Borrowers should be prepared for an SBA review of their PPP loan at any time in the application and disbursement process, as well as during the term of the loan.
On May 22, 2020, the Treasury Department and Small Business Administration (SBA) released a new interim final rule on the SBA’s process for reviewing Paycheck Protection Program (PPP) loans under the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The May 22 interim final rule sets forth procedures relevant to both PPP loan borrowers and lenders in the context of review and audits of PPP loans.
Note the following important items that, in some cases, differ from previously released information:
- The interim final rule does not distinguish between loans of $2 million or more and loans below $2 million for purposes of the SBA’s review rights. The prior guidance by the SBA that borrowers of PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith remains. However, there are other review areas, highlighted below, that apply to all borrowers, regardless of loan size.
- The SBA may undertake a review at any time in the SBA’s discretion―loans will not be limited to review only if a borrower applies for loan forgiveness.
- The SBA reiterated that the limitation of recourse against individual shareholders, members or partners of a PPP borrower for nonpayment of a PPP loan applies only if the borrower is eligible for a PPP loan in the first instance under the rules and guidance available at the time of the borrower’s loan application.
SBA Review of Loans
The May 22 interim final rule confirms that the SBA may review PPP loans of any size, at any time, in its sole discretion in one or more of the following three areas:
- The eligibility of the borrower for the PPP loan under the CARES Act, the rules and guidance available at the time of the borrower’s application and the terms of the borrower’s loan application. An example of the areas the SBA may review is the SBA’s affiliation rules in 13 CFR 121.301(f) and the subsequent rules set forth.
- Whether the borrower correctly calculated the PPP loan amount and used the loan for authorized purposes; and
- Whether the borrower is entitled to loan forgiveness and in the amount applied for in the Loan Forgiveness Application.
However, a borrower is still entitled to rely on the rules and guidance available at the time of the borrower’s loan application (FAQ 17).
In undertaking a review, the SBA will review a borrower’s (a) certifications made when the borrower completed the PPP loan application regarding eligibility; (b) certifications and representations regarding eligibility for loan forgiveness; and (c) use of the loan proceeds for the purposes Congress required―keeping workers paid and employed. The administrator has determined that in order for a borrower to be an eligible recipient for forgiveness, the borrower must have been an eligible recipient of the loan under the rules and guidance available at the time of the borrower’s loan application.
Accordingly, the scope of a review can be all-encompassing of the application for the PPP loan and the application for loan forgiveness.
Borrowers should be prepared for an SBA review of their PPP loan at any time in the application and disbursement process, as well as during the term of the loan. In addition, borrowers must retain documentation related to their PPP loan for six years after the date that the loan is forgiven or paid in full, which means that reviews may also be completed after the loan.
Borrower Response in SBA Review
Borrowers will have the opportunity to respond to the SBA’s questions in a review. The SBA rules are unclear about whether a response from borrowers is required; however, the rules appear to require at least some response from borrowers when a request is received from the SBA. The SBA may request additional information about a borrower from a lender, request that the lender contact the borrower or request the information from a borrower directly. If a borrower fails to respond to a request from the SBA, the borrower may be declared ineligible for the PPP loan or loan forgiveness.
Impact of SBA Review on Loan Forgiveness
If the SBA determines that a borrower is ineligible for a PPP loan during its review process, the borrower will not be eligible for loan forgiveness and the lender will be directed to deny the application for loan forgiveness. The SBA may also seek repayment of the PPP loan or may pursue “other available remedies” according to the May 22 interim final rule. Borrowers should keep in mind that the SBA may intervene and review the matters specified above, whether or not a borrower seeks loan forgiveness; the SBA may also review the loan before a borrower seeks loan forgiveness and, depending on the review results, could prevent a borrower from receiving forgiveness. Accordingly, borrowers should be prepared to timely respond to any SBA requests for additional information and should be mindful of record-keeping requirements.
