Watch our webinar as we discuss updates and insights straight from Washington, DC, and share what you can do in preparation for your next steps.
- Leslie Boyd, CLA Principal
- Jack Rybicki, CLA Managing Principal of Industry, Real Estate
- Todd Sprang, CLA Principal
- Omar Nashashibi, The Franklin Partnership
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What we talked about:
Boyd: Good afternoon to our CLA Family, clients, community partners, and friends. Welcome back to our eleventh livestream to talk about the recent developments with respect to the Paycheck Protection Program. We are grateful to have you and, as always, your health and safety are our top priority.
We have had a lot of activity on the PPP and other lending programs in the last few days since our previous livestream. The activity has focused on additional legislation and expansion of the program, new guidance issued, and media buzz. We have three speakers that I would like to introduce today to help guide us through these topics. I would like to welcome back Omar Nashashibi from the Franklin Partnership. Omar is a Washington, D.C. lobbyist. We also have Jack Rybicki from our real estate group to speak on issues impacting borrowers, and Todd Sprang to talk about the lending programs from the financial institutions perspective. Welcome to the three of you!
To give a roadmap of the discussion today, we will start with Omar who has updates from the Hill. We will then pivot to Todd and Jack to discuss latest guidance, FAQs, and activity we are seeing with lenders and borrowers.
Welcome back, Omar.
Nashashibi: Thanks, Leslie. As always, lots is happening on the Hill. President Trump signed the Phase 3.5 interim COVID-19 bill into law on Friday, which totaled $484 billion, which included $75 billion for hospitals and $25 billion for testing. Most of the attention was placed on PPP, but the Economic Injury Disaster Loan program also received an additional $60 billion, including $10 billion in direct grants.
Through last week, EIDL had issued 38,000 loans totaling about $e8 billion, though it is currently unclear when EIDL will reopen for new applicants.
The PPP began accepting loans again yesterday, Monday, April 27 at 10:30 a.m. ET. By 3:30 p.m., the program had processed over 100,000 loans from 4,000 lenders. Demand now appears greater than first round.
The system is clearly stressed and not capable with keeping up with demand, and the Small Business Administration is pacing lending to avoid regional disparities, and likely system collapse – including pacing how many applications a lender can submit per hour. Initially, many thought the PPP would run out of funds as early as Wednesday, but now that they are slowing the pace of lending, the funds can likely get through the week and possibly even into early next week.
Department of Treasury is telling Hill staff this funding should cover 60 million workers, which is the rough number of employees at small businesses. Capitol Hill staff are skeptical that the funding is enough, though Treasury is saying they do not intend to request more funding in the next COVID-19 legislation.
Congress is still likely to take up another bill as the President would like to see another round of checks go out to individuals. We are hearing that Memorial Day is still the timeline to move another bill, but the U.S. House of Representatives just reversed itself and will not be returning to the Capitol next week after 11 construction workers at the Capitol Complex tested positive for COVID-19.
Regardless, the horse trading within Congress has begun. Democrats want funding for cash-strapped state and local governments, but it may be restricted to COVID-19 related expenses – not for general operations. Meanwhile, Mitch McConnell is demanding some form of liability insurance to shield business owners, health care workers, and employees from lawsuits as the country starts to reopen. We are also hearing that the Democratic Chairman of the House Tax Writing Committee is trying to attract Republican votes for the next bill. Rumors are Chairman Neal is offering to make 100% business expensing permanent, as it is slated to begin phasing out in a couple of years. But we also know that progressives are very unhappy with the net operating loss provisions that allow for losses in 2018 and 2019.
Back to PPP, a new announcement came this morning from Treasury Secretary Steven Mnuchin that companies receiving more than $2 million in small business loans will be audited by the SBA. According to SBA sources, there are 26,000 business who received a loan of $2 million or more in the first tranche. Businesses could face criminal liability if it turns out they were not eligible to apply for relief money. We do not have more clarity or guidance from the SBA on the audit criteria, or documentation needed to support the certification of need. The main provision is that this loan is necessary to support the ongoing operations of the applicant.
Speaking of guidance, this week, we expect more information on the loan forgiveness now that we are in week four of the eight-week forgiveness period.
Boyd: Thanks, Omar, for the update. We appreciate you keeping us informed on things we need to know and can expect to see legislatively going forward. I want to turn now to Jack and Todd to discuss the new regulations related to lenders and FAQ updates that we have seen. Welcome, Jack and Todd.
Todd, can you give us an update on lending regulations that affect the financial institutions as well as what the banks are experiencing at the moment?
Sprang: So far, we’ve seen no update on Main Street Lending terms, though we expect an update any day now. We have heard that big banks have been meeting with the Fed.
I’ll also just briefly cover some of the high-level terms of the SBA Express program. It’s got a $25,000 max and a longer term – up to seven years. It also has a higher interest rate – prime plus 6.75%. Lenders also need to have been an SBA Express lender as of March 13, so these lenders that have recently come in with the PPP program are not able to come in and grant these SBA Express loans.
Now some updates on PPP. As Omar said, we’re still waiting on forgiveness guidance. There have been really frustrating SBA system issues on Monday, April 26 – smaller banks are really upset after SBA publicized their plan to prevent system congestion.
Finally, quickly touching on Question 31 and the ability to reassess: as a borrower, you can expect to receive a letter from your lender to make you familiar with the FAQ. It’s an informational piece. Best recommendation I have is to call your lender and ask them why you might be receiving it.
