Business Loan Program Temporary Changes; Paycheck Protection Program – Additional Eligibility Revisions to First Interim Final Rule (Docket No. SBA-2020-0039)

Summary

Interim final rule of the Small Business Administration, Docket No SBA-2020-0039, further revising the felony eligibility requirement of the first Paycheck Protection Program interim final rule published April 15, 2020. The first rule barred loans where an owner of 20 percent or more had a felony conviction within five years; on June 12, 2020 the timeframe was shortened to one year for felonies not involving fraud, bribery, embezzlement or a false statement. This rule limits the restriction on pending criminal charges to felony offenses and applies the same five-year and one-year limits to owners on probation or parole. The agency says the change is consistent with the First Step Act of 2018.

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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

Docket No. SBA-2020-0039

RIN 3245-AH53

Business Loan Program Temporary Changes; Paycheck Protection Program – Additional

Eligibility Revisions to First Interim Final Rule

AGENCY: U.S. Small Business Administration.

ACTION: Interim final rule.

SUMMARY: On April 2, 2020, the U.S. Small Business Administration (SBA) posted on its

website an interim final rule relating to the implementation of sections 1102 and 1106 of the

Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the Act) (published in the

Federal Register on April 15, 2020). Section 1102 of the Act temporarily adds a new product,

titled the “Paycheck Protection Program,” to the U.S. Small Business Administration’s (SBA’s)

7(a) Loan Program. Subsequently, SBA issued a number of interim final rules implementing the

Paycheck Protection Program. On June 12, 2020, SBA posted on its website an interim final rule

revising the interim final rule published in the Federal Register on April 15, 2020 by changing

the eligibility requirement related to felony convictions of applicants or owners of the applicant.

This interim final rule further revises SBA’s interim final rule published in the Federal Register

on April 15, 2020 by further changing that eligibility requirement.

DATES: Effective Dates: The provisions in this interim final rule are effective [INSERT DATE

OF FILING AT THE OFFICE OF THE FEDERAL REGISTER].

Comment Date: Comments must be received on or before [INSERT DATE 30 DAYS AFTER

DATE OF PUBLICATION IN THE FEDERAL REGISTER].
ADDRESSES: You may submit comments, identified by number SBA-2020-0039, through the

Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting

comments.

SBA will post all comments on www.regulations.gov. If you wish to submit confidential

business information (CBI) as defined in the User Notice at www.regulations.gov, please send an

email to ppp-ifr@sba.gov. Highlight the information that you consider to be CBI and explain

why you believe SBA should hold this information as confidential. SBA will review the

information and make the final determination whether it will publish the information.

FOR FURTHER INFORMATION CONTACT: A Call Center Representative at 833-572-0502,

or the local SBA Field Office; the list of offices can be found at https://www.sba.gov/tools/local-

assistance/districtoffices.

SUPPLEMENTARY INFORMATION:

I. Background Information

On March 13, 2020, President Trump declared the ongoing Coronavirus Disease 2019

(COVID-19) pandemic of sufficient severity and magnitude to warrant an emergency declaration

for all states, territories, and the District of Columbia. With the COVID-19 emergency, many

small businesses nationwide are experiencing economic hardship as a direct result of the Federal,

State, and local public health measures that are being taken to minimize the public’s exposure to

the virus. These measures, some of which are government-mandated, have been implemented

nationwide and include the closures of restaurants, bars, and gyms. In addition, based on the

advice of public health officials, other measures, such as keeping a safe distance from others or

even stay-at-home orders, have been implemented, resulting in a dramatic decrease in economic

activity as the public avoids malls, retail stores, and other businesses.

2
On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic

Security Act (the CARES Act or the Act) (Pub. L. 116-136) to provide emergency assistance and

health care response for individuals, families, and businesses affected by the coronavirus

pandemic. The Small Business Administration (SBA) received funding and authority through

the Act to modify existing loan programs and establish a new loan program to assist small

businesses nationwide adversely impacted by the COVID-19 emergency.

Section 1102 of the Act temporarily permits SBA to guarantee 100 percent of 7(a) loans

under a new program titled the “Paycheck Protection Program.” Section 1106 of the Act

provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under

the Paycheck Protection Program.

On April 24, 2020, the President signed the Paycheck Protection Program and Health Care

Enhancement Act (Pub. L. 116-139), which provided additional funding and authority for the

PPP. On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act of

2020 (Flexibility Act) (Pub. L. 116-142), which changed provisions of the PPP relating to the

maturity of PPP loans, the deferral of PPP loan payments, and the forgiveness of PPP loans.

