Borrowers applying for loan forgiveness under the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") should familiarize themselves with the SBA guidance regarding the loan forgiveness review process. By adopting a forward-thinking and proactive approach to loan forgiveness and its review, borrowers may increase the likelihood of having their loans forgiven. This article provides a general overview of the PPP loan forgiveness review process to help borrowers identify and address potential issues before and after submitting their loan forgiveness application. We expect further guidance relating to the loan forgiveness process in the future and will continue to provide updates as the guidance is released.
A borrower should:
- Understand the bank's calculator and internal process for reviewing the loan forgiveness application
- Understand the calculations and the certifications and have support for those items
- Make sure that the loan forgiveness application is accompanied by all the required documents (any borrower should check with their counsel to ensure they are not inadvertently producing documentation protected by the attorney-client privilege)
- Understand the timeline:
- In general, the lender has 60 days from receipt of a complete loan forgiveness application to issue a decision to the SBA, and the SBA, subject to its review, will remit funds within 90 days after the lender issues its decision to the SBA. The lender will notify the borrower of the loan forgiveness amount.
- If the lender determines that the borrower is not entitled to forgiveness in any amount, the lender must notify the borrower and the SBA. Within 30 days of that notice, the borrower may notify the lender that it is requesting that the SBA review the lender's decision. If the borrower makes a request, the lender must provide the borrower's notice to the SBA within 5 days of receipt, and the SBA will notify the lender if the SBA declines a request for review. If the SBA accepts the borrower's request for review, the SBA will notify the borrower and lender of the results of the review. If the SBA declines the borrower's request for review or if the borrower does not request SBA review, the lender is to notify the borrower that the borrower is not entitled to forgiveness. The SBA can use the statutory 90-day period to review the PPP loan and forgiveness documentation. There is an appeal process for certain SBA decisions.
- The SBA can also initiate a review on its own. There are no specific timelines.
- Be prepared for a review, as the SBA reserves the right to review any loan "in SBA's discretion[,]" and the SBA will review any loan over $2 million. Areas of review include eligibility, necessity, calculation of the loan amount, use of loan proceeds, and the calculation of the loan forgiveness amount.
- The PPP Forgiveness Platform, which lenders can use to provide loan forgiveness decisions, supporting documentation, and requests for forgiveness payments, went live and began accepting lender submissions on August 10, 2020.
- Retain PPP documentation for six years after the date the loan is forgiven or repaid in full. For more details about this, see our article "Key Considerations for PPP Documentation."
On May 22, 2020, the SBA posted an interim final rule addressing the PPP loan review procedures and related borrower and lender responsibilities (the "First Loan Review Rule"). Through the rulemaking process, the SBA amended the First Loan Review Rule on June 22, 2020, in order to account for changes to the PPP enacted via the Paycheck Protection Program Flexibility Act of 2020 (the "Flexibility Act") as signed into law by the President on June 5, 2020. The SBA's second interim final rule regarding the PPP loan review procedures and related borrower and lender responsibilities (the "Second Loan Review Rule") and the SBA's interim final rule regarding appeals of SBA loan review decisions under the Paycheck Protection Program (the "Appeal Rule") provide the basis for most of the information outlined in this general overview. On October 8, 2020, the SBA posted an alternative PPP Loan Forgiveness Application Form 3508S ("SBA Form 3508S") for borrowers with a PPP loan of $50,000 or less and an interim rule modifying the First Loan Review Rule regarding the lender's obligations when the SBA Form 3508S is used.
