Recent Guidance from the SBA and the Department of the Treasury
As the Paycheck Protection Program (PPP) enters its eighth week, lenders should expect to begin receiving borrowers’ applications for loan forgiveness. PPP loans are fully forgivable to the extent the loan proceeds were used for payroll expenses, business mortgage interest payments, business rental and lease payments, and business utilities payments, as long as at least 75 percent of the loan is used for payroll expenses.1 On May 15, 2020, the Small Business Administration (SBA) issued a loan forgiveness application form, and on May 22, 2020, the SBA and the Department of the Treasury issued two new Interim Final Rules (“IFR”) that provide guidance for lenders about processing loan forgiveness applications.
Loan Forgiveness Application Procedure
The loan forgiveness application requires a borrower to calculate the total amount of the loan to be forgiven, including payroll costs, business mortgage interest payments, business rent or lease payments for real or personal property, and business utility payments that were incurred during the eight-week period after receipt of the loan. The borrower must also provide documentation supporting these forgivable payroll and non-payroll expenditures and certify (i) that its calculations and its documentation are true and accurate; (ii) that the loan was used for forgivable purposes; and (iii) that the borrower understands that the SBA may ask for additional documentation if necessary.
The Lender’s Responsibilities in Processing the Loan Forgiveness Application
The two most recent IFRs appear to modify earlier guidance from the SBA regarding a lender’s obligations. In the April 15, 2020 Interim Final Rule, the SBA had previously stated that the “lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs” and that the SBA will “hold harmless any lender that relies on such borrower documents and attestation from a borrower.”
While the most recent IFRs continue to require that the borrower provide accurate calculations and documentation as well as to certify that they are accurate when seeking loan forgiveness, they also require lenders to perform a good-faith review of the borrower’s application and to confirm certain information before approving or denying the loan forgiveness application.
For each application, the lender shall:
- Confirm receipt of the borrower certifications contained in the loan forgiveness application form.
- Confirm receipt of the borrower documentation required by the loan forgiveness application form.
- Confirm the accuracy of the borrower’s calculations on the loan forgiveness application form, including confirming that the payroll costs constitute 75 percent of the loan proceeds, by reviewing the documentation submitted by the borrower.
A lender need not independently verify the borrower’s reported information so long as the borrower submits documentation supporting its request for loan forgiveness and attests that it accurately verified the payments for eligible costs. However, a lender’s obligations may be greater depending on the documentation that a borrower submits with the loan forgiveness application. As the SBA’s guidance explains, a lender is only required to “minimally review” a borrower’s calculations if the underlying documentation comes from established third-party payroll processors; however, a lender may need to perform additional review of calculations and data if payroll costs are not documented in such recognized sources. The SBA is quite clear that, if a lender identifies errors or deficiencies in a borrower’s application, the lender is to work with the borrower to remedy those issues.
Once the lender has received a complete loan forgiveness application, the lender has 60 days to review the materials and to issue a decision regarding loan forgiveness to the SBA. Based on the information provided, the lender can approve the application in whole or in part, deny the application, or deny the application without prejudice (in cases where the loan was under review by the SBA prior to the forgiveness application’s submission). Regardless of whether the lender approves or denies the loan, the lender must confirm that the information it provides to the SBA accurately reflects its own records for the loan, and that the lender has made its decision in accordance with the SBA requirements. Based on the current guidance from the SBA, it is not clear what this lender confirmation will look like.
Approving the Application in Whole or in Part
If the lender approves the borrower’s application, either in whole or in part, the lender then notifies the SBA of the approval and requests payment. The lender must also submit its PPP Loan Forgiveness Calculation Form, PPP Schedule A, and the PPP Borrower Demographic Information Form (if the borrower submitted this optional form to the lender).The SBA will, subject to review of the lender’s approval determination, remit payment to the lender within 90 days of the request.2 Once the lender receives payment from the SBA, the lender must notify the borrower of the amount forgiven and the amount still owed, if any.
