On Friday evening, May 22, the SBA put a kink in our Memorial Day Weekend plans by issuing additional guidance on Paycheck Protection Program (PPP) loan forgiveness, loan review procedures and related borrower and lender responsibilities. Instead of rushing to the beach to socially distance from the throngs of other beach goers, we decided to stay in front of our computers and write an article about the loan review procedures and related borrower and lender responsibilities, including our observations and related recommendations.
We hope this gave you the opportunity to go to the beach, golf course, or wherever else you relax and forget about Paycheck Protection Loans (PPL) for a few days!
Purpose of the Guidance
With this interim final rule, the SBA contemporaneously issued interim final guidance on its process for reviewing all PPL applications and loan forgiveness applications, regardless of the date on which they were submitted. The goal of this notice is to provide borrowers a high degree of certainty about the SBA’s application review so they may take immediate steps to maximize their loan forgiveness.
The Small Business Act authorizes the SBA Administrator to conduct investigations to determine whether a recipient or participant in any 7(a) program, including the PPP, is ineligible for a loan. Given the unique structure of the PPP, in which loans and loan forgiveness are provided based on the borrower’s certifications and documentation, the Administrator determined that additional procedures and criteria are necessary to make these eligibility assessments.
The interim final rule answers questions about many significant areas of the PPP, including:
SBA Reviews of Individual PPP Loans
Q. Will the SBA review individual PPP loans?
A. Yes. Any loan may be reviewed as the Administrator deems appropriate.
Observation: This includes loans with principal amounts of less than $2 million. The safe harbor provided for in the Treasury’s FAQs is only applies to certifying the loan need based on economic uncertainty.
Q. What borrower representations and statements will the SBA review?
A. The Administrator may review whether a borrower:
- is eligible for a PPL based on the laws, rules, and guidance available at the time of the borrower’s loan application,
- calculated the loan amount correctly and used loan proceeds for the allowable uses.
- is entitled to loan forgiveness in the amount claimed on the borrower’s Loan Forgiveness Application (SBA Form 3508 or lender’s equivalent form)
Q. When will the SBA undertake a loan review?
A. The SBA at any time may, at its discretion, undertake a loan review. For example, the SBA may review a loan if the loan documentation submitted to SBA by the lender, or any other information, indicates that the borrower may be ineligible for a PPL, or may be ineligible to receive the loan amount or loan forgiveness amount claimed. A borrower must retain PPP documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access such files upon request.
Q. Will a borrower get the opportunity to respond to the SBA’s questions in a review?
A. Yes. If the loan documentation submitted by the lender to the SBA, or any other information, indicates that a borrower may be ineligible for a PPL, or may be ineligible to receive the loan amount or loan forgiveness amount claimed, the SBA requires the lender to contact the borrower in writing to request additional information. The SBA may also request information directly from the borrower. The lender will provide to the SBA any additional information provided to it by the borrower. The SBA will consider all information provided by the borrower in response to such an inquiry.
Failure to respond to the SBA’s inquiry may result in a determination that the borrower was ineligible for a PPL or ineligible to receive the loan amount or loan forgiveness amount claimed. Providing an accurate calculation of the loan forgiveness amount is the responsibility of the borrower, who attests to the accuracy of its reported information and calculations on the Loan Forgiveness Application.
Q. If the SBA determines that a borrower is ineligible for a PPL, can the loan be forgiven?
A. No. If the SBA determines that a borrower is ineligible for the PPL loan, the SBA will direct the lender to deny the loan forgiveness application. Further, if the SBA determines that the borrower is ineligible for the loan amount or loan forgiveness amount claimed by the borrower, the SBA will direct the lender to deny the loan forgiveness application in whole or in part, as appropriate. The SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.
Q. May a borrower appeal SBA’s determination that the borrower is ineligible for a PPL or ineligible for the loan amount or the loan forgiveness amount claimed by the borrower?
A. Yes. The SBA intends to issue a separate interim final rule addressing this process.
Observation: It is imperative that a borrower document and keep records supporting its loan request, how loan proceeds are spent, and employment records supporting the number of employees and full-time equivalents. Eligibility will be determined as part of the loan forgiveness process. If forgiveness is denied, there are several appeals levels.
