Last week, the House passed H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020 (“PFA”) in nearly unanimous fashion with only a single dissenting vote. Late yesterday, the Senate approved the PFA unanimously so it is now headed to the President’s desk to become law.

While passage seems certain, nothing about the Paycheck Protection Program (“PPP”), a small business provision of the larger CARES Act, has been certain. There seems to be no Congressional doubt that the PPP’s provisions needed to be modified to extend financial relief to small businesses still suffering from the lingering COVID-19 pandemic. The PFA proposes to significantly amend several critical provisions of the PPP, which include:

1. Loan Maturity is Extended (For New Loans) from Two Years to Five

While the CARES Act originally established that PPP loans would have a term of not more than ten years, the SBA implemented the PPP with only a two year loan maturity date. Congress has now acted to extend the maturity term to five years, but only for new loans entered after the passage of the PFA. For already existing loans, Congress allowed that lenders and borrowers may mutually agree to modify the maturity term to conform to five years.

Loan maturity is the only PFA modification that is limited to new loans. Each of the following changes apply to both new and existing loans, thus significantly altering the PPP as it has been understood by lenders and borrowers and implemented by the SBA.

2. The Period of Deferred Payment is Modified – and a Forgiveness Deadline is Imposed

Under the CARES Act, a deferral period of not less than six months and not more than one year was allowed for loan payments of principal and interest. The SBA implemented a six month period. The PFA modifies this period so that deferral now runs until the date that the lender receives the forgiveness amount from the SBA. Because the eight week covered period is also extended (as is discussed further below), borrowers now have greater flexibility.

However, with this extension Congress has also newly imposed a deadline for forgiveness applications. Now, if a loan recipient fails to apply for forgiveness within ten months after the last day of the covered period, payments of “principal, interest and fees” on such covered loan shall start “on the day that is not earlier than the date that is ten months after the last day of such covered period.”

3. The Covered Period is Extended

The CARES act established an eight week covered period for borrowers to incur and pay payroll and non-roll costs that were then eligible for loan forgiveness. The SBA had recently relaxed this provision in two ways, First, SBA established an optional alternative period for borrowers seeking to align their covered period with payroll cycles (at least for eligible payroll expenses). Then, the SBA also allowed that payroll and non-payroll costs that were incurred, and costs that were paid, were both eligible so long as incurred costs were paid during the next regular cycle. This modification had the potential to extend the covered period beyond eight weeks. The PFA now extends the covered period to the earlier of 24 weeks after the date of the loan’s origination or December 31, 2020, though the $100,000 cap on individual payroll eligibility remains unchanged.

4. The New 60% / 40% Hurdle Bars (Rather than Reduces) Loan Forgiveness

One of the significant criticisms of the implementation of the PPP concerned SBA’s regulatory rule that required 75% or more of the forgiveness eligible costs to be payroll rather than non-payroll costs. Recently, the SBA clarified that while the so-called 75% / 25% rule would not foreclose forgiveness eligibility entirely, the rule would operate to reduce non-payroll costs to not exceed 25% of the total amount of eligible forgiveness. Criticism persisted however, that the 75% payroll threshold was still too high.

The PFA has now modified the SBA rule so that 60% (or more) of the forgiveness amount must be eligible payroll costs. This will enable some borrowers to benefit from increased eligibility for costs such as rent, transportation, utility costs, and mortgage interest. However, the PFA also changes the effect of the rule as the new ratio no longer simply cause a reduction of forgiven non-payroll costs. Now, it operates as a threshold bar for eligibility. As drafted in the PFA, a borrower seeking forgiveness of spent loan amounts that including less than 60% payroll costs will not receive any forgiveness. This may be a consequence of unintended drafting and it will be interesting to see if Treasury and the SBA respond with regulations seeking to eliminate the threshold and restore the reduction.

5. Employee Count and Wage/Salary Safe Harbors Extended

The PPP requires reductions of the loan amount to be forgiven if (i) the borrower’s employee count of full time equivalent (“FTE”) employees drops and/or (ii) if any employee suffers a reduction in his or her wages/salary that is greater than 25%. In both cases, the borrower can restore the full amount for forgiveness if it fully restores its FTE count or wages to its February 15, 2020, levels before June 30, 2020.

The dilemma for many borrowers is that their businesses are not yet fully operational, and in some cases cannot be fully staffed pursuant to continuing government orders. To help resolve this predicament, the safe harbor deadlines are now extended to December 31, 2020. So long as the borrower fully restores its FTE count or wages to its February 15, 2020, levels before December 31, 2020, no reduction in forgiveness will be required.

6. New Exemption From Proportional Reduction of FTE Employees

Under the new PFA, during the period beginning on February 15, 2020, and ending on December 31, 2020, the amount of loan forgiveness shall be determined without regard to a proportional reduction in the number of FTE employees if an eligible recipient, in good faith—

1. “isabletodocument—
   1. “an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and
   2. "an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
2. "is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”

It is anticipated that President Trump will sign the PFA and that these amendments then become law effective immediately, but it is unknown when this will happen. As noted above, with the exception of extended loan maturity, each of these provisions will be retroactive in effect and shall apply to any PPP loan. Under the PFA, borrowers that received a covered loan before PFA enactment retain the option to utilize the 8 week covered period after the date of the origination of such covered loan. It is uncertain whether the option to utilize the alternative covered period for payroll costs has been supplanted. With passage, further guidance from the SBA should also be anticipated.