Grounds for Review
Congress authorized the PPP as a new temporary SBA section 7(a) loan program through the provisions of the Coronavirus, Aid, Relief, and Economic Security Act (the "CARES Act"). Section 1106 of the CARES Act provides the basis for borrowers to seek forgiveness up to the full principal amount of qualifying loans guaranteed by the SBA under the PPP. The CARES Act also requires the SBA to issue guidance and regulations addressing the loan forgiveness process. The Small Business Act authorizes the SBA Administrator to conduct investigations to determine whether a recipient or a participant in any assistance under a section 7(a) program, including the PPP, is ineligible for a loan, or has violated section 7(a), or any rule, regulation, or order issued in accordance with section 7(a). Borrowers that plan to seek forgiveness of their PPP loans should be aware that the SBA may review whether the borrower is an "eligible recipient" for the PPP loan and the borrower's use of PPP loan proceeds, based on the provisions of the CARES Act, the rules and guidance available at the time of the borrower's PPP loan application, and the specific terms of the borrower's loan application (for example, whether the borrower lacked an adequate basis for the certifications that it made in its loan application).
Loans Over $2 Million and Review
The SBA has stated that it will review PPP loans over $2 million, and the forgiveness applications specifically have a box relating to PPP loans in excess of $2 million. The box is for a borrower together with its affiliates.
Starting around October 26, 2020, the SBA asked some PPP lenders to provide certain questionnaires to PPP borrowers with loans over $2 million. The purpose of the forms according to the SBA "is to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that [a borrower] made on [its] PPP Borrower Application . that economic uncertainty made the loan request necessary." Although both the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and FAQ #31 instructed borrowers to assess their need for the loan at the time of application, the SBA's new forms gather information to assess need both at the time of application and during the use of the funds. This is a surprise for most borrowers who were prepared to provide information about "necessity" at the "time of the application" but were not anticipating scrutiny about necessity over the period of use of the funds. With that said, at this time, we don't know whether the information "during the use of the funds" will be used by the SBA to determine "necessity" or whether the SBA is merely gathering information. Borrowers with loans over $2 million should gather the requested information now in anticipation of the lender's request. Given the uncertainty as to how this process will be administered and how the information will be used, and the fact that clarifications are needed and there are tight timelines, borrowers should seek legal advice prior to submitting a forgiveness application. These borrowers should also consider delaying to apply for forgiveness until some of these open issues are clarified. For more information, see PPP Loans Over $2 Million and the PPP Necessity Questionnaires.
Initiating the Review Process
A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan-including before the end of the covered period-if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. As a reminder, the Flexibility Act amended the definition of "covered period" to mean, for borrowers whose loan was originated after June 5, 2020, the 24 week period beginning on the date of the origination of the PPP loan. Borrowers whose loan was originated prior to June 5, 2020, can choose to use either the original 8 week period after origination of their loan as the "covered period" or the longer 24 week period. In either case, borrowers must either pay or incur covered expenses within the applicable covered period in order to receive forgiveness of the PPP loan. If the borrower does not apply for loan forgiveness within 10 months after the last day of the covered period, or if the SBA determines that the borrower is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest.
Lender's Role in Review Process
In addition to the changes enacted via the Flexibility Act, the SBA also issued an alternative Loan Forgiveness Application, SBA Form 3508EZ, thus making changes to the First Loan Review Rule necessary. The Second Loan Review Rule, as revised, outlines lender requirements in light of the changes to the loan forgiveness application process. When a borrower submits to its lender SBA Form 3508, SBA Form 3508EZ, or the lender's equivalent loan forgiveness application form, the lender must (i) confirm receipt of the borrowers certifications, (ii) confirm receipt of the documentation the borrower must submit to aid in verifying payroll and non-payroll costs, and (iii) confirm various calculations on the SBA forms or lender equivalent forms. However, when a borrower submits SBA Form 3508S or the lender's equivalent form, the lender is not required to perform (iii)-that is, the lender is not required to confirm the calculations on SBA Form 3508S. Borrowers bear sole responsibility for providing accurate calculations of the loan forgiveness amount and for attesting to the accuracy of information in the loan forgiveness application. The borrower must submit documentation supporting its request. The lender must also request that the borrower provide the lender with the applicable documentation that the instructions to the loan forgiveness applications forms (SBA Form 3508 and SBA Form 3508EZ) instruct the borrower to maintain but not submit.
