There are a few things to keep in mind in regard to the Small Business Administration (the "SBA") and the Paycheck Protection Program ("PPP") loan forgiveness review process.
Adding on to the initial PPP funding, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the "Economic Aid Act" or "PPP2 Act") was followed by new forgiveness application forms and the Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act ("2021 Forgiveness IFR"), which may create new questions.
To explore the latest information, we created a four-part series that may offer some clarity around the new updates:
- Initial Takeaways and Agency Guidance for the Latest PPP Updates
- Grounds for SBA Review, the SBA Loan Review Process, and Borrower Items
- The Lender's Role in the PPP Loan Review Process
- What to Know about PPP Appeals and Next Steps
The article below explores grounds for review, scenarios for review, loans at or over $2 million, and what happens if the SBA determines that a borrower is ineligible. This article also touches on actions a borrower can take to initiate or respond to the SBA in the review process.
Grounds for Review
The SBA 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 Economic Aid 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. These include, but are not limited to:
- Ineligible business regulations—see our article " PPP Ineligibility Update: Businesses Ineligible for First Draw and Second Draw PPP Loans."
- The information, certifications, and representations on the borrower application form (SBA Form 2483, 2483-SD, or lender's equivalent form) and the loan forgiveness application form (SBA Form 3508, 3508EZ, 3508S, or lender's equivalent form). With respect to a Second Draw PPP Loan, this may include a review of whether the borrower experienced the 25% revenue reduction required under the Economic Aid Act.
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 and the Economic Aid 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, 3508EZ, 3508S, or lender's equivalent form).
When Will the SBA Undertake a Loan Review?
For a PPP loan of any size, the SBA may undertake a review at any time in the SBA's discretion. For example, 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.
Additionally, section 7A(l)(1)(E) of the Small Business Act expressly provides that SBA may review and audit PPP loans of $150,000 or less and access any records the borrower is required to retain. The SBA may, in its discretion, review a borrower's First Draw PPP Loan and Second Draw PPP Loan at the same time or at different times. For loans of more than $150,000, as noted on the loan forgiveness application forms, the borrower must retain PPP documentation in its files for six years after the date the loan is forgiven or repaid in full.
For loans of $150,000 and under, the borrower must retain records relevant to the form that prove compliance with the requirements of section 7(a)(36) or 7(a)(37), as applicable, of the Small Business Act:
- for employment records, for the four-year period following submission of the loan forgiveness application, and
- for other records, for the three-year period following submission of the loan forgiveness application.
All borrowers must permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access such files upon request.
Additionally, all borrowers must provide documentation independently to a lender to satisfy relevant federal, state, local, or other statutory or regulatory requirements or in connection with an SBA loan review. Lenders must comply with applicable SBA requirements for records retention, which for federally regulated lenders means compliance with the requirements of their federal financial institution regulator and for SBA supervised lenders (as defined in 13 CFR 120.10 and including PPP lenders with authority under SBA Form 3507) means compliance with 13 CFR 120.461.
Loans At or Over $2 Million and Review
The SBA has stated that it will review PPP loans over $2 million (which includes loans of affiliates that aggregate to $2 million), and the forgiveness applications specifically have a box relating to PPP loans of $2 million or more. The box is for a borrower together with its affiliates. Starting around October 26, 2020, the SBA asked PPP lenders to provide certain questionnaires to PPP borrowers with loans at or over $2 million. Form 3509 (Loan Necessity Questionnaire (For-Profit Borrowers)) and Form 3510 (Loan Necessity Questionnaire (Non-Profit Borrowers)) are posted on the Treasury site.
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 CARES Act and FAQ #31 instructed borrowers to assess their need for the loan at the time of application, the SBA's 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. On December 9, 2020, the SBA posted FAQ #53 discussing the "Necessity Questionnaire" and stated that the SBA assessment will be based on the totality of the borrower's circumstances through a multi-factor analysis.
The form is due 10 business days from receipt from the lender, which is a tight timeframe, and the information includes:
- Gross revenue;
- Explanation of the effect of COVID-19;
- Cash on hand;
- Dividends and distributions;
- Outstanding debt;
- Highly-paid owners and employees;
- Value of the borrower, ownership, and other CARES Act benefits.
For more information on this topic, see " PPP Loans Over $2 Million and the PPP Necessity Questionnaires."
Make note: Borrowers with loans at or 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 there are tight timelines, borrowers should consider seeking legal advice prior to submitting a Loan Necessity Questionnaire.
What Happens If the SBA Determines a Borrower Is Ineligible?
If the SBA determines that a borrower is ineligible for the PPP loan, the SBA will direct the lender to deny the loan forgiveness application. An SBA determination that a borrower is ineligible for a First Draw PPP Loan may also result in an SBA determination that the borrower is ineligible for any Second Draw PPP Loan, and the SBA may direct the lender to deny any loan forgiveness application submitted for the Second Draw PPP Loan.
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.
Section 7A(b) of the Small Business Act provides for forgiveness of a PPP loan only if the borrower is an "eligible recipient." The SBA has determined that to be an eligible recipient that is entitled to forgiveness under section 7A(b), the borrower must be an "eligible recipient" under section 7(a)(36) and section 7(a)(37) of the Small Business Act and rules and guidance available at the time of the borrower's loan application.
How Can Borrowers Initiatethe Review Process?
A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness, except that a borrower applying for the forgiveness of a Second Draw PPP Loan that is more than $150,000 must submit the loan forgiveness application for its First Draw PPP Loan before or simultaneously with the loan forgiveness application for its Second Draw PPP Loan.
As a reminder, the Economic Aid Act amended the definition of "covered period" to mean the period beginning on the date the lender disburses the PPP loan and ending on the date selected by the borrower that occurs during the period (i) beginning on the date that is 8 weeks after the date of disbursement, and (ii) ending on the date that is 24 weeks after the date of disbursement (the "Covered Period"). Borrowers must either pay or incur covered expenses within the 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 maximum covered period of 24 weeks, 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. If this occurs, the lender must notify the borrower of the date the first payment is due.
How Should Borrowers Respond to the SBA's Questions in a Review?
If loan documentation the lender submits to the SBA 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 the borrower claims, 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.
For clarity around the lender's role in the review process, please view the next article in our After the Economic Aid Act: An Updated Guide to the PPP Loan Forgiveness Review and Appeals Process series, " The Lender's Role in the PPP Loan Review Process."
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.