II. Comments and Immediate Effective Date

This interim final rule is effective without advance notice and public comment because

section 1114 of the CARES Act authorizes SBA to issue regulations to implement Title I of the

Act without regard to notice requirements. In addition, SBA has determined that there is good

cause for dispensing with advance public notice and comment on the grounds that that it would

be contrary to the public interest. Specifically, advance public notice and comment would defeat

the purpose of this interim final rule given that SBA’s authority to guarantee PPP loans expires

on June 30, 2020. These same reasons provide good cause for SBA to dispense with the 30-day

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delayed effective date provided in the Administrative Procedure Act (APA). Although this

interim final rule is effective on or before date of filing, comments are solicited from interested

members of the public on all aspects of the interim final rule, including section III below. These

comments must be submitted on or before [INSERT DATE 30 DAYS AFTER DATE OF

PUBLICATION IN THE FEDERAL REGISTER]. The SBA will consider these comments,

comments received on the interim final rule posted on SBA’s website April 2, 2020 (the First

Interim Final Rule) and published in the Federal Register on April 15, 2020, comments received

on the interim final rule posted on SBA’s website June 12, 2020 and published in the Federal

III. Paycheck Protection Program – Additional Eligibility Revisions to First Interim Final
Rule (85 FR 20811)

Overview

The CARES Act was enacted to provide immediate assistance to individuals, families, and

businesses affected by the COVID-19 emergency. Among the provisions contained in the

CARES Act are provisions authorizing SBA to temporarily guarantee loans under a new 7(a)

loan program titled the “Paycheck Protection Program.” Loans guaranteed under the Paycheck

Protection Program (PPP) will be 100 percent guaranteed by SBA, and the full principal amount

of the loans may qualify for loan forgiveness. The purpose of this interim final rule is to make

further changes to the First Interim Final Rule, posted on SBA’s website on April 2, 2020, and

published in the Federal Register on April 15, 2020 (85 FR 20811), as amended by the interim

final rule posted on SBA’s website on June 12, 2020 and published in the Federal Register on

June 18, 2020 (85 FR 36717). The First Interim Final Rule, as amended, should be interpreted

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consistent with the frequently asked questions (FAQs) regarding the PPP that are posted on

SBA’s website1 and the other interim final rules issued regarding the PPP.2

1. Changes to the First Interim Final Rule

Eligibility Requirements

The First Interim Final Rule provided, among other things, that a PPP loan will not be

approved if an owner of 20 percent or more of the equity of the applicant has been convicted

of a felony within the last five years. On June 12, 2020, the First Interim Final Rule was

amended after the Administrator, in consultation with the Secretary of the Treasury (the

Secretary), determined that a shorter timeframe for felonies that do not involve fraud,

bribery, embezzlement, or a false statement in a loan application or an application for federal

financial assistance is more consistent with Congressional intent to provide relief to small

businesses and also promotes the important policies underlying the First Step Act of 2018

(Pub. L. 115-391).

Upon further consideration, and in consultation with the Secretary, the Administrator has

determined that two additional modifications to the First Interim Final Rule are appropriate

to ensure a consistent approach to applicants with criminal histories. First, the First Interim

Final Rule provided that an applicant is ineligible for a PPP loan if an owner of 20 percent or

more of the equity of the applicant is presently subject to an indictment, criminal

information, arraignment, or other means by which formal criminal charges are brought in

any jurisdiction. The Administrator has determined that this restriction should be limited to

pending criminal charges for felony offenses, which aligns with the Administrator’s prior

determination that only felony convictions (but not convictions for other types of offenses)

1
See https://www.sba.gov/document/support--faq-lenders-borrowers.
2
See https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program.

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will limit an applicant’s eligibility for the PPP, subject to the time periods specified above.

Second, the First Interim Final Rule provided that an applicant was ineligible for a PPP loan

if an owner of 20 percent or more of the equity of the applicant is on probation or on parole.

The Administrator has determined that this restriction should be limited to individuals whose

probation or parole commenced within the time periods specified above—i.e., within the last

five years for any felony involving fraud, bribery, embezzlement, or a false statement in a

loan application or an application for federal financial assistance, and within the last one year

for other felonies. Applying these time limitations to the probation and parole restriction

aligns with the Administrator’s prior determination to apply the identical time limitations to

felony convictions. Moreover, aligning the time limitations applicable to these restrictions is

consistent with Congressional intent to provide relief to small businesses and also promotes

the important policies underlying the First Step Act of 2018 (Pub. L. 115-391). This

amendment does not affect the rule regarding applicants that are presently suspended,

debarred, or proposed for debarment, which remains effective. Therefore, Part III.2.b.iii. of

the First Interim Final Rule (85 FR 20811, 20812) is revised to read as follows:

b. Could I be ineligible even if I meet the eligibility requirements in (a) above?

