According to the Small Business Association (SBA), as of May 23, 2020, 4.4 million Payroll Protection Program (PPP) loans have been approved for a grand total of more than $511 billion. Approximately, $138 billion in appropriated funds under PPP have yet to be deployed; 79 percent of the loans are under $100,000.
The most compelling feature of the PPP program for entrepreneurs is that the total amount of the loan is forgivable if properly used. On Fri., May 15, the SBA released the loan forgiveness application. A week later on Fri., May 22, the SBA issued additional comments on the loan forgiveness process for both entrepreneurs and banks. This new round of guidance gives more clarity and leaves a number of questions still unanswered.
Will SBA review individual PPP loans?
Yes. The SBA has complete discretion regarding which PPP applications it will review, regardless of loan size.
What representations and statements will SBA review?
The SBA may review the following information from your application:
- Borrower eligibility—Were you eligible? Was the information, certifications and representations made in the loan application, as well as forgiveness application, correct? Separately, the SBA indicated that it will not review whether you had economic necessity for the loan if your loan amount is under $2 million. This point was not addressed in the May 23 guidance, which is creating confusion and anxiety among entrepreneurs.
- Loan amounts and use of proceeds—Did you calculate the loan amount correctly and use the proceeds properly?
- Loan forgiveness amounts—Are you entitled to loan forgiveness in the amount claimed on your loan forgiveness application?
When will SBA undertake a loan review?
SBA may review any borrower, regardless of size, at any time. PPP borrowers are required to maintain records for six years after the loan is forgiven or paid in full.
Will I have the opportunity to respond to SBA’s questions in a review?
Yes. If the SBA rejects your loan application or loan forgiveness application, the SBA will require the bank to contact you in writing to request additional information. The SBA may also request information directly from you.
If the SBA determines my loan is ineligible, can it be forgiven?
No. If SBA determines that you are ineligible for the PPP loan, the bank will reject your loan forgiveness application. The SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies. What those remedies are is a bit of a mystery at this point.
Will there be an appeal process?
Yes. If you have a negative determination, you may appeal within 30 days. The SBA will issue future guidance on that process.
What will the bank review in a forgiveness application?
The PPP Loan Forgiveness Application must be accompanied by the following information:
- Certification contained in the Loan Forgiveness Application Form.
- Documentation to verify payroll and nonpayroll costs.
- Calculation of payroll and nonpayroll costs. Providing an accurate calculation of the loan forgiveness amount is your responsibility as the borrower. Banks are expected to perform a good-faith review, in a reasonable time, of your calculations and supporting documents. For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. By contrast, if payroll costs are not documented with such recognized sources, more extensive review of calculations and data would be appropriate. If the bank identifies [SV1] errors in your calculation or supporting documents, the bank should work with you to remedy the issue.
What is the timeline for the lender’s decision on a loan forgiveness application?
The bank must issue a decision to SBA on a loan forgiveness application no later than 60 days after receipt of a complete loan forgiveness application from you. That decision may take the form of an approval (in whole or in part); denial; or (if directed by SBA) a denial without prejudice due to a pending SBA review of the loan. In the case of a denial without prejudice, you may subsequently request that the bank reconsider its application for loan forgiveness.
The Guidance was a disappointment
According to the Independent Community Bankers of America: “The long-awaited forgiveness guidance released by Treasury last Friday evening was more than a source of disappointment and frustration for lenders and borrowers alike. It opens up a new source of liability risk for community bankers who have acted in good faith.”
Furthermore, the guidance failed to address two key issues: (1) an extension of the eight-week period during which PPP funds must be spent to qualify for forgiveness, and (2) eliminating the 75/25 Rule. However, these two issues are the focus of multiple bills being considered in Congress.