The Loan Forgiveness Process for Lenders
Q. What should a lender review?
A. For all loan forgiveness applications, each lender shall confirm:
1. Receipt of the borrower certifications contained in the Loan Forgiveness Application Form.
2. Receipt of the documentation borrowers must submit to aid in verifying payroll and nonpayroll costs, as specified in the instructions to the Loan Forgiveness Application Form
3. Borrower’s calculations on the borrower’s Loan Forgiveness Application, including the dollar amount of:
- Cash Compensation, Non-Cash Compensation, and Compensation to Owners claimed on Lines 1, 4, 6, 7, 8, and 9 on PPP Schedule A
- Business Mortgage Interest Payments, Business Rent or Lease Payments, and Business Utility Payments claimed on Lines 2, 3, and 4 on the PPP Loan Forgiveness Calculation Form, by reviewing the documentation submitted with the Loan Forgiveness Application
- that the borrower made the calculation on Line 10 of the Loan Forgiveness Calculation Form correctly, by dividing the borrower’s Eligible Payroll Costs claimed on Line 1 by 0.75
Observation: It appears the SBA’s primary focus is on loan forgiveness.
Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness. For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. By contrast, if payroll costs are not documented with such recognized sources, more extensive review of calculations and data would be appropriate. The borrower shall not receive forgiveness without submitting all required documentation to the lender.
Lenders may rely on borrower representations. If the lender identifies errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue. A lender does not need to independently verify the borrower’s reported information if the borrower submits documentation supporting its request for loan forgiveness and attests that it accurately verified the payments for eligible costs.
Observation: Reports provided by third parties (e.g.: payroll providers, CPA firms) are likely to facilitate the loan forgiveness process.
Q. What is the timeline for the lender’s decision on a loan forgiveness application?
A. The lender must issue a decision to the SBA on a loan forgiveness application not later than 60 days after receipt of a completed loan forgiveness application. That decision may take the form of an approval (in whole or in part); denial; or (if directed by the SBA) a denial without prejudice due to a pending SBA review of the loan for which forgiveness is sought. In the case of a denial without prejudice, the borrower may subsequently request that the lender reconsider its application for loan forgiveness, unless the SBA has determined that the borrower is ineligible for a PPP loan.
When the lender issues its decision to the SBA determining that the borrower is not entitled to forgiveness in any amount, the lender must provide the SBA with the reason for its denial together with certain documentation. The lender must also notify the borrower in writing that the lender has issued a decision to SBA denying the loan forgiveness application. The SBA, in its sole discretion, reserves the right to review the lender’s decision. Within 30 days of notice from the lender, a borrower may request that the SBA review the lender’s decision.
Q. What should a lender do if it receives notice that SBA is reviewing a loan?
A. The SBA may, in its sole discretion, begin a review of any PPL of any size at any time. If the SBA undertakes such a review; it will notify the lender in writing and the lender must notify the borrower in writing within five business days.
Q. Is the lender eligible for a processing fee if SBA determines that a borrower is ineligible?
A. No. If the SBA conducts a loan review and determines that the borrower was ineligible for PPL, the lender is not eligible for a processing fee.
Q. Are lender processing fees subject to claw back if the SBA determines that a borrower is ineligible?
A. Yes. For any SBA-reviewed PPL, if within one year after the loan was disbursed the SBA determines that a borrower was ineligible based on the provisions of the CARES Act or applicable rules or guidance available at the time of the borrower’s loan application, or the terms of the loan application, the SBA will seek repayment of the lender processing fee from the lender.
Observation: Lenders are incentivized to work with PPL borrowers to make sure they have documented and kept records supporting their loan request, how loan proceeds are spent, and their loan forgiveness amount correctly calculated. These rules presume all borrowers will apply for loan forgiveness. Neither the borrower nor lender rules contemplate a PPL which is not forgiven. We hope this this situation is addressed in future guidance.
With respect to your loan amount calculation and documentation, loan proceeds spending documentation, and loan forgiveness calculation and documentation, we recommend the following:
- Take the time to contemporaneously document your need for a PPL and how COVID-19 is currently and prospectively affecting your business. Indicate which rule, (500 employees or less or one of the of the alternative rules) your business qualified. Refer to our previously issued FAQ to learn more.
- Understand which expenses are eligible to be paid with PPL proceeds and which are forgivable.
- Plan for maximizing your spending in each category.
- Keep accurate records of how PPL funds are spent.
- To the extent possible, rely on information provided by third parties.
- If you seek a level of certification regarding the calculation of the loan amount, loan proceeds spending, or the loan forgiveness calculation, consider engaging our Emergency Loan Consulting team to perform agreed-upon procedures.
- Communicate with your bank ahead of submitting your forgiveness application to determine the information it needs and in what form to facilitate a “yes” response to your loan forgiveness request.