SBA Issues New Guidance on First and Second Draw PPP LoansJanuary 12, 2021
On January 8, 2021, the Small Business Administration (“SBA”) issued two Interim Final Rules containing guidance related to the Economic Aid Act signed into law at the end of last year, which provided funds for new first draw Paycheck Protection Program (“PPP”) loans, (“First Draw Loans”) as well as second draw PPP loans (“Second Draw Loans”). The first new Interim Final Rule (the “First Draw Loan Rule”) was for the most part a consolidated restatement of rules previously issued by the SBA with respect to PPP loans. The second new Interim Final Rule (the “Second Draw Loan Rule”) answered a few key questions regarding the Second Draw Loans, but was otherwise largely reiterative of the provisions of the Economic Aid Act. Summaries of the First Draw Loan Rule and the Second Draw Loan Rule are below.
First Draw Loan Rule
The First Draw Loan Rule consolidates and restates almost two dozen previously issued SBA rules, providing PPP borrowers a single resource to consult on borrower eligibility, lender eligibility and loan application and origination requirements, as well as general rules on increases and loan forgiveness applications for PPP loans (note that borrowers should also consult the SBA’s previously issued interim final rules on loan forgiveness and the loan review process, which guidance was not consolidated into the First Draw Loan Rule). The First Draw Loan Rule is organized by a user-friendly and easily understandable Table of Contents, providing a much more efficient way to navigate the guidance.
The First Draw Loan Rule includes the changes to First Draw Loans made by the Economic Aid Act, as summarized in our previously issued Client Alert. The Economic Aid Act makes First Draw Loans available to eligible recipients who did not receive PPP loans under the initial rounds offered in 2020. Under the Economic Aid Act, a new PPP applicant may choose between calendar year 2019 or the 12 months beginning on the date the loan is made for calculating average monthly payroll costs for purposes of determining its maximum loan amount. The First Draw Loan Rule permits new PPP applicants (other than the self-employed, sole proprietors or independent contractors) to instead select calendar year 2020 as their baseline for calculating average monthly payroll costs (the “Payroll Cost Alternative Baseline”). Although the Payroll Cost Alternative Baseline was provided by the SBA for administrative ease (as payroll costs are often tracked on a calendar year, rather than rolling, basis), it seems likely that a pre-pandemic 2019 baseline will result in a higher loan amount for many borrowers.
The SBA also published a new application form for First Draw Loans and promised to update its previously issued FAQs as soon as feasible.
Second Draw Loan Rule
The Second Draw Loan Rule is also organized by a user-friendly Table of Contents and largely restates in an more easily understood format the terms of the Economic Aid Act related to Second Draw Loans, as summarized in our previously issued Client Alert. In addition to providing that the Payroll Cost Alternative Baseline (as defined above) applies to Second Draw Loans, the Second Draw Loan Rule sets forth a few additional terms and conditions that apply to Second Draw Loans but were not included in the Economic Aid Act.
First, the Second Draw Loan Rule clarifies that “gross receipts” for purposes of determining the amount of an applicant’s revenue reduction for eligibility purposes, should be calculated in accordance with the definition of “annual receipts” under 13 CFR 121.104 (generally, all revenue in whatever form received or accrued, plus cost of goods sold, and excluding net capital gains or losses). The Second Draw Loan Rule also makes clear that the amount of any forgiven First Draw Loan should be excluded from a borrower’s calculation of its gross receipts.
Next, the Second Draw Loan Rule provides that businesses that are part of a single “corporate group” (businesses that are majority owned, directly or indirectly, by a common parent) cannot receive more than $4 million of Second Draw Loans in the aggregate. This aggregate cap on Second Draw Loans (which are capped at $2 million individually) is in the same proportion as the $20 million aggregate cap on First Draw Loans (which were capped at $10 million individually).
The Second Draw Loan Rule also states that if a Second Draw Loan applicant’s First Draw Loan is under review with the SBA, and/or there is information in possession of the SBA that indicates the applicant may have been ineligible for the First Draw Loan, a Second Draw Loan will not be available to the applicant until the matter has been resolved (in favor of the applicant).
Lastly, and importantly, the Second Draw Loan Rule included a clarification related to borrower certifications. Under the Economic Aid Act, it was not clear whether the 25% revenue reduction requirement would replace the controversial “necessity of the loan certification” required for First Draw Loans. The Second Draw Loan Rule makes clear that applicants for Second Draw Loans will indeed be required to make the certification that “the current economic uncertainty makes the loan necessary to support ongoing operations of the applicant.” Therefore, the risk around this certification remains, and borrowers will need to carefully consider their circumstances when making the certification, especially given that there is arguably much less economic uncertainty than in early spring last year.
The SBA’s form of application for Second Draw Loans can be found here.
 Under the Economic Aid Act, First Draw Loans and Second Draw Loans are available through March 31, 2021, although it is not clear when lenders will begin accepting applications.
One of the eligibility requirements for a Second Draw Loan is that the applicant show a reduction in gross receipts of at least 25% in any one quarter of 2020 as compared to the same quarter in 2019.
This summary does not include or address every provision of the Economic Aid Act, the Paycheck Protection Program under the CARES Act, or related SBA rules and guidance, which should be read in their entirety.