On May 8, 2020, the Small Business Administration’s (SBA) inspector general (IG)1 issued a “Flash Report” which analyzed certain aspects of the SBA’s implementation of the Paycheck Protection Program (PPP). In this Flash Report, the IG reviewed and assessed PPP-specific statutory requirements, regulations, and guidance published by the SBA. The Flash Report highlighted a number of identified shortcomings and made specific recommendations regarding areas in need of improved guidance.
Specifically, the IG identified three broad areas in which guidance issued by the SBA and the U.S. Treasury does not fully align with the provisions of the CARES Act (the Act), the law which established the PPP. According to the IG, the guidance to date does not sufficiently: (1) prioritize PPP loans for underserved and rural markets, (2) provide for which loan proceeds are eligible for forgiveness, or (3) provide guidance pertaining to loan deferments. The IG recommended that the SBA take a number of actions in response to its findings, including, but not limited to, providing additional guidance to lenders, and conducting an analysis of the impact of both loan forgiveness requirements and the specified percentage of loan proceeds eligible for forgiveness, and provide updated guidance based upon that analysis. Accordingly, lending institutions and borrowers (as well as potential borrowers) should be on the lookout for the forthcoming guidance which will flow from the Flash Report.
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.