On Friday, June 5, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 into law. By now, most of the readers of this blog will know the changes but it is good to first review what has NOT changed in the law.
· The application deadline for PPP loans is still June 30, 2020
· The eligible amount to apply for is still 2.5x monthly payroll expenses
· The interest rate on the loan is still 1%
· Amount the government pays financial institutions to do these loans has not changed
· Forgiven amounts remain taxable
· Eligible expenses are still wages, retirement and health benefits, state taxes, rents, mortgage interest, and utilities paid by the business
Let us look at a few features that HAVE changed.
· Borrowers can use a 24-week period to restore their workforce instead of the 8-week period. If a borrower can achieve full forgiveness in the 8 weeks, they should do so
· Forgiveness can be calculated on the better of the 24 or 8-week period
· Only 60% of the loan, as opposed to 75% must be spent on payroll costs
· If the borrower fails to spend 60% on payroll costs, none of the loan is forgiven
· Unforgiven amounts are amortized over 5 years instead of 2
· Now have until December 31 to reach full employment levels compared to the February 15 safe harbor
· No proportional reduction in forgiveness due to the number of full-time equivalent employees is applicable if the borrower is able to document
o Inability to rehire individuals who were employees on February 15 and cannot hire similarly qualified employees for the unfilled position before December 31, or
o The business cannot return to the same level of business activity the business was operating at before February 15 due to compliance from the Secretary of Health and Human Services, CDC, or OSHA
· Business who received a PPP loan can delay payment of payroll taxes
· Borrowers can apply for forgiveness of a covered loan up to 10 months after the last day of the covered period
· Payment deferment period is now extended from the original 6 months to the date the borrow is told the amount of their loan forgiveness
Now that the PPP origination period is coming to an end, we are beginning to wonder what will happen with new business for the remainder of the year. One thing to look for is a strong economic rebound. Last week showed a strong increase in employment with 2.5 million jobs, in areas outside of farming, added in May compared to the 7 million losses expected by the analysts. This comes as large states like California, New York, Illinois, and Michigan were in a period of being largely shut down. A surprising majority of those who have lost jobs consider their loss as “temporary”.
Initial jobless claims are dropping from their peak. Job growth is coming virtually across the board with more jobs in areas like health, construction, and hospitality. While we do see improvement, continuous unemployment claims are still at close to 22.5 million.
Other signs are beginning to point to possible economic growth. New home sales rebounded in April, but existing home sales dropped, while housing prices are still show some growth. Personal income is up. On the other hand, consumer spending is down by nearly 17% in April and retail sales dropped showing the negative impact of the coronavirus on the economy. New orders for durable goods and manufacturers’ new orders have both taken steep dives.
The remaining of 2020 will present tremendous opportunities for some while marking continued struggles for others. For the lender, this will require great skill and insight to finding the new opportunities while managing the troubled credits in one’s portfolio.