The May 22 interim final rule states that PPP loan borrowers will have the opportunity to appeal a determination from the SBA that the borrower is either ineligible for a PPP loan or ineligible for loan forgiveness. The SBA will issue additional rules on the appeal process in the future.
Responsibilities of Lenders During Review Process
For PPP Loan Forgiveness Applications, a lender must:
- Confirm receipt of the borrower certifications contained in the Loan Forgiveness Application;
- Confirm receipt of the documentation evidencing payroll and nonpayroll costs;
- Confirm the calculations in connection with loan forgiveness; and
- Confirm that the borrower correctly calculated the amount eligible for payroll costs and nonpayroll costs to be forgiven (the 75/25 rule) by making sure that the borrower divided payroll costs in the applicable covered period by 0.75.
Lenders must perform a good faith review of the loan forgiveness calculations as calculated by the borrower and set forth on its Loan Forgiveness Application. The May 22 interim final rule provides that a “minimal review of calculations based on a payroll report by a recognized third-party payroll processor” would satisfy the lender’s review responsibilities. If a borrower does not submit adequate documentation evidencing amounts to be forgiven, the lender must perform more extensive review. However, a borrower cannot have any amounts forgiven without submitting all of the documentation required by the Loan Forgiveness Application to the lender.
Timing for Lender’s Decision on Loan Forgiveness Application
Lenders have 60 days after the date of receipt of a borrower’s Loan Forgiveness Application to decide on loan forgiveness and appropriately notify the SBA of that decision. A lender’s decision may be 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 borrower’s eligibility for loan forgiveness. In the scenario of denial without prejudice, a borrower may request that a lender reconsider the request if the SBA does not determine that the borrower is ineligible for a PPP loan or loan forgiveness. According to the May 22 interim final rule, borrowers should be prepared for any outcome between approval of the full amount applied for forgiveness to outright rejection. A borrower could, under the May 22 interim final rule, see its loan forgiveness amount reduced upon the review of the lender.
When submitting the loan forgiveness materials, lenders must confirm that the information submitted by the lender to the SBA accurately reflects the lender’s records for the loan and that the lender has made the decision on loan forgiveness in conformity with the SBA’s rules and the CARES Act generally.
When a lender determines that a borrower is eligible for loan forgiveness in whole or in part, the lender must request payment from the SBA for that amount about the time it submits the Loan Forgiveness Application to the SBA. The SBA will then remit the loan forgiveness amount to the lender, plus any interest accrued through the date of payment. The remittance by the SBA must be made no later than 90 days after the lender submitted its decision regarding the loan forgiveness to the SBA.
If a lender determines that a borrower is ineligible for loan forgiveness, the lender must provide the SBA with the reason for the denial for loan forgiveness. The lender must also notify the borrower in writing regarding its decision to deny loan forgiveness. However, the SBA may review any rejection of loan forgiveness. Within 30 days of receiving a rejection notice from the lender, a borrower can request that the SBA review the lender’s decision to reject loan forgiveness. The SBA then will have 90 days to review a borrower’s appeal of a lender’s rejection.
Lender Responsibilities During SBA Review Process
Within five days of receipt of a notice from the SBA regarding the SBA’s review of a borrower’s PPP loan, a lender must respond to the SBA with the following documents:
- The Borrower Application Form;
- The Loan Forgiveness Application;
- A signed and certified transcript of account;
- A copy of the executed note evidencing the PPP loan; and
- Any other documentation related to the loan.
During an SBA review of a PPP loan, the lender is not permitted to approve an application for loan forgiveness from the borrower whose application is under review.
The May 22 interim final rule provides that a lender is not eligible for a processing fee if the SBA determines that a PPP loan borrower is ineligible. In addition, the SBA is permitted to claw back lender processing fees if the SBA determines that a borrower is ineligible or if a lender has not fulfilled its obligations under the applicable rules. However, the SBA review process will not affect the SBA’s guaranty of the loan.
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