PPP Aspects of the Consolidated Appropriations Act, 2021 for Lenders

• January 6, 2021
• Susan Sabo

This blog is posted on behalf of my colleague Todd Sprang, Financial Institutions Group, Principal.

The Consolidated Appropriations Act, 2021 (the Act) establishes another round of Paycheck Protection Program (PPP) loan origination and revisions to the existing rules and forgiveness. Lenders are now faced with addressing the continued tasks and challenges associated with processing forgiveness applications from the previous rounds of PPP loans while simultaneously originating new PPP loans to new or recurring borrowers.  This article summarizes some of our initial thoughts and areas where clarity is needed.

Impact on Existing PPP Loans and Forgiveness

Cost versus Benefit of Expanded Uses of Funds

Eligible expenditures are expanded to include certain business operations, property damage, supplier, and COVID-19 worker protection costs such as expenditures related to drive-up and outdoor dining operations.  On the surface, expansion of allowable expenditures seems like a good thing, but is this really impactful?  Borrowers still need to cover 60% of the loan with payroll and most borrowers are currently achieving forgiveness primarily or entirely with payroll expense as a result of the expansion of the maximum covered period from 8 weeks to 24 weeks.  New eligible expenditures require new forgiveness forms and additional, specific guidance. Without specific guidance, these expenditures could give rise to the same level of frustration associated with definition of utilities.  It also gives borrowers an opportunity to submit additional excess documentation.  We’ve already seen borrowers submit documentation for expenditures well in excess of their loan balance just to be safe. 

Covered Period Flexibility

Borrowers can now select their covered period, as opposed to the original full 8 or 24 weeks, eliminating some of the confusion associated with requesting forgiveness. The covered period will be designated by the borrower and must be between 8 and 24 weeks in duration, following the date of origination.  Borrowers will need to wait for a revised application for each applicable form type to utilize this flexibility.  While we appreciate this flexibility, we are concerned about the additional complexity this may cause since borrowers will have to properly prorate the maximum compensation limits of $100,000 per employee per year to correspond with the covered period they choose.

EIDL Advances No Longer Subtracted From Forgiveness

This provision addresses the operational consequences (payment schedules and other arrangements) and borrower frustration when EIDL advances leave a small amount of the PPP loan to be repaid by the borrower. 

The remaining question relates to handling borrowers that received forgiveness but EIDL Advances were subtracted.  Whether borrowers paid back the balance quickly or entered into longer payment arrangements with lenders, we hope for guidance that would make these borrowers whole by providing guidance for reimbursing them for the principal and interest payment(s).   There are also the related questions of potentially reporting these situations to SBA. 

Stop, Pause or Continue to Accept Borrower Forgiveness Applications?

For now, many borrowers with balance of $150,000 or less continue to file the same forms and are potentially unaware of the impact of the Act.

The Act introduces a forthcoming simplified forgiveness form for borrowers with loans of $150,000 or less seems closer to blanket forgiveness, but we won’t know until we see the form and instructions.  This new form could be similar in nature to the Form 3508S previously released by the SBA for use by borrowers with PPP loans of $50,000 or less.  We assume that similar to a Form 3508S, the simplified form will be subject to the same affiliated group limitations. 

Applications from borrowers with loans greater than $150,000 are less impacted by the Act and continued processing appears appropriate.

Impact on PPP Originations

Eligibility and Loan Sizing

The next round of originations involves some changes that lenders need to consider when reviewing applications.  Here are a few examples:

• Applicants must have fewer than 300 employees, but that limit increases to 500 employees if the applicant has multiple locations.  This raises questions as to what constitutes a “location” for applicants with 300-500 employees. This may be clarified by SBA guidance or simply the addition of a certification.
• Certain applicants with the North American Industry Classification System (NAICS) code 72 are eligible for larger loans based on 3.5 times average monthly payroll, but are still subject to the same maximum $2 million loan amount. That code applies to entities in the Accommodation and Food Service sector.  It’s reasonable to expect some applicants to question or challenge their NAICS code.
• Eligible borrowers must have a reduction in gross receipts of at least 25 percent in any quarter in 2020 compared to the same quarter in 2019.  Expect borrowers to ask questions and utilize differing methods of calculating gross receipts, even if additional SBA guidance provides enhanced clarity.  It’s also reasonable to expect eligibility questions for applicants who meet the definition of an operating business at February 15, 2020, but generated little or no revenue in any quarter of 2019 attributable to being in start-up mode, restructuring their operations or related to other plausible causes or circumstances.
• Farmers are now eligible for larger loan amounts.  For more specifics applicable to this borrower group, see specific information on our website at More SE Farmer PPP Loan Detail | CLA (CliftonLarsonAllen) (claconnect.com) 
  • Eligible borrowers must have not traded on a national exchange.  While NYSE and NASDAQ are obvious exchanges, you may receive questions from applicants with pink sheet or various OTC exchanges listings.
  • New entity types are also eligible to participate in the PPP program, including 501(c)(6) and direct marketing organizations with limited lobbying activities.  That group of eligible borrowers introduces a new group of basic and voluminous applicant questions lenders dealt with during prior application processing.

Lender processing fees

Lender processing fees for future PPP originations is:

• For loans up to $50,000, the fee is the lesser of 50% of the loan amount or $2,500.
• For loans greater than $50,000 but $350,000 or less, the fee is 5% of the loan amount.
• For loans greater than $350,000 the fee is 3% of the loan amount.

This modified fee structure for loans up to $50,000 addresses the issue that lender costs associated with prior small PPP loans often exceeded the fee or even the entire loan amount.  For example, a $2,000 loan that generated a $100 fee in the past, will generate a fee of $1,000 in the future.

The key for lenders is to understand their costs for originating, servicing and processing forgiveness and consider setting a corresponding minimum loan size.

How we can help

CLA is here to know you and help you. We are prepared to provide lenders the resources and assistance to help you effectively participate in the second round of PPP lending as we as forgiveness application processing assistance. Access our webinar: PPP Aspects of the Consolidated Appropriations Act, 2021 for Financial Institutions where we discuss the Act in more detail.

Throughout the COVID-19 pandemic, we have delivered relevant and timely communications to help you and your financial institution teams manage through new guidance. As this next round of economic relief is finalized, look for more communication from our team. Please contact your CLA representative anytime.

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