You are ineligible for a PPP loan if, for example:

*****

iii. An owner of 20 percent or more of the equity of the applicant is presently

incarcerated or, for any felony, presently subject to an indictment, criminal

information, arraignment, or other means by which formal criminal charges are

brought in any jurisdiction; or has been convicted of, pleaded guilty or nolo

contendere to, or commenced any form of parole or probation (including

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probation before judgment) for, a felony involving fraud, bribery, embezzlement,

or a false statement in a loan application or an application for federal financial

assistance within the last five years or any other felony within the last year; or

*****

Under the First Interim Final Rule, as amended, an applicant is ineligible if an owner of 20

percent or more of its equity is presently incarcerated. In considering this amended Interim

Final Rule the Administrator, in consultation with the Secretary, has determined that this

restriction on eligibility remains appropriate because the operations of small business

concerns present a greater danger of becoming impaired when their owners are incarcerated.

As a result, they may have greater difficulty repaying their loans and present a greater credit

risk. Although PPP loans may be forgiven under section 1106 of the CARES Act, PPP loans

may only be forgiven in cases where borrowers can document that the proceeds were

expended in accordance with the requirements of section 1106. In situations where the

proceeds have not been used appropriately, and the loans, accordingly, cannot be forgiven,

the borrowers’ ability to repay the loans remains an important consideration. In addition,

ineligibility for businesses whose owners are currently incarcerated will help prevent misuse

of PPP loan funds, irrespective of loan forgiveness considerations.

Under the First Interim Final Rule, as amended, an applicant is also ineligible if an owner of

20 percent or more of its equity is, for any felony, subject to an indictment, criminal

information, arraignment, or other means by which formal criminal charges are brought in

any jurisdiction. Individuals charged with felonies are at risk of imprisonment, which, as

discussed above, could place the creditworthiness of their businesses in question. Therefore,

the Administrator, in consultation with the Secretary, has determined that this limitation also

7
remains appropriate to ensure that PPP funds are not allocated to an applicant for which a

recent felony charge may impair its ongoing business operations and therefore its ability to

repay a PPP loan for reasons unrelated to the COVID-19 pandemic.

Finally, under the First Interim Final Rule, as amended, an applicant is ineligible if an owner

of 20 percent or more of its equity has been convicted of, pleaded guilty or nolo contendere

to, or commenced any form of parole or probation (including probation before judgment) for,

a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or

an application for federal financial assistance within the last five years or any other felony

within the last year. The Administrator, in consultation with the Secretary, has determined

that, in order to ensure program integrity and safeguard against misuse of PPP funds, it

remains appropriate to require that applicants whose owners previously were convicted of or

pleaded guilty or nolo contendere to a felony offense have avoided a further felony charge

following conviction or incarceration for a period of at least one year before obtaining a PPP

loan. This interval provides a reasonable level of assurance that such applicants do not

present unacceptable risks of re-incarceration that could, as discussed above, undermine the

ability of their businesses to repay their PPP loans. The Administrator, in consultation with

the Secretary, has determined that a longer five-year limitation is appropriate for felonies

involving fraud, bribery, embezzlement, or a false statement in a loan application or an

application for federal financial assistance because such felonies are most relevant to the

applicant’s business integrity and responsibility, and may indicate a greater risk of potential

misuse of PPP loan funds.

Each of the ineligible applicant categories described above has been formulated to reduce the

risk of default and fraud in the PPP and to ensure that PPP loan funds are provided for small

8
businesses that will be able to support jobs, consistent with Congressional intent in the

CARES Act. These measures are particularly necessary in light of the structure of the PPP,

in which lenders are subject to relatively few underwriting obligations before issuing loans

that are 100 percent guaranteed by SBA and that may be subject to full forgiveness based on

documentation provided by the borrower. While neither lenders nor SBA are conducting

typical analysis of the characteristics of PPP applicants, the measures described above are

intended to mitigate the risk of default, fraud, or misuse of PPP loan funds intended to benefit

small business employees and at the same time balance that need with the need to assist in

the rehabilitation of felons, who are working to become responsible and productive members

of society.

2. Additional Information

SBA may provide further guidance, if needed, through SBA notices which will be posted on

SBA’s website at www.sba.gov. Questions on the Paycheck Protection Program may be directed

to the Lender Relations Specialist in the local SBA Field Office. The local SBA Field Office

may be found at https://www.sba.gov/tools/local-assistance/districtoffices.

