What does the second round of SBA PPP loans expect?

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It was a very big surprise to those of us who have observed and advised clients on PPP loans, that the program does not continue with the Rubio-Collins bill which was proposed on July 27, 2020. Click HERE to read my past coverage of PPP updates.

This proposed law would instead offer PPP borrowers a second loan if they have experienced a reduction of more than 50% in their income based on a number of different tests that may apply.

The economic need for this smaller and better regulated second round is clear. Many companies are on the verge of being made redundant or shut down because they simply have no more money or have to preserve the capital available to try to restart the business if and when the going gets tough. normal in our economy.

Meanwhile, many lenders, landlords and suppliers are paid less than what they are owed or, in many cases, are completely unpaid. Many people and companies show great patience, even absolute generosity, in preserving goodwill, the continuity of relationships and, in some cases, sincere sympathy for individuals and companies who do not have everything. they just can’t afford to pay their bills.

On the flip side, some individuals and businesses take advantage of the situation by failing to pay the bills they can afford to pay homeowners and others who actually need the money more than the non-payer. Sadly, this is the way the world works: the small percentage of the population who benefit from a situation like this eventually causes heartache for those with significant needs, in circumstances where it is difficult to determine who can really. pay and who cannot.

Unlike the Great Recession of 2008, the FDIC and the Federal Reserve System do not pressure banks to demand that loans meet both payment and loan-to-value and other debt ratios. , which was part of the exacerbation of problems in 2008., when banks filed foreclosures against borrowers who never missed a payment, due to debt ratios and other technical loan violations.

Fortunately, I am not yet seeing a drop in the values ​​of real estate, motor vehicles, boats or other assets, and some real estate experts believe that we are in fact in a “bubble” and that prices may go down. quickly and significantly when there are fewer people who can afford to own their home, rent a luxury apartment, or even live apart from their parents.

With the above as a backdrop, it makes sense to speculate on what may happen in the future, in order to better plan and make decisions regarding valuable resources and the possible financial health of customers, suppliers, and others.

Will the current P3 forgiveness rules continue to change?

The changes updated on August 24 show me that the SBA is trying to fine-tune the P3 rules to some extent, and not necessarily in favor of borrowers.

For example, the most recent rule changes took me by surprise by indicating that rent payments made to related parties would only result in a discount to the extent that the related party has a legitimate interest expense on a previous loan. until February 15, 2020 which is due. on the rented property (s). The parties are considered “related” if there is NO common ownership, and the limitation would apply even to people who own only 1% of the entity receiving rent payments.

In addition, the revised regulations provide a safe harbor so that the remuneration and benefits paid to a shareholder of less than 5% of a company are not subject to the caps of $ 20,833 and other applicable caps reflected by the published rules. in June 2020. This has come as an unpleasant surprise to many small business owners who themselves constitute a large part of their workforce.

The fact that these rules can get much worse, without warning, should certainly inspire borrowers to complete and submit their rebate requests before things change for the worse.

Readers can find a more in-depth analysis of the August 24 update in my previous article which can be found HERE.

What will become of the EIDL program?

It seems very likely that the EIDL program will continue in a somewhat erratic manner to provide loans large and small to borrowers who have applied on the basis of a “lottery” to see if the borrower has any news. of the EIDL and what the SBA agent who was randomly assigned to the borrower decides to loan.

Remember that EIDL loans bear interest at 3.5% and that the loan contract prohibits distributions or premiums from being made to owners or non-owners during the term of the loan.

Under SBA regulations, a business can only collect an EIDL loan if the business cannot otherwise remain operational without these funds. This is very different from the more lenient “necessity” PPP standard. While it is certainly reasonably necessary to have reasonable working capital and cash flow to ensure that a business can survive this epidemic, a large number of borrowers did not absolutely need the bank’s money. loan to keep the business open at the time the loan was granted. taken.

In addition, many EIDL loans must be guaranteed by one or more shareholders of the borrower, and the SBA has extraordinary powers beyond those of a creditor, including the ability to seize tax refunds from the borrower. a guarantor, the tax refund of a joint guarantor in certain circumstances, and the ability to garnish wages, even in states where normal creditors are not allowed to do so.

If I get a new PPP loan, will the repayment be mandatory or will forgiveness be allowed?

The Rubio-Collins Bill, as originally presented, made no mention of changing the rules for the second round of PPP loans. This bill also did not mention whether the forgiveness period would be the same as for the first loan, or whether the forgiveness period for the two loans combined would be limited to the 28 weeks that began when the first loan was made.

Most likely there will be two PPP forgiveness periods – one that begins when the first loan is taken out and a second that begins when the second loan is received.

Hopefully the SBA will provide that expenses that exceeded what was needed for the full cancellation of the first loan can be counted against the second loan.

However, it could take several weeks after the bill is passed to receive clear guidance on this matter. It is likely that a new spreadsheet should start on the date of the second loan. This would mean that the borrower would have to wait at least an additional 8-24 weeks to spend the borrowed money on authorized items.

It would make sense to require this to ensure that the money from the second round is spent using the same general parameters as the first round – To get a full pardon, at least 60% of the money will need to be spent on the payroll and the group health insurance, with up to 40% spent on interest, rent and utilities.

Where will my second PPP loan come from?

It seems clear that the second loan will come from the same bank that made the first loan, and the banks will profit significantly from it.

Under the Rubio-Collins bill, banks would receive 3% of new loans up to $ 350,000, and 1% of surplus. This bill also provided that there would be no “enforcement action” against a lender who acted in good faith on the basis of a certificate or documents submitted by a borrower.

What do I need to do to be ready to get my second PPP loan?

I suspect borrowers will have to complete a brand new application. Most of the questions will likely be the same as the first application, and if the borrower completed the first application correctly, then the answers could be transferred quite easily.

When the time comes, be sure to consult with your CPA or other advisors to make sure your request is accurate. This is important because the request is issued “under penalty of perjury”.

Also determine if the loan will be “necessary to support the operations of the business”. Even companies that have qualified for the first round and whose revenues have been reduced by more than 50% may not meet the requirements of necessity, for example if the company has been successful in downsizing and is reasonably profitable.

Sadly, there doesn’t appear to be a definitive end to this COVID-19 pandemic in sight, which means that further expansion of PPP is very likely to occur. I will make sure to provide updates if and when new updates or guidelines are released regarding PPP loan cancellation.

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