Skip to main content

“First Come, First Served:” SBA Issues Critical Guidance for Payroll Protection Program Loans



The Small Business Administration (SBA) has issued an Interim Final Rule controlling how $349 billion in short-term business loans under the CARES Act will be allocated. While the SBA is seeking comments from the public, the rule is effective immediately to provide immediate relief to businesses affected by the COVID-19 emergency. Applications for lenders and borrowers are available now.

The interim rule clarifies—and in some cases contradicts—the text of the CARES Act. But one provision will interest lenders and borrowers alike: payroll protection loans will be made on a “first come, first served” basis until the program’s funds are exhausted. The rule may also allay concerns from lenders skeptical of the government’s promise to guarantee 100 percent of these loans: it says banks that participate in the program as lenders will be held harmless for misrepresentations in the borrower’s application. Other noteworthy rule provisions are summarized below.

Eligibility Requirements

The interim rule implements the eligibility criteria in the CARES Act. Small business borrowers may be eligible if they meet the requirements below:

The rule is designed to encourage lenders to participate in the lending program with various provisions that make clear the lender is not responsible for independently verifying financial data provided by borrowers. But lenders must confirm receipt of information and evaluate whether the information provided by the borrower establishes loan eligibility, including:

  • Certification of the number of the borrower’s employees and backup documentation. The lender need not independently verify the accuracy.
  • Certification that the borrower was operating as of February 15, 2020, had employees and paid payroll taxes or independent contractors, again with backup documentation.
  • Certification that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”

Amount of the Loan

Like the CARES Act, the interim rule calculates the loan amount using the borrower’s payroll costs for the past 12 months, and then pro rates them for roughly 8-10 weeks. Importantly, though, the rule clarifies that borrowers may take out both a Payroll Protection Program loan and an Economic Injury Disaster Loan (EIDL). It further clarifies that borrowers are only eligible for one loan under the Payroll Protection Program, so borrowers should apply for the maximum available amount.

Again, lenders must demand and review information to confirm the loan amount, including:

  • Records sufficient to show average monthly payroll costs (lenders can rely on its accuracy without independent verification once certified by the borrower). These may include
    • Payroll processor records,
    • Payroll tax filings,
    • Form 1099-MISC
    • Income and expenses (sole proprietorship), and
    • Bank records, if those other documents are not available
  • Certification that funds will be used to retain workers and maintain payroll, make mortgage interest payments, lease payments and utility payments (and that non-payroll expenses will not exceed 25% of the total funds received)

Lender Certification

Both the interim rule and the lender’s application to participate in the program (Form 2484) require the lender to certify receipt of information above from the borrower and confirm it will comply with the Bank Secrecy Act. Under the rule, the “lender’s underwriting obligation under the PPP is limited to the items above and reviewing the ‘Paycheck Protection Application Form.’”

Interest Rate and Maturity Date

The interim rule sets interest rates and maturity dates lower than contemplated by the CARES Act:

  • Interest on all loans is one percent (100 basis points) and does not vary by borrower or principal amount. The Act capped rates at four percent.
  • The maturity date on all loans is two years from the date of funding. The Act provided the SBA with the flexibility to offer loans with a maximum maturity date of ten years, but the SBA determined a shorter timeframe for repayment was appropriate.

Deferment Period

Borrowers need not make any payments for six months after the loan is funded, but interest will continue to accrue. Here again, the SBA determined to offer less generous terms than were authorized under the Act, which authorized a 12-month deferment period.

Loan Forgiveness

Lenders may rely entirely on a borrower’s documentation that supports its request for loan forgiveness. The lender need not independently verify the authenticity of information within that documentation. The interim rule provides that penalties for fraudulent documentation or misrepresentations will be assessed only against borrowers (and not lenders).

Other Program Terms

  • Lenders need not consider whether borrowers can obtain credit elsewhere (“credit elsewhere test”).
  • Lenders may collect fees for loans made under the program, less fees charged by agents who assist the borrower, including:
    • 5% if the principal amount is not more than $350,000.
    • 3% if the principal amount is not more than $2 million.
    • 1% if the principal amount is more than $2 million.
  • There are no upfront or annual fees, nor are there fees if the lender sells the loan into the secondary market.

For more information about ongoing developments related to COVID-19, visit Miller Nash's resource library.