The Small Business Administration’s (SBA) fifteenth Interim Final Rule (IFR) for paycheck protection program (PPP) loans, released on May 22, provides new insight into the agency’s review of PPP loans. The IFR makes it clear that any PPP loan is subject to review, even if it is less than $2 million, and provides information for lenders on the loan forgiveness process. (All of the IFRs can be found here.)
SBA Review of PPP Loans
In FAQ 39 of its PPP loan FAQs, the SBA announced “that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.” Although the SBA provides for different treatment of PPP loan depending on whether the PPP loan exceeds $2 million (as we discussed in this article), the SBA never stated that it would not review PPP loans of $2 million or less. The IFR builds on this, explicitly providing that the SBA may review any PPP loan, regardless of the loan amount. SBA review may include, but is not limited to, the following:
- Eligibility – Was the borrower eligible for the loan? Were borrower representations and statements accurate?
- Use of Proceeds – Did the borrower use loan proceeds for qualified expenses?
- Forgiveness Amount – Did the borrower calculate the forgiveness amount correctly?
The IFR notes that the SBA may review a PPP loan at any time and borrowers are required to maintain documentation for six years.If, during the course of an SBA review, the SBA requests additional information about a PPP loan, then the lender may be required to contact the borrower in writing to request it. Any information provided by the borrower to the lender must be submitted to the SBA.Failure to respond may result in the SBA determining that the borrower was ineligible to receive the loan or loan forgiveness.
At the risk of stating the obvious, the IFR clarifies that if the SBA determines a borrower was not eligible for a PPP loan, then the loan cannot be forgiven. The SBA may direct the lender to deny the loan, seek repayment of the loan, or pursue other available remedies.
Lender Responsibilities
Lenders are responsible for each of the following items after receipt of a PPP loan forgiveness application:
- Confirming the borrower made all required certifications in the application;
- Confirming receipt of required documentation for payroll and non-payroll costs incurred during the covered period, as specified in the application;
- Confirming the borrower’s calculations of loan forgiveness and tracing amounts to the supporting documentation; and
- Confirming the borrower divided eligible payroll costs on line 10 by 0.75 (calculating the maximum amount of non-payroll costs included in forgiveness amount).
Lenders must undertake a “good faith” review of these items and should use their judgment in how much time and effort the review of each item should take. However, as with the PPP loan application, this generally requires a high-level review that the borrower provided the required documents; lenders do not need to investigate the content or veracity of these documents. As demonstrated by this story, the Department of Justice is monitoring for fraud, so lenders should not ignore obvious indications that the submitted information might be fraudulent. The IFR notes that supporting payroll documentation provided by an outsourced provider (e.g., ADP) is generally more reliable than documentation prepared in-house, and therefore may not need as much review. We suspect that a cottage industry will soon develop by CPAs and consultants who can “audit” a forgiveness application to give it a good housekeeping seal of approval before it is shared with the lender.
Lenders have 60 days to issue their forgiveness decision to the SBA. Lenders may (1) approve the forgiveness in whole or in part, (2) deny the request, or (3) deny the request without prejudice due to a pending SBA review.
This last option — denial without prejudice — suggests that the 60-day response period provided in CARES can be extended. A lender can defer making a loan forgiveness determination when the loan is pending SBA review. This ensures that lenders are not put in the precarious position of making a determination that will be second-guessed by the SBA. Instead, they can wait to ensure that the borrower is eligible before making a forgiveness decision. This is important because a PPP loan issued to an ineligible recipient is not eligible for forgiveness. On the other hand, section 1106(g) of the CARES Act states that the lender must issue a forgiveness decision within 60 days of receiving the application. It is unclear whether Congress intended this result.
Once the lender submits their forgiveness decision to the SBA, the SBA will remit the appropriate forgiveness amount, plus accrued interest through the date of payment, to the lender within 90 days. However, the 90-day timeframe does not apply where the SBA opts to review the loan.
Lender Denied Applications
Where a lender determines that a borrower is not eligible for forgiveness, in whole or in part, they must provide the following to the SBA:
- Reasoning for denial;
- Loan forgiveness calculation form;
- PPP Schedule A (application);
- PPP Demographic Information Form (application), if completed; and
- Confirmation that information provided accurately reflects the lender’s records and lender made denial in accordance with the requirements (described above).
The lender must notify the borrower in writing of its denial. The borrower has 30 days to appeal the lender’s decision — the appeal is presumably to the lender unless the SBA is responsible for the denial.
SBA Reviewed Loans
The SBA will notify the lender in writing — not the borrower — of any loan review. The lender is required to notify the borrower within five business days of receipt. The lender also has five business days to submit electronic copies of the following items to the SBA:
- Loan application form and all supporting documents provided by the borrower;
- Loan forgiveness application (if received) and all supporting documentation provided by the borrower;
- Signed and certified transcript of account;
- A copy of the executed note evidencing the PPP loan; and
- Any other documents related to the loan and requested by the SBA.
Lenders are prohibited from approving a loan forgiveness application until the SBA notifies the lender that they have completed their review of any loan selected for review. Stay tuned for some frustrated borrowers and lenders while they await delays in approval from the SBA because the SBA lacks the resources to undertake any broad substantive review.
Lender Fees
Lenders receive fees from the SBA for issuing PPP loans. Those fees are subject to clawback if the SBA determines a borrower was ineligible within one year of the first disbursement. While the lender is out the fee, the lender is not at risk for the underlying loan amount if they otherwise comply with their PPP loan obligations.