Everything PPP Borrowers Need To Know About Why The SBA’s 75% Rule Is Wrong

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Why does the SBA require that a Paycheck Protection Program (“PPP”) borrower use 75% of the PPP proceeds on “payroll costs”?  It’s a curious question.  It’s particularly curious given that the CARES Act itself does not require this.  In fact, the CARES Act actually says that a borrower can spend the loan proceeds on other costs—and even mandates forgiveness for those expenditures if they fall into three other categories.  So where does that leave borrowers?  Well, they are stuck with the SBA’s 75% restriction, unless they want to challenge the validity of the SBA’s rule.  But I’m betting that they would win if they did.    

To be clear, the SBA currently maintains that no more than 25% of a borrower’s forgiven PPP loans can be attributable to non-payroll costs.  In other words, the borrower must use 75% of the funds on “payroll costs” to realize full forgiveness.  The SBA, however, has superimposed this 75% requirement on a statute that unambiguously does not impose such a requirement. (It’s not the first time that they have gotten an important PPP rule wrong.)  The 75% rule is, in other words, the SBA’s rule—not Congress’s rule.  That seems like a problem.  

The Statute 

Let’s start by reviewing the exact language that Congress used.  Congress, after all, makes the laws.  The CARES Act itself provides as follows: 

(b) FORGIVENESS.—An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period: 

(1) Payroll costs. 

(2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation). 

(3) Any payment on any covered rent obligation. 

(4) Any covered utility payment.

Interestingly, Congress did not speak a single word about the proportion of the PPP funds that a borrower would be required to spend on “payroll costs”—or any other category for that matter.  It did not say that a portion of the PPP funds must be spent on one category, or that only a percentage of the PPP funds could be spent on another category.    

Again, pay close attention to the congressional language.  The provision states that “[a]n eligible recipient shall be eligible for forgiveness…”  The word “shall” connotes a mandatory directive (unlike a discretionary term, such as “may”).  Supreme Court case law is littered with court opinions to this effect.  A mandatory directive from the words of Congress is the law.  There are no “if, ands, or buts” about it.

But let’s go on.  More fully, the Act’s language provides that: “An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs . . . .”  Again, this language is not ambiguous.  It spares no room for splicing and dicing the relative proportions of the “following costs.”  In fact, it says the opposite: the amount forgiven is “equal to the sum” of those costs.  

And what are those costs that we sum?  They are listed above as payroll costs, “[a]ny payment of interest on any covered mortgage obligation,” “[a]ny payment on any covered rent obligation,” and “[a]ny covered utility payment.”  How much of those non-payroll costs did Congress say would be eligible for forgiveness?  “Any.”  Not some.  Not a portion.  Not 25%.  But “any.” 

So why, again, can only 25% of the amount of PPP forgiveness be attributable to non-payroll costs?  This time, the question is rhetorical. 

The SBA’s Rules 

Notably, the 75% rule first appeared when the SBA released its First Interim Rule on April 2, 2020—some 6 days after the CARES Act was signed into law.  That rule was subsequently published in the Federal Register (an official compendium of federal regulations) on April 15, 2020.  Let’s look closely at what the SBA said.  The Interim Rule provided as follows: 

HOW CAN PPP LOANS BE USED?

The proceeds of a PPP loan are to be used for:

i. payroll costs . . .;

ii. costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;

iii. mortgage interest payments (but not mortgage prepayments or principal payments);

iv. rent payments;

v. utility payments;

vi. interest payments on any other debt obligations that were incurred before February 15, 2020 . . . .

However, at least 75 percent of the PPP loan proceeds shall be used for payroll costs.

Read in context, this rule actually purports to require that 75% of the PPP loan proceeds be used on “payroll costs.”  Period.  That is, separate and apart from the question of whether the borrower qualifies for forgiveness, the SBA’s interim rule actually imposes a requirement that 75% of the PPP funds be used on “payroll costs.”   

In adopting the rule, the SBA explained that it “ha[d] determined in consultation with the Secretary that 75 percent is an appropriate percentage in light of the Act’s overarching focus on keeping workers paid and employed.”  The SBA continued, “the Administrator and the Secretary believe that applying this [75%] threshold to loan forgiveness is consistent with the structure of the Act.”   Thus, under the SBA’s rules, “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.”  

