To explain the key relief for 501(c)(3)s and small businesses in the recently enacted $2 Trillion CARES Act (complete text), we published our CARES Act Alert #1 (Help for Small Businesses & 501(c)(3)s via the PPP); CARES Act Alert #2 (Get Ready to Apply); CARES Act Alert #3 (PPP vs EIDL), and CARES Act Alert #4 (initial Guidance from Treasury).
In general, over $350 billion of the CARES Act is meant for small entities – mostly small businesses and 501(c)(3) nonprofits – with no more than 500 employees. Most of the money flows through two main loan/grant programs administered by the Small Business Administration ( SBA): Economic Injury Disaster Loans (EIDLs) and Paycheck Protection Program ( PPP) loans.
This Alert #5 reviews the Interim Final Rule (IFR) (SBA link or Treasury link), PPP Borrower Application (BA Form), and associated documents issued by the SBA and effective yesterday (New Documents). They provide further guidance about the eligibility of entities to share in this emergency economic relief and the loan application process. They were published last night (April 2, 2020) and indicate that still further guidance is forthcoming for religious organizations – perhaps as early as today.
A. THREE CRITICAL OBSERVATIONS.
1. Time Is of the Essence – STILL (and more so). The New Documents reinforce that those applying for a loan under the CARES Act should move quickly, noting that the PPP is “ first-come, first-served.” Recent news reports suggest that the volume of applications will likely far exceed and quickly exhaust the $349 Billion authorized by Congress for PPP loans.
2. Caveat Emptor (Buyer Beware) – STILL (but now less so). The IFR and BA Form answer many questions for lenders and Applicants. The IFR also provides some reassurance to religious 501(c)(3)s concerned that PPP loans might subject them to, or later imply they agreed to, specific legal requirements that might undermine their religious free exercise and hamper their religious ministries. Specifically, the IFR states that “[a]ll loans guaranteed by the SBA pursuant to the CARES Act will be made consistent with constitutional, statutory, and regulatory protections for religious liberty” and with an SBA rule (13 C.F.R. §113.3-1h) that exempts certain membership and employment decisions made on the basis of religion from certain SBA nondiscrimination requirements. See IFR III.5, pp. 27-28. But the IFR and the BA Form do not address all questions and do not fully eliminate all reasons for those concerns. The IFR states that SBA intends to promptly issue additional guidance regarding religious liberty protections under the PPP program. There are indications that such guidance may be issued as early as today (Friday, April 3).
3. Be Prepared – TODAY! All interested 501(c)(3) nonprofits should immediately assign an internal leadership team (or obtain outside expert assistance); download, review, and complete the BA Form; contact their preferred FDIC-insured bank or other SBA-approved lender; and be prepared to proceed ASAP. Churches and other religious 501(c)(3)s should do the same while maintain ongoing diligence about potential risks for their religious freedoms. Legal counsel can help you make an informed risk/reward decision now and/or later, based on your specific circumstances, even while continuing to monitor for new guidance on these issues.
B. FINAL PPP BORROWER APPLICATION FORM (BA FORM).
Applicants must use the BA Form to apply for a PPP loan when the application window opens TODAY, Friday, April 3, 2020 (or, if delayed, tomorrow). Applicants should focus on reviewing this BA Form and gathering the information and supporting documentation that the BA Form requires. It is a “fillable” PDF form that Applicants can download, fill out, submit and/or save/print. For the Form and related info, visit the following SBA and Treasury sites (we’re giving multiple sites, in case one crashes):
Some potential Applicants may have reviewed SBA’s initial Sample form. The current BA Form includes revised terminology to accommodate nonprofits, which are unusual borrowers (and lesser known) to the SBA and many participating lenders. It also includes new “CERTIFICATIONS ” that address the specific eligibility and use requirements for a PPP loan. Be careful to use the current revised/approved BA Form (linked above). It is that Form that the Applicant must complete and sign, “certifying in good faith” that it “is true and accurate in all material respects.” Again, legal counsel can help an Applicant review any concerns. This includes any religious freedom concerns of a religious 501(c)(3), especially since the BA Form does not reference any of the legal “protections for religious liberty” referenced in the IFR. See IFR III.5, pp. 27-28.
