Alan Gassman, Contributor
Sept. 10, 2020
It was a very big surprise for those of us who have been watching and advising clients on PPP loans, that the program did not continue with the Rubio-Collins Bill that was proposed on July 27th, 2020.
This proposed law would instead provide PPP borrowers with a second loan if they have had more than a 50% reduction in revenues based upon a number of different tests that could apply.
The economic need for this smaller and more finely tuned second round is clear. Many businesses are in the process of having layoffs or shutting down because they have simply run out of money or they need to preserve whatever capital is available to try to restart the business if and when things return to normal in our economy.
In the meantime, many lenders, landlords, and suppliers are being paid less than what they were owed or, in many cases, are unpaid entirely. Many people and businesses are displaying significant patience, if not outright generosity, to preserve goodwill, continuing relationships, and in some cases heartfelt sympathy for individuals and businesses who can simply not afford to pay their bills.
On the other hand, some individuals and businesses are taking advantage of the situation by not paying bills that they can afford to pay to landlords and others who actually need the money more than the non-payer. This, unfortunately, is the way of the world – the small percentage of the population that takes advantage of a situation like this causes eventual grief for those with significant needs, under circumstances where it is difficult to determine who can really pay and who cannot.
Unlike the Great Recession of 2008, the FDIC and Federal Reserve System are not putting pressure on banks to require that loans be in compliance with both payment and loan-to-value and other debt ratios, which was part of the exacerbation of problems in 2008, where banks filed foreclosures against borrowers who never missed a payment, because of debt-equity ratios and other technical loan violations.
I am fortunately not yet seeing reduced values for real estate, motor vehicles, boats, or other assets, and some real estate experts believe that we are actually in a “bubble,” and that prices may go down quickly and significantly when there are fewer people that can afford to own their home, to rent a luxury apartment, or even to live separate and apart from their parents.
With the above as a backdrop, it makes good sense to speculate as to what may occur going forward, in order to best plan and make decisions with respect to precious resources, and the possible financial health of customers, suppliers, and others.
Will The Present PPP Forgiveness Rules Continue To Change?
The August 24th updated changes show me that the SBA is attempting to fine-tune the PPP rules to some extent, and not necessarily in favor of borrowers.
For example, the most recent rule changes took me by surprise by indicating that rent payments made to related parties would only result in forgiveness to the extent that the related party has a legitimate interest expense from a pre-February 15, 2020 loan that is owed on the leased property or assets. Parties are considered “related” if there is ANY common ownership, and the limitation would apply even for individuals who own just 1% of the entity receiving rent payments.
In addition, the revised regulations provide a safe harbor so that compensation and benefits paid to an under-5% shareholder of a company are not subject to the $20,833 and other applicable ceilings that were reflected by rules that were issued in June 2020. This was an unpleasant surprise for many small business owners who themselves constitute a large part of their workforce.
The fact that these rules may well get worse, without warning, certainly should encourage borrowers to fill out and submit their forgiveness applications before things change for the worst.
What Will Become Of The EIDL Program?
It seems highly likely that the EIDL Program will continue in a somewhat erratic manner to provide small and large loans to borrowers who have applied based upon a “luck of the draw” as to whether the borrower is hearing back from the EIDL, and what the SBA officer who has been randomly assigned to the borrower decides to lend.
It must be remembered that EIDL loans bear interest at 3.5%, and the loan agreement prohibits distributions or bonuses to be made to owners or non-owners during the term of the loan.
Under the SBA regulations, a business can only collect an EIDL loan if the business cannot otherwise remain operational without those funds. This is much different from the more lenient PPP “necessity” standard. While it is certainly reasonably necessary to have a reasonable amount of working capital and cash set aside to assure that a business can survive this epidemic, a great many borrowers did not absolutely need the loan money to keep the business open at the time the loan was taken.
In addition, many EIDL loans have to be guaranteed by one or more shareholders of the borrower, and the SBA has extraordinary powers above and beyond what a creditor has, including the ability to seize tax refunds of a guarantor, the tax refund of a guarantor’s spouse in some circumstances, and the ability to garnish wages, even in states where normal creditors are not permitted to do so.
If I Get a New PPP Loan Will The Repayment Be Required, Or Will Forgiveness Be Permitted?
The Rubio-Collins Bill, as it was initially introduced, made no mention of changing the rules for the second round of PPP loans. This bill also made no mention as to whether the forgiveness period would be the same as the first loan, or whether the forgiveness period for both loans combined would be limited to the 28 weeks that started when the first loan was made.
Quite likely there will be two PPP forgiveness periods – one that begins when the first loan was taken, and a second that will begin upon receipt of the second loan.
Hopefully, the SBA will provide that expenses which exceeded what was needed for full forgiveness of the first loan can be counted towards the second loan.
However, it could take many weeks after the bill passes to receive clear guidance on this. It is likely that a new spreadsheet would need to start on the date of the second loan. This would mean that the borrower would have to wait at least another 8 to 24 weeks to spend the monies borrowed on permitted items.
It would make sense to require this to assure that the second round money is spent using the same general parameters as the first round – To get full forgiveness, at least 60% of the monies will need to be spent on payroll and group health insurance, with up to 40% spent on interest, rent, and utilities.
Where Will My Second PPP Loan Come From?
It seems clear that the second loan will come from the same bank that made the first loan, and the banks will make a significant profit on this.
Under the Rubio-Collins Bill, banks would receive 3% of new loans for up to $350,000, and 1% of the excess thereof. This bill also provided that there would be no “enforcement action” against a lender who acted in good faith in relying upon certification or documentation submitted by a borrower.
What Do I Need To Do To Be Prepared to Get My Second Round PPP Loan?
I presume that borrowers will be required to fill out an entirely new application. Most of the questions will likely be the same as the first application, and if the borrower appropriately filled out the first application, then the answers would be able to transfer rather easily.
When the time comes, remember to confer with your CPA or other advisors to assure that your application is accurate. This is important because the application is issued “under penalty of perjury.”
Also, consider whether the loan will be “necessary to support the operations of the business.” Even businesses that qualified for the first round and had more than 50% reduction in revenues may not meet the necessary requirements, such as if the business has successfully downsized and is reasonably profitable.
Unfortunately, there does not seem to be a definitive end to this COVID-19 pandemic in sight which means that further expansion of the PPP is very likely to occur. I will be sure to provide updates if and when new updates or guidance are released with respect to PPP loan forgiveness.
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