The significant issue of the past month for Payroll Protection Program loans has been the necessity of such loans and the threat of an after-the-fact review by the Small Business Administration of such need. In FAQ #39 issued by the SBA, the SBA discussed review of PPP loan applications and stated that all PPP loans in excess of $2 million will be reviewed, and further implied in FAQ #46 that loans less than $2 million will not be reviewed to preserve administrative resources. On May 22, the SBA issued a new Interim Final Rule addressing forgiveness of loans under review by the SBA and walked back this implied non-review of small loans.
The Interim Rule begins by flatly stating that any PPP loan is subject to review by the SBA, based on grounds that include initial eligibility (on grounds such as general rules for ineligibility for SBA loans, size of a borrower taking into consideration the affiliation rules, and certifications on the loan application form or the loan forgiveness form (such as the need for the loan)), incorrect calculations and inappropriate uses of loan proceeds. A review may be undertaken at the SBA’s discretion at any time, and thus documentation is required to be retained for six years. If the SBA decides to review a PPP loan, it will notify the lender who then must notify the borrower within 5 business days. If a loan forgiveness application is in process, it is held pending completion of the SBA review. Both the lender and the SBA may request additional information from the borrower with respect to a loan under review. If the SBA determines that a borrower is ineligible for a PPP loan, then the loan may not be forgiven. The SBA may seek immediate repayment, and despite FAQ #46 forswearing “administrative enforcement or other referrals,” if the loan is repaid, the SBA reserves the right to seek “other available remedies”. Any SBA determination of ineligibility may be appealed by the borrower pursuant to a process to be determined in the future.
The forgiveness review primarily falls on the lender, who is required to confirm receipt of the forgiveness application and all documentation required and confirm correctness of all calculations. Lenders must perform a good-faith review of the calculations and supporting documents, but much of the supporting documentation will have to be taken on faith by the lender and lenders need not independently verify documented information. It should be noted that lender processing fees are not payable for ineligible loans and must be repaid by the lender to the SBA if a determination of borrower ineligibility occurs within one year after loan disbursement (implying review outside that threshold).
Despite language in the Interim Rule that the 90 day period in which the SBA must pay a lender for a forgiven loan is “appropriate” for a review of the loan to prevent fraud or misuse of PPP loan funds (thus implying an immediate review), keep in mind the small size of the SBA and that as of May 23 there were 30,085 PPP loans over $2 million. The review process could continue for years to come, and borrowers are therefore advised to document now the need for the PPP loan and all related matters. Additionally, while the language of the Interim Rule suggests review is keyed off of a request for loan forgiveness, SBA guidance is actually silent regarding what triggers a review and so even borrowers who do not request forgiveness may be reviewed. It remains to be seen how the SBA will be able to accomplish all these reviews and what, if any, actual standards will be applied for the reviews.
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