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. The SBA, through its Second Loan Review Rule, directs lenders to work directly with borrowers to remedy issues if the lenders identify errors in the borrower's calculations or if there is a material lack of substantiation in the borrower's supporting documentation. However, lenders are not required 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.
Upon receiving a borrower's loan forgiveness application, lenders are responsible for conducting the review procedures outlined above and issuing a decision to the SBA regarding loan forgiveness. A lender must issue a decision to the SBA on a loan forgiveness application not later than 60 days after receipt of a complete loan forgiveness application from the borrower. The lender's 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 pending SBA review of the loan for which forgiveness is sought. If the SBA has notified the lender that the SBA has commenced a loan review, the lender shall not approve any application for loan forgiveness for such loan until the SBA notifies the lender in writing that the SBA has completed its review.
Unless the SBA has determined the borrower is ineligible for a PPP loan, borrowers who receive a decision denying their loan forgiveness application without prejudice may subsequently request that the lender reconsider its application for loan forgiveness. If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for under the statute and applicable regulations, the lender must request payment from the SBA at the time the lender issues its decision to the SBA.
Lender's Denial of Forgiveness in Whole or in Part
If the lender issues a 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 the denial and certain documentation. The lender must also notify the borrower in writing of the lender's decision. The SBA reserves the right to review the lender's decision in its sole discretion. Within 30 days of notice from the lender, a borrower may notify the lender that it is requesting that the SBA review the lender's decision in accordance with the guidance provided in the First Loan Review Rule, the Second Loan Review Rule, and the Appeal Rule. Within five days of receipt, the lender must notify the SBA of the borrower's request for review. The SBA will notify the lender if the SBA declines a request for review. If the SBA accepts the borrower's request for review, the SBA will notify the borrower and the lender of the results of the review. If the borrower does not request SBA review of the lender's initial decision or if the SBA declines the request for review, the lender is responsible for notifying the borrower of the date on which the borrower's first payment is due. Similarly, if the SBA denies forgiveness in whole or in part, the lender is responsible for notifying the borrower of the date on which the borrower's first payment is due. The SBA is entitled to use the statutory 90-day review period.
SBA Review of Individual PPP Loans
The SBA may review any PPP loan, as the SBA Administrator deems appropriate. The Administrator is authorized to review the following:
- Borrower Eligibility: Whether a borrower is eligible for the PPP loan based on the provisions of the CARES Act, the rules and guidance available at the time of the borrower's PPP loan application, and the terms of the borrower's loan application. See FAQ 17 (posted April 6, 2020). These include, but are not limited to, SBA's regulations under 13 CFR 120.110 (as modified and clarified by the PPP Interim Final Rules) and 13 CFR 121.301(f) and the information, certifications, and representations on the Borrower Application Form (SBA Form 2483 or lender's equivalent form) and Loan Forgiveness Application Form (SBA Form 3508 or lender's equivalent form).
- Loan Amounts and Use of Proceeds: Whether a borrower calculated the loan amount correctly and used loan proceeds for the allowable uses specified in the CARES Act.
- Loan Forgiveness Amounts: Whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower's Loan Forgiveness Application (SBA Form 3508 or lender's equivalent form).
For a PPP loan of any size, the SBA may undertake a review at any time in the SBA's discretion. For example, the SBA may review a loan if the loan documentation submitted to the SBA by the lender or any other information indicates that the borrower may be ineligible for a PPP loan, or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower. As noted on the Loan Forgiveness Application Form, the 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.
Responding to the SBA's Questions in a Review
If loan documentation submitted to the SBA by the lender or any other information indicates that the borrower may be ineligible for a PPP loan or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower, the SBA will require 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 any additional information that the borrower provides to it to the SBA. The SBA will consider all information the borrower provided 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 PPP loan or ineligible to receive the loan amount or loan forgiveness amount the borrower claims.