C. INTERIM FINAL RULE (IFR) FOR THE PPP.
While the IFR is effective now, it provides for a 30-day period of public comment before it is revised into a Final Rule. Awaiting a Final Rule has risks, since the PPP loan application window opens today (April 3) and total loans sought may swamp the $349 Billion. Thus, Applicants may wish to apply as soon as they can, within their informed comfort level, and not await a Final Rule.
Note: This Alert references the original 31-page version of the IFR, which may be found here: SBA link or Treasury link. The same IFR text later will appear in an officially published version in the Federal Register.
The IFR reaffirms the very limited eligibility requirements established by the CARES Act for a PPP loan. See IFR III.2.a, p. 5. However, the IFR and the BA Form clarify that certain traditional SBA requirements still apply and that certain things, such as involvement in illegal activities, could result in ineligibility for PPP loans (as well as prosecution or penalties). See IFR III.2.b, p. 7.
The IFR provides much more explanation about the payroll-based calculations that determine the maximum loan available to each Applicant (within the $10 Million overall maximum) and how the relevant “payroll costs” are determined under the PPP program. See IFR III.2.d through III.2.g, pp. 8-10. In general, a PPP loan incurs interest at a rate of 1% for a term of two years, with six months deferment for the first payment, subject to up to total loan forgiveness (see below).
As noted above, the IFR emphasizes that PPP loans are “first come, first served.” See IFR III.2.m, p. 13. The IFR also says more about the application process, application forms, and their submission. See IFR III.2.q, p. 15. And it provides meaningful additional details about the use (IFR III.2.r, pp. 15-17), the misuse (IFR III.2.s, p. 17), and the forgiveness (IFR III.2.o, pp. 13-14) of PPP loans. Loan forgiveness (up to the total loan amount) is a second step, requiring a second submission, and SBA will provide further guidance about and forms for the forgiveness process.
The IFR provides significant clarifications and additional information, while also leaving open questions of ongoing concern to 501(c)(3)s, particularly religious ones, who are considering applying for PPP loans. For example, the IFR leaves some ambiguity as to whether certain regulations that restrict religious activities of loan recipients that SBA has applied to other loan programs will be applied to this PPP program. However, the IFR expressly promises that:
“All loans guaranteed by the SBA pursuant to the CARES Act will be made consistent with constitutional, statutory, and regulatory protections for religious liberty, including the First Amendment to the Constitution, the Religious Freedom Restoration Act, 42 U.S.C. 2000bb-1 and bb-3, and SBA regulation at 13 C.F.R. 113.3-1h, which provides:”
“Nothing in [SBA nondiscrimination regulations] shall apply to a religious corporation, association, educational institution or society with respect to the membership or the employment of individuals of a particular religion to perform work connected with the carrying on by such corporation, association, educational institution or society of its religious activities.”
See IFR III.5, pp. 27-28. Immediately following the above quoted language is the pledge that “SBA intends to promptly issue additional guidance with regard to religious liberty protections under this program.” See IFR III.5, p. 28. Useful informal guidance has arisen from members of Congress and other sources affirming the eligibility of religious 501(c)(3)s to participate in PPP loans without sacrificing their religious freedom or identity. But the official guidance will govern. Any church or other religious (c)(3) with lingering concerns would be wise to consult legal counsel and should watch attentively for the additional SBA guidance that is expected imminently.
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For assistance, please contact one of our attorneys: Nancy LeSourd, Matthew Szymanski, Scott Ward, or Derek Gaubatz. Our CARES Act Team also includes our non-attorney consultant Phil Eskeland. Mr. Szymanski and Mr. Eskeland bring experience from their past service, respectively, as the chief of staff and the deputy chief of staff of the Small Business Committee of the U.S. House of Representatives, including during the legislative response to 9/11. More Alerts to follow.