Denying the Application
If the lender denies the borrower’s application, the lender must notify the borrower in writing and provide the SBA with the reason for its denial, along with necessary documentation. Within 30 days of receipt of notice of denial from the lender, a borrower may request that the SBA review the lender’s decision. The SBA reserves the right to review the lender’s decision in its sole discretion. As part of the SBA’s review process, the lender must transmit certain documentation to the SBA, including the borrower’s PPP loan application and loan forgiveness application, all supporting documentation from the borrower, a signed and certified transcript of the loan account, a copy of the executed PPP loan note, and any additional supporting documentation that the SBA may request. In the communication to the borrower denying loan forgiveness, lenders should notify the borrower of the right to request a review with the SBA within 30 days.
Denial Without Prejudice Pending SBA Review
The SBA has stated that it has discretion to independently review any loan at any time. If the SBA decides to review a loan at any point, the SBA will notify the lender of the review in writing. The lender must then notify the borrower of the SBA’s review within five business days of receipt of a review notice from the SBA. After receiving a review notice, the lender has five business days to transmit certain documentation to the SBA, including the borrower’s PPP loan application and loan forgiveness application, all supporting documentation provided by the borrower, a signed and certified transcript of the loan account, a copy of the executed PPP loan note, and any additional supporting documentation that the SBA may request.
If the SBA is independently reviewing a loan prior to the borrower submitting a loan forgiveness application, the lender is to deny any subsequently received loan forgiveness application without prejudice, pending the outcome of the SBA’s review. The SBA will notify the lender in writing of the outcome of any review. Should the SBA determine that the borrower is eligible for the loan, the borrower may subsequently request that the lender reconsider its application for loan forgiveness. If the SBA determines that the borrower is ineligible for the loan, the borrower may appeal this determination. In its May 22, 2020 Interim Final Rule, the SBA stated that guidance regarding the appeal procedure is forthcoming.
The SBA has not committed to any timeline3 relating to its review of loan documentation or borrower appeals. Therefore, lenders (as well as borrowers) may not have a final answer as to the status of their loan for some time.
Additional Lender Communication Obligations
Again, in the most recent interim final rule, the SBA has stated that it may undertake a review of any PPP loan, regardless of size.4 If loan documentation submitted to SBA by the lender or any other information indicates that the borrower may be ineligible to receive the loan forgiveness amount claimed by the borrower, the lender is responsible for notifying the borrower of the deficiency in the loan documentation in writing and for requesting additional information. Lenders should be mindful of the SBA’s instruction that a lender is to work with a borrower in obtaining necessary documentation.
Clawback of Lender Fees
The SBA has made it clear that if it determines that a borrower is ineligible for a PPP loan, the lender is not eligible for its processing fee and SBA will seek repayment of that fee. Lenders should also take care to fulfill all loan processing requirements and document retention requirements, because the SBA retains the right to claw back any processing fees paid to the lender if it determines that the lender has failed to satisfy these requirements. Further, the SBA warns that loans may not be eligible for a guaranty if the lender does not satisfy these requirements. However, the SBA has stated that a determination of borrower ineligibility alone will not affect its guaranty of the loan.
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- On May 28, 2020, the House of Representatives passed H.R. 7010, which substantially alters the forgiveness provisions of the PPP. Among other things, H.R. 7010 extends the eight-week period and also reduces the amount of the loan that must be used for payroll expenses from 75 percent to 60 percent. The bill has not yet passed the Senate.
- A borrower that obtained an emergency grant under the Economic Injury Disaster Loan (EIDL) through the SBA will have the outstanding amount of that loan deducted from the amount forgiven from its PPP loan by the SBA, pursuant to the terms of the CARES Act.
- The SBA has stated that borrowers must retain PPP documentation for a period of 6 years, and that the SBA may conduct reviews during that time. Additionally, lenders must retain documents during this same time period pursuant to its independent obligations under federal regulatory requirements.
- Previously, the SBA stated that it would review all loans in excess of $2 million. See Response to FAQ 39. Lenders and borrowers should continue to assume that this is the case, but should be prepared for SBA review of loans of less than $2 million.
Client Alert 2020-365
