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COVID-19 Legal Updates

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April 07, 2020 BY


On April 2, 2020, the Small Business Administration (SBA) issued an interim final rule (Rule) applicable to sections 1102 and 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the Act). As addressed in a prior Drew, Eckl & Farnham memorandum, Section 1102 of the Act temporarily adds the Paycheck Protection Program (PPP) to the U.S. Small Business Administration’s (SBA’s) 7(a) Loan Program, and Section 1106 of the Act provides for forgiveness of up to the full principal amount of loans guaranteed under the Paycheck Protection Program. The Rule outlines key provisions of SBA’s implementation of sections 1102 and 1106 of the Act and provides additional guidance for lenders and borrowers.

The Rule is effective immediately and applies to applications submitted under the PPP through June 30, 2020, or until funds made available for this purpose are exhausted.

The following are highlights of the Rule:

  1. Interest rate. The interest rate is 100 basis points or one percent (1%) (The rate was 4% in the original Act)
  2. Term/Maturity date. The maturity is two years (The term was 10 years in the original Act).
  3. Multiple loans. A single borrower cannot apply for more than one PPP loan. Therefore, a borrower should consider applying for the maximum amount.
  4. Independent contractors as employees.  Since independent contractors may apply for a PPP loan on their own, they do not count as employees for purposes of a borrower’s PPP loan calculation.
  5. Payment deferment. No payments will be due for six months following the date of disbursement of the loan. However, interest will accrue during the deferment. (The original Act authorized deferment for up to one year).
  6. Loan forgiveness. The Rule requires that not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs (The original Act provides that borrowers are eligible for forgiveness in an amount equal to the sum of payroll costs and any payments of mortgage interest, rent, and utilities).

  1. Use of proceeds. The proceeds of a PPP loan are to be used for:
    1. payroll costs (as defined in the Act and in 2.f.);
    2. costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
    3. mortgage interest payments (but not mortgage prepayments or principal payments);
    4. rent payments;
    5. utility payments;
    6. interest payments on any other debt obligations that were incurred before February 15, 2020; and/or
    7. refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020. If you received an SBA EIDL loan from January 31, 2020 through April 3, 2020, you can apply for a PPP loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

Note: At least 75 percent of the PPP loan proceeds must be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included.


Robert Welch 


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