Treasury.

3In a separate interim rule (SBA-2020-0033), the SBA described “its procedures for reviewing PPP loan applications and loan forgiveness applications.”  

4The CARES Act loan forgiveness provisions regarding mortgage obligations specifically exclude “prepayment”.