Compliance with Executive Orders 12866, 12988, 13132, 13563, and 13771, the Paperwork

Reduction Act (44 U.S.C. Ch. 35), and the Regulatory Flexibility Act (5 U.S.C. 601-612).

Executive Orders 12866, 13563, and 13771

This interim final rule is economically significant for the purposes of Executive Orders

12866 and 13563, and is considered a major rule under the Congressional Review Act. SBA,

however, is proceeding under the emergency provision at Executive Order 12866 Section

6(a)(3)(D) based on the need to move expeditiously to mitigate the current economic conditions

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arising from the COVID–19 emergency. This rule’s designation under Executive Order 13771

will be informed by public comment.

This rule is necessary to implement Sections 1102 and 1106 of the CARES Act and the

Flexibility Act in order to provide economic relief to small businesses nationwide adversely

impacted under the COVID-19 Emergency Declaration. We anticipate that this rule will result in

substantial benefits to small businesses, their employees, and the communities they

serve. However, we lack data to estimate the effects of this rule.

Executive Order 12988

SBA has drafted this rule, to the extent practicable, in accordance with the standards set forth

in section 3(a) and 3(b)(2) of Executive Order 12988, to minimize litigation, eliminate

ambiguity, and reduce burden. The rule has no preemptive effect but does have a limited

retroactive effect consistent with section 3(d) of the Flexibility Act.

Executive Order 13132

SBA has determined that this rule will not have substantial direct effects on the States, on the

relationship between the National Government and the States, or on the distribution of power and

responsibilities among the various layers of government. Therefore, SBA has determined that

this rule has no federalism implications warranting preparation of a federalism assessment.

Paperwork Reduction Act, 44 U.S.C. Chapter 35

SBA has determined that this rule will require modification to the existing PPP

information collection that is approved under OMB Control Number 3245-0407 as an emergency

request until October 31, 2020. As discussed above, this rule amends the PPP eligibility

requirements regarding certain criminal activity. As a result of these amendments, conforming

changes will be made to Questions 5 and 6 of Form 2483, Borrower Application Form, and

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Section H of Form 2484, Lender Application Form. SBA will submit the revisions to these

forms to the Office of Management and Budget for approval.

Regulatory Flexibility Act (RFA)

The Regulatory Flexibility Act (RFA) generally requires that when an agency issues a

proposed rule, or a final rule pursuant to section 553(b) of the APA or another law, the agency

must prepare a regulatory flexibility analysis that meets the requirements of the RFA and publish

such analysis in the Federal Register. 5 U.S.C. 603, 604. Specifically, the RFA normally requires

agencies to describe the impact of a rulemaking on small entities by providing a regulatory

impact analysis. Such analysis must address the consideration of regulatory options that would

lessen the economic effect of the rule on small entities. The RFA defines a “small entity” as (1) a

proprietary firm meeting the size standards of the Small Business Administration (SBA); (2) a

nonprofit organization that is not dominant in its field; or (3) a small government jurisdiction

with a population of less than 50,000. 5 U.S.C. 601(3)–(6). Except for such small government

jurisdictions, neither State nor local governments are ‘‘small entities.’’ Similarly, for purposes of

the RFA, individual persons are not small entities.

The requirement to conduct a regulatory impact analysis does not apply if the head of the

agency “certifies that the rule will not, if promulgated, have a significant economic impact on a

substantial number of small entities.” 5 U.S.C. 605(b). The agency must, however, publish the

certification in the Federal Register at the time of publication of the rule, “along with a statement

providing the factual basis for such certification.” If the agency head has not waived the

requirements for a regulatory flexibility analysis in accordance with the RFA’s waiver provision,

and no other RFA exception applies, the agency must prepare the regulatory flexibility analysis

and publish it in the Federal Register at the time of promulgation or, if the rule is promulgated in

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response to an emergency that makes timely compliance impracticable, within 180 days of

publication of the final rule. 5 U.S.C. 604(a), 608(b).

Rules that are exempt from notice and comment are also exempt from the RFA requirements,

including conducting a regulatory flexibility analysis, when among other things the agency for

good cause finds that notice and public procedure are impracticable, unnecessary, or contrary to

the public interest. Small Business Administration’s Office of Advocacy guide: How to Comply

with the Regulatory Flexibility Act, Ch.1. p.9. Accordingly, SBA is not required to conduct a

regulatory flexibility analysis.

Authority: 15 U.S.C. 636(a)(36); Coronavirus Aid, Relief, and Economic Security Act, Pub. L.

116-136, Section 1114.

Jovita Carranza,
Administrator

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