To be clear, it’s hard to take issue with the direction as a general policy matter.  But that does not make it legally valid.  In a system based on the rule of law, where certain institutions make the laws and others implement them, the point truly is an important one.  It is fundamentally premised on a theory that law-making authority ultimately emanates from the people.  Congress is elected.  It answers directly to, and represents, the will of the people.  Regulators are not elected.  And it simply is no answer to say that difficult times call for exceptions.  That path leads down a slippery and dangerous slope.  

Boiled down, it seems that the legal issue here is fundamentally a separation-of-powers question.  Who should be writing the laws?  Congress or the SBA?  But that probably sounds more than a little bit “ivory tower”-ish to many readers who are just scanning the web for some PPP guidance.  So let’s frame it in more concrete terms: Should a small business owner with low payroll costs but significant equipment and facility lease costs, utility costs, and other qualifying non-payroll costs be forced to put its PPP funds into this SBA-mandated bucket when doing so does not further the long-term goal of keeping the business viable?  It seems that doing so could be a counter-productive waste of taxpayer dollars in many circumstances.  Indeed, small businesses are not cookie-cutter operations.  And the PPP was not meant to be a one-size-fits-all cram-down.  Why not allow small businesses to use the funds in the most sensible manner?  History has shown that such a “deregulated” approach actually has a better chance of protecting jobs and employees than bureaucratically regulating these kinds of details.  

The Law

The issue raised here is a common one. Courts have long wrestled with the amount of discretion to afford agencies in writing rules.  And they have largely settled on a basic rule.  Under the Supreme Court’s seminal case in Chevron v. Natural Resources Defense Council, Inc., in analyzing whether an agency has authority to make such a rule, the first question is “whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for . . .  the agency[] must give effect to the unambiguously expressed intent of Congress.”  Here, as discussed above, Congress has done just that.  Its language could hardly be clearer; and it leaves no ambiguity that would indicate an intention to impose the 75% requirement.  

Legally, that is the end of the analysis.  Generally, it is only where the statute is silent or ambiguous on an issue that the agency can impose affirmative rules and obligations like the SBA has done here.  But even then, it cannot impose just any rules.  Those rules have to be based on a fair reading of the statutory language.  As the Supreme Court has put it, “if the statute is silent or ambiguous with respect to the specific issue, the question [then] . . . is whether the agency’s answer is based on a permissible construction of the statute.” [1] Again, the statute is not silent or ambiguous on the specific issue.  But even if it was, it is difficult to see where exactly the 75% rule comes from.  

Again, the fundamental question is whether the agency had authority to create the 75% rule.  As the D.C. district court very recently put it, in analyzing whether an agency had authority to implement a rule:

In every challenge to agency action, “the question a court faces when confronted with an agency’s interpretation of a statute it administers is always, simply, whether the agency has stayed within the bounds of its statutory authority.”  Stated differently, “the question in every case is, simply, whether the statutory text forecloses the agency’s assertion of authority, or not.” [2] 

(internal citations omitted.).  

It would seem that the answer here is that the agency has exceeded its authority in light of the clear language of the legislative text.  The only other avenue to support such an exercise of administrative rule-making authority would be a claim that Congress affirmatively delegated authority to the agency to create such a rule.  But the reality is that Congress did no such thing.  The statute, in fact, provides for a specific congressional mandate when it comes to the PPP.  Congress instructed the SBA as follows: “Not later than 30 days after the date of enactment of this Act, the Administrator shall issue guidance and regulations implementing this section.”  The mandate to “implement” the statutory PPP rules does not give the SBA liberty to create its own policy, especially when that policy, as explained above, is actually contrary to the legislature’s language.  The Oxford dictionary defines the word, “implement,” as to “put into effect.”  Materially changing a congressional rule does not implement that rule—it implements a new and different rule: The SBA’s rule; not Congress’s.  

For a comprehensive breakdown of the PPP and CARES Act, see our Compendium.

[1] Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984).

[2] Merck & Co. v. United States Dep’t of Health & Human Servs., 385 F. Supp. 3d 81, 88–89 (D.D.C. 2019).

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