Interim Final Rule on SBA Loan Review Procedures and Related Borrower and Lender Responsibilities
Simultaneously with issuing its Interim Final Rule of PPP Loan Forgiveness on Friday night, May 22, 2020, the Small Business Administration (the “SBA”) issued guidance on the review procedures for PPP loans and related obligations of borrowers and lenders, in the form of another Interim Final Rule (the “Review Procedures IFR”). Although there does not appear to be anything unexpected in the Review Procedures IFR, it nonetheless provides clarity on:
i. what have been a borrower’s responsibilities in making its initial application for a PPP loan, and
ii. what are a borrower’s responsibilities in making its subsequent application for forgiveness?
PPP loans are offered under the 7(a) guaranteed loan program that is administered by the SBA. The Review Procedures IFR makes it clear that all of the laws and regulations that are applicable to the 7(a) program (as modified for the PPP by the CARES Act) apply to the PPP loan program, including the applicable laws and regulations that mandate that the SBA conduct reviews of loans issued under the 7(a) program. In light of the CARES Act’s focus of responsibility on the borrower, the SBA states its purpose in issuing the Review Procedures IFR as follows:
“In light of the structure of the PPP program established by the CARES Act and the PPP Interim Final Rules, in which loans and loan forgiveness are provided based on the borrower’s certifications and documentation provided by the borrower, the Administrator [of the SBA], in consultation with the Secretary of the Treasury (Secretary), has determined that it is appropriate to adopt additional procedures and criteria through which SBA will review whether an action by the borrower has resulted in its receipt of a PPP loan that did not meet program requirements.”
The SBA makes it clear in the Review Procedures IFR that the ultimate responsibility for proving all facts given in connection with a PPP loan rests on the borrower. As should be expected, the SBA reserves to itself the maximum right and flexibility to determine what to review and when. This does not necessarily mean that a borrower will be subject to intense scrutiny, but it does underscore our prior advice regarding the need for a borrower to be careful to assemble and retain adequate records to document the facts included in its loan application and forgiveness application.
- A PPP lender is responsible for:
- Confirming receipt of the borrower certifications set forth in the Loan Forgiveness Application Form.
- Confirming receipt of the documentation that borrowers are required to submit in order to aid the lender in verifying payroll costs and nonpayroll costs, as specified in the instructions to the Loan Forgiveness Application Form.
- Confirming the borrower’s calculations on the Loan Forgiveness Application, including the dollar amount of each payroll cost and each nonpayroll cost by reviewing the documentation submitted along with the Loan Forgiveness Application.
- Confirming that, on the Loan Forgiveness Calculation Form, the borrower made the correct calculation of the payroll cost limitation as to the forgiveness amount (i.e., eligible payroll costs ÷ .75).
- Notwithstanding the lender’s responsibilities noted above, “[p]roviding an accurate calculation of the loan forgiveness amount is the responsibility of the borrower, and the borrower attests to the accuracy of its reported information and calculations on the Loan Forgiveness Application [emphasis added].” Thus, although lenders are expected to perform a good-faith review of the application and supporting documents concerning amounts eligible for loan forgiveness, the ultimate responsibility remains with the borrower.
- If the lender identifies errors in the borrower’s calculation or a material lack of substantiation in the borrower’s supporting documents, the lender is expected to work with the borrower in an effort to help the borrower to remedy the issue.
- The lender must issue a decision to the SBA on a loan forgiveness application not later than 60 days after receipt of a complete Loan Forgiveness Application from the borrower. That decision may take the form of an approval (in whole or in part); denial; or (if directed by the SBA) a denial without prejudice due to a pending SBA review of the loan for which forgiveness is sought. In the case of a denial without prejudice, the borrower may subsequently request that the lender reconsider its application for loan forgiveness, unless the SBA had already determined that the borrower is not eligible for a PPP loan.
- If a lender issues its decision to the SBA and that decision indicates that the borrower is not entitled to forgiveness in any amount, then the borrower may request that the SBA review the lender’s decision by reviewing the loan. The borrower’s request must be made to the SBA within 30 days after receiving written notice from the lender of its decision.
WHAT THE SBA WILL REVIEW
Whether or not requested by the borrower, the SBA reserves the right to review each individual borrower’s loan application and forgiveness application for the following:
- The Borrower’s Eligibility for the PPP Loan – “[B]ased on the provisions of the CARES Act, the rules and guidance available at the time of the borrower’s PPP loan application [emphasis added], and the terms of the borrower’s loan application. See FAQ 17 (posted April 6, 2020).”
- Loan Amounts and Use of Proceeds – “[W]hether a borrower calculated the loan amount correctly and used loan proceeds for the allowable uses specified in the CARES Act.”
- Loan Forgiveness Amounts – “[W]hether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s Loan Forgiveness Application (SBA Form 3508 or lender’s equivalent form).”
WHEN THE SBA WILL REVIEW
“For a PPP loan of any size, SBA may undertake a review at any time in SBA’s discretion.” This statement seems to ignore the loan certification “safe harbor” for PPP loans under $2 million. As noted above, however, the Review Procedures IFR must be read in conjunction with the other guidance published by the SBA, and this statement is not so specific in its terms that it should be read to over-ride the previous more specific guidance on the safe harbor.
HOW LONG RECORDS SHOULD BE RETAINED
“As noted on the Loan Forgiveness Application Form, the borrower must retain PPP documentation in its files for six years [emphasis added] after the date the loan is forgiven or repaid in full. During that six-year period, the borrower must permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access such files upon request.”
THE PROCESS FOR REVIEW
- The SBA either will request that the lender supply additional information, in which case the lender will request the information from the borrower, or the SBA may request information directly from the borrower.
- “Failure to respond to SBA’s inquiry may result in a determination that the borrower was ineligible for a PPP loan or ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower.”
RESULTS OF THE REVIEW
- “If SBA determines that a borrower is ineligible for the PPP loan, SBA will direct the lender to deny the Loan Forgiveness Application. Further, if SBA determines that the borrower is ineligible for the loan amount or loan forgiveness amount claimed by the borrower, SBA will direct the lender to deny the Loan Forgiveness Application in whole or in part, as appropriate. SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.”
- “It is also consistent with the CARES Act’s nonrecourse provision, . . . , which limits SBA’s recourse against individual shareholders, members, or partners of a PPP borrower for nonpayment of a PPP loan only if the borrower is an eligible recipient of the loan.” In other words, if the SBA determines that a borrower was not eligible for the PPP loan, then it will not be precluded by the CARES Act from seeking recovery from the borrower’s owners.
- The SBA intends to issue a subsequent IFR on the ability of a borrower to appeal an adverse determination of its eligibility for a PPP loan or forgiveness.
Even with this additional guidance, borrowers and lenders should stay tuned. The Review Procedures IFR specifically indicates that the SBA will issue additional guidance, either in the form of new FAQs or another Interim Final Rule.
Of course, if you have any questions regarding how to document the facts stated in your original PPP loan application or your Loan Forgiveness Application, about your rights and responsibilities in the event your lender or the SBA makes an adverse determination regarding your PPP loan or forgiveness, or how to respond to a request for documentation from your lender or the SBA, please feel free to contact any member of Trenam Law’s COVID-19 Relief Programs Team.