Boyd: Thanks, Todd. Jack, can you speak more to this FAQ #31 and what that means for the borrowers?
Rybicki: On April 23, Treasury issued FAQ #31, which asked “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” The response focuses on the certification an applicant had to make on the application that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The guidance effectively adds new language to this certification, in that it states that borrowers must “take into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”
The FAQ then provides a safe harbor for borrowers, stating: “Any borrower that applied for a loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certifications in good faith.”
The interim final rule issued on April 24 provided further clarity on this matter. That rule clarified that hedge funds and private equity funds are not eligible to participate in the PPP, and that portfolio companies of private equity funds must consider the affiliates rules and whether they can make the certification regarding the necessity of the loan to support ongoing operations.
The April 24 interim final rule sets forth the limited safe harbor with respect to certification concerning the need for a PPP loan request in a manner consistent with the FAQ, further stating that the “safe harbor is necessary and appropriate to ensure that borrowers promptly repay PPP loan funds that the borrower obtained based on a misunderstanding or misapplication of the required certification standard.”
We have also heard that most, if not all, banks will be sending a letter to borrowers approved for PPP loans regarding this new guidance, which will undoubtedly raise further concerns amongst borrowers.
The sufficiency of the basis on which the borrower made the certifications and representations at the time of application for a PPP loan is a legal, not an accounting, matter.
Treasury is now saying that access to other sources of liquidity need to be considered when making this certification, and that if a borrower made this certification in error, they can return ALL the money by May 7th and all will be forgiven. This is a HUGE retraction by Treasury. Let’s not forget the name of Title I of the CARES Act – “Keeping American Workers Paid and Employed Act”.
Boyd: This is a big update. What are steps that the viewers should take in light of this information?
Rybicki: Let me lay out a few things that that borrowers can do:
- Consult legal counsel. This is not an accounting question. Accountants CANNOT provide you with assurance that “your facts are okay. You have no risk.”
- Borrowers should document the basis for ALL certifications in the application.
- Certifications not only include the “economic need” item discussed above, but also include “the funds will be used to retain workers and maintain payroll [or pay other allowable non-payroll costs]” – we believe this applies to the period ending June 30, 2020. If you aren’t expecting a significant portion of the loan to be forgiven, then you could be at risk related to this certification as well.
- One thing to note is that the borrower also has to certify that the funds received will be used to retain workers and maintain payroll as specified under the PPP Rules, which require the funding to be used during the period from February 15 – June 30. Thus, any rationale supporting the need for the loan should specifically address the alternatives being considered during the covered period, and the necessity of the loan to allow the borrower to make a decision to retain workers and maintain payroll during that period.
Boyd: Thanks, Jack – I know this is very much on the minds of our clients right now, and what I hear you saying is that if there are concerns. This is really a legal matter and the best course of action is to discuss everything with your attorney. Todd, did you want to comment on the fraud statutes?
Sprang: Yes, definitely. I have seen legal pieces on this topic which imply that if the government determines that a borrower’s certifications were not accurate and made in good faith, and that borrower did not return the funds by May 7, then the borrower would have been ineligible to receive the loan and could be exposed to liability under the False Claims Act. This could result in 3X damages applied to the amount of the PPP loan itself, or even criminal penalties. So, the worst case is NOT just having a low interest, short-term working capital loan that you could have to repay.
It is IMPERATIVE for us to re-stress the point Jack made above that we cannot provide any assurance on the sufficiency of your rationale to support this certification. It is possible that rationale may come under scrutiny at some point in the future based on expectations around the future oversight of the program. Borrowers should also consider the public perception associated with receipt of funds, as this information will be out there for all to see.
Rybicki: Sure, just a few updates on FAQ items. First, there has been no update recently on principal residence.
Specific to agricultural business, we can clarify that Agricultural Enterprises and Cooperatives were scoped into EIDL program and there was no change for PPP.
There are two “others” that I think are important for us to address. First, regarding misinformation around full-time equivalent calculations: people seem to think that this is a headcount number that only included salaried and full-time employees, and that if they retain that part of their workforce, they will be okay. That is NOT the way we believe FTE’s works. We believe you must also consider part-time employees and determine fractional percentages for each employee by comparing their hours to a 30-hour work week.
Also, the 75% threshold for payroll may be a threshold, not a sliding reduction – this is unconfirmed, but is getting a lot of press. We have heard indirectly that many SBA staffers have expressed the view that if 75% of the loan proceeds are not spent on payroll during the eight-week period, then there will be NO forgiveness. This would be huge change in terms of this program.
Boyd: Thanks, Jack. Todd, are there other lending topics that we need to cover with the audience before we wrap up today?
Sprang: Borrowers need to know that if they participate in this program, there is a potential for public scrutiny as lists of borrowers of PPP loans are being made available daily. Potential regulatory oversight. This program will be monitored for abuses. Likely a risk-based approach will be used (i.e., larger individual and aggregated loans will get more scrutiny than small loans) and will focus on those borrowers that got low forgiveness, which means they didn’t take actions to retain workers and pay them a comparable wage during the eight-week period – the spirit of the Act.
Boyd: Thank you all for the help today. We will continue to cover this topic in future livestreams, including more forgiveness guidance as it arises, along with some other issues that are hot topics for your organizations during these very uncertain times. Thanks for watching!
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