Background
Congressional leaders on both sides of the political aisle have criticized the PPP for failing to adequately help small businesses manage the current economic crisis. Nearly $660 billion has currently been allocated to the program as of the date of this alert, comprising an initial $349 billion in the first round of funding and an additional $310 billion in the second. Additionally, Congress has signaled its intent to pass legislation that will raise these amounts again soon. However, while the demand for this critical funding continues, applicants and recipients are expressing increased levels of concern about ambiguities surrounding SBA loan eligibility guidance and the uncertainty regarding forgiveness standards.
The Office of Inspector General initiated its planned review of the PPP’s implementation on April 24, 2020. However, it expedited the release of the Flash Report in response to written requests from Senate Minority Leader Chuck Schumer, D-N.Y., and Sens. Ben Cardin, D-Md., and Sherrod Brown, D-Ohio. The senators asked the IG to provide written recommendations by May 8, 2020 to ensure that businesses get the money they need under the program and borrowers are being treated fairly by lenders. The Flash Report presented the IG’s analysis and recommendations regarding section 1102 of the CARES Act, the published Interim Final Rules and the associated guidance, found in the Frequently Asked Questions (FAQs) that have been released since the program’s start through April 30, 2020. This report did not consider or review informal guidance issued after April 30, 2020, including new FAQ Nos. 40-46.
Prioritizing underserved and rural markets
The IG found that the SBA has yet to issue sufficient guidance to help lenders prioritize making loans to underserved and rural communities. The Act requires the SBA to provide guidance to lenders and agents in order to prioritize lending to small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals, women, and businesses in operation for under two years.
The IG noted that because this guidance has not been issued, there is a concern that eligible entities in these communities may not have received the loans that they otherwise would have received. The IG also noted that because the SBA did not require that demographic data be provided in connection with PPP loan applications, it will be impossible to determine actual loan volumes in these prioritized markets.
Loan proceeds eligible for forgiveness
The IG also found issues with the SBA’s Interim Final Rule pertaining to loan forgiveness. The April 2, 2020 Interim Final Rule includes a requirement – which does not otherwise appear in the CARES Act – that at least 75 percent of a PPP borrower’s loan proceeds must be used for payroll in order to receive full forgiveness. The IG observed that many small businesses have more operational expenses than employee expenses, which could result in these businesses losing out on the ability to have their loans forgiven.
Guidance on loan deferments
The third item identified by the IG relates to the SBA’s failure to issue guidance to lenders servicing PPP loans related to the loan deferment process. The CARES Act requires the SBA to provide guidance on this topic within 30 days of the enactment of the Act (March 27, 2020). As the IG notes, section 1102 of the CARES Act requires lenders to provide complete payment deferment relief for impacted borrowers with covered loans for a period of not less than six months (including payment of principal, interest, and fees).
The IG also notes that, without further guidance from the SBA, lenders and borrowers are left in the dark regarding servicing requirements and loan repayments for PPP loans with balances remaining after forgiveness. In the absence of additional guidance, lenders may not be adequately prepared to service PPP loans that carry balances and borrowers may not understand what is required to repay outstanding loan balances.
Registration of loans
In addition to the above deficiencies, the IG further notes that the SBA has yet to register PPP loans as required under the Act.2 Although the SBA has been collecting each borrower’s Taxpayer Identification Number (TIN), it has not been formally registering this information. Section 1102 of the CARES Act requires that no later than 15 days after a loan is made, the SBA must register the loan using the TIN assigned to the borrower.
IG recommendations and takeaways
The IG Flash Report contains a number of recommendations for the SBA to implement that will bring the PPP in line with the requirements of the CARES Act:
- The SBA should issue guidance to lenders requiring they prioritize borrowers in underserved markets and revise the PPP borrower application to include the collection of optional demographic data for the remaining period of the program and any future lending periods established pursuant to the program.
- For loans that are already dispersed, the SBA should include optional demographic information on forms that will be used to request loan forgiveness.
- The SBA should evaluate the potential negative impact on borrowers of the specified percentage of loan proceeds eligible for forgiveness and update the requirements, as necessary.
- The SBA should issue guidance to lenders regarding the deferment process.
- The SBA should register PPP loans by TIN, as required by the CARES Act.
It is clear that while the IG found that the SBA has complied with Congress’ statutory requirements in many ways, it has work to do in some areas. Of critical importance is the IG’s determination that the SBA’s shortcomings may adversely impact those who may be in dire need of PPP funds by ultimately preventing them from receiving these funds and being able to take advantage of the loan forgiveness aspect of the PPP. Congress has made it clear that it is determined to ensure that the funds it is providing to those in need will ultimately reach those entities. Accordingly, lenders and borrowers should look for the SBA to take action based upon this Flash Report and provide guidance to close these identified gaps in the near term.
Also, we note that this Flash Report appears to be just the tip of the iceberg as it relates to the IG’s work. The IG has stated that it will continue to review aspects of the SBA’s implementation of programs associated with COVID-19-related legislation and will issue additional reports in the future. As Congress continues to take legislative action, as formal agency regulations are issued and as informal guidance continues to be released, the Office of the IG will continue its oversight role designed to ensure that applicable statutory requirements are being met by published regulations and guidance. We anticipate that the SBA will take action in accordance with the IG’s recommendations, and that such action will drive changes in PPP execution that will continue to affect lenders and borrows alike.
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- The SBA’s inspector general is a presidentially-appointed and Senate-confirmed officer who is tasked with keeping the SBA administrator and Congress fully informed of any deficiencies or complications pertaining to the SBA. The inspector general is also tasked with recommending and monitoring related corrective actions. The current inspector general is Hannibal “Mike” Ware, who assumed the role on May 24, 2018.
- A loan servicer registers a loan in an internal database which tracks the maturity dates on loans belonging to that servicer. The loan register shows when the loans are due and lists them in chronological order by maturity date.
Client Alert 2020-323