Appealing Certain SBA Review Decisions
- Who Hears the Appeal: The SBA Office of Hearing and Appeals ("OHA").
- What Are the Rules: As part of the Appeal Rules, the Rules of Practice (the "PPP Appeal Rules of Practice") were published. Those rules include the scope of rules, the appeal petition, standing, deadline, dismissal, notice and order, the administrative record, response to an appeal petition, evidence beyond the record, discovery and oral hearings, interlocutory appeals, alternative dispute resolution procedures, standard of review, decision on appeal, effects of the decision, Equal Access to Justice Act and no recovery of attorney's fees, exhaustion of administrative remedies, and confidential information and protective order. In addition, the following regulations apply: amendments and supplemental pleadings, representation in cases before OHA, requirement of signature (13CFR 134.207 through 134.209), Motions (134.211), Summary Judgment (134.212), and Settlement, Judges, Sanctions, Prohibition against ex parte communication and prehearing conferences (134.217 through 134.221).
- What Can Be Appealed under the PPP Appeal Rules of Practice: A final SBA loan review decision that is appealable under the PPP Appeal Rules of Practice is an official written decision by the SBA, after the SBA completes a review of a PPP loan, that finds a borrower: (1) was ineligible for a PPP loan; (2) was ineligible for the PPP loan amount received or used the PPP loan proceeds for unauthorized uses; (3) is ineligible for PPP loan forgiveness in the amount determined by the lender in its full approval or partial approval decision issued to SBA (except for the deduction of any Economic Injury Disaster Loan advance in accordance with section 1110(e)(6) of the CARES Act); and/or (4) is ineligible for PPP loan forgiveness in any amount when the lender has issued a full denial decision to the SBA.
- What Cannot Be Appealed:
- A borrower cannot file an OHA appeal of any decision made by a lender concerning a PPP loan. A borrower can request an SBA review of a lender decision to deny the borrower's loan forgiveness application in full, but that request is for a review by the SBA, not an OHA appeal. A borrower may exercise any other rights it has under applicable law against a PPP lender regarding a lender decision.
- Any determination by the SBA's Office of Inspector General concerning a PPP loan.
- Any SBA decision on any 7(a) loans other than PPP loans.
- The Rules of Practice for Appeals From Size Determinations and NAICS Code Designations do not apply to appeals of SBA loan review decisions or to the PPP.
- Deadline for Filing Appeal Petition: 30 calendar days after the earlier of: (i) the appellant's receipt of the final SBA loan review decision, or (ii) notification by the lender of the final SBA loan review decision.
- Consequences of an Appeal: Because a PPP borrower must begin making payments of principal and interest on the remaining balance of its PPP loan at the end of the loan payment deferral period or when the SBA remits the loan forgiveness amount to the PPP lender (or notifies the lender that no loan forgiveness is allowed), an appeal by a PPP borrower of any SBA loan review decision does not extend the deferral period of the PPP loan. Additionally, if the SBA remits to the lender the PPP loan forgiveness amount set forth in the decision issued by the lender to the SBA (except for the deduction of any Economic Injury Disaster Loan advance), the borrower may not file an appeal with OHA, and the borrower must begin repayment of any remaining balance of its PPP loan.
Suggested Next Steps
Because the loan forgiveness application review process outlined above sets out requirements for both borrowers and lenders, borrowers are encouraged to familiarize themselves with their requirements and work collaboratively with lenders to obtain approval of loan forgiveness applications. In addition, the SBA states that it "may provide further guidance, if needed" and we expect that further guidance will be issued.
As with previous client updates, borrowers are reminded to be aware of the different sources of statutory and regulatory guidance related to the loan forgiveness process. The statutory and regulatory landscape relating to the PPP is likely to continue to evolve in the coming months. Schwabe is closely monitoring developments related to the PPP and other implications that COVID-19 may have on legal issues our clients face. We encourage you to visit Schwabe's COVID-19, CARES Act, and PPP Portal resource pages for the most up-to-date information as it becomes available.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.