On January 19, 2021, the U.S. Small Business Administration (SBA) published its 28th Interim Final Rule (Forgiveness IFR) covering the loan forgiveness requirements and review procedures for the Paycheck Protection Program, as reauthorized and amended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act), and as enacted under the Coronavirus Aid, Relief, and Economic Security Act (as amended, supplemented or otherwise modified from time to time prior to the enactment of the Economic Aid Act, including the Paycheck Protection Program and Health Care Enhancement Act, the Paycheck Protection Program Flexibility Act, applicable federal regulations and interpretive guidance issued by the SBA and U.S. Department of Treasury (the CARES Act)).
In connection with the Forgiveness IFR, the SBA also released the following updated loan forgiveness applications and instructions:
- PPP – Loan Forgiveness Application and Instructions – Form 3508S
- PPP – Loan Forgiveness Application and Instructions – Form 3508EZ
- PPP – Loan Forgiveness Application and Instructions – Form 3508
The Forgiveness IFR consolidates, restates and clarifies prior SBA regulations governing loan forgiveness, while also updating those rules to incorporate changes effected by the Economic Aid Act. The SBA advises that each of the new interim final rules, including the Forgiveness IFR, are to be interpreted consistently with each other and with the Frequently Asked Questions (FAQs)[1], but any discrepancy or conflict that may exist is to be resolved in favor of the Economic Aid Act.
Highlights of what we believe to be material new guidance or clarification of existing guidance in the Forgiveness IFR are as follows:
I. General PPP Loan Forgiveness Review Procedures by the Lender and the SBA
The Forgiveness IFR confirms prior guidance establishing that, while the SBA may undertake a review of any PPP loan, whether first or second draw, at any time, it is the lender that is tasked with conducting the review of a borrower’s completed PPP loan forgiveness application and accompanying required supporting documentation, including payroll data, and making a determination based on the forgiveness application and supporting documentation of the forgiveness amount. The lender must issue a decision to the SBA as to the loan forgiveness amount not later than 60 days after receipt of a complete loan forgiveness application package from the PPP 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 lender must notify the PPP borrower in writing that the lender has issued a decision to the SBA denying loan forgiveness and provide the SBA with a copy of the notice. The notice to the PPP borrower must include the reasons that the lender concluded that the PPP borrower is not entitled to loan forgiveness in any amount and inform the PPP borrower that the PPP borrower has 30 calendar days from receipt of the notification to seek, through the lender, review by the SBA of the lender’s decision. Within 30 days of notice from the lender, a PPP borrower may notify the lender that it is requesting that the SBA review and reconsider the lender’s decision, unless the SBA has determined that the borrower is ineligible for a PPP loan. Within 5 days of receipt, the lender must notify the SBA of the PPP borrower’s request for review.
The SBA reserves the right, in its sole discretion, to review the lender’s decision as to loan forgiveness (whether approved in whole or part, or denied), and will notify the lender if the SBA decides to review the lender’s decision or if the SBA declines a request for review. If forgiveness is denied in whole or in part and if the PPP borrower does not timely request SBA review or the SBA declines the request for review, the lender is responsible for notifying the PPP borrower of the date on which the borrower’s first amortizing payment of the unforgiven portion of the PPP loan plus any accrued interest is due. If the SBA accepts a PPP borrower’s request for review, the SBA will notify the PPP borrower and the lender of the results of the review. If the SBA has, upon such review, denied forgiveness in whole or in part, the lender is responsible for notifying the PPP borrower of the date on which the borrower’s first amortizing payment of principal of the unforgiven portion of the PPP loan plus any accrued interest is due.
The Forgiveness IFR adds that the SBA can, in its discretion, review a borrower’s first and second draw PPP loans at the same time or at different times, and also analyze whether a borrower was “eligible for a PPP loan based on the provisions of the CARES Act, the Economic Aid Act, the rules and guidance available at the time of the borrower’s PPP loan application, and the terms of the borrower’s loan application.” If the SBA undertakes such a review, the SBA will notify the lender in writing and the lender must in turn notify the PPP borrower in writing within five business days. The SBA may, among other things, review whether the borrower (i) properly calculated the maximum loan amount available, (ii) used the proceeds of the PPP loan for authorized uses, and (iii) in the case of a second draw PPP loan, whether the borrower experienced the required 25% reduction in gross receipts to be eligible for such second draw PPP loan. The SBA reasoned that such a review is “essential to ensure that PPP loans are directed to the businesses Congress intended, and that PPP loan proceeds are used for the purposes Congress required, including the CARES Act’s and the Economic Aid Act’s central purposes of keeping workers paid and employed.”
If the SBA, on review, determines the borrower to have been ineligible for a PPP loan, the PPP loan will not be eligible for forgiveness. The SBA may also seek immediate repayment of the outstanding PPP loan balance or pursue other remedies available to it. Importantly, the Forgiveness IFR notes that the CARES Act’s nonrecourse provisions limiting the SBA’s recourse against individual equity holders of the PPP borrower for nonpayment of the PPP loan applies “only if the borrower is an eligible recipient of the loan”.
II. Simpler Forgiveness Application for PPP Loans Less than $150,000
In accordance with Section 307 of the Economic Aid Act, the SBA released SBA Form 3508S, which is a simpler forgiveness application form for borrowers of PPP loans of less than $150,000. SBA Form 3508S only requires such borrowers to certify that they are in compliance with rules governing the PPP at the time of application, and that the information provided in this application is true and correct in all material respects. There is no additional documentation required to be delivered.
III. Silence on SBA Review of PPP Loans of $2 Million or More and the Economic Necessity Certification
As previously discussed in our client alerts on the subject matter here and here, the SBA stated that it would review and audit businesses receiving first draw PPP loans of $2 million or more. Pursuant to FAQ #46, if the SBA determines in the course of its review that a borrower “lacked an adequate basis for the required certification concerning the necessity of the [PPP] loan request,” the SBA will “seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.” Further, the SBA also released a Loan Necessity Questionnaire to lenders for them to provide to PPP borrowers that received loans of $2 million or more. FAQ #53 and the Loan Necessity Questionnaire stipulates that, upon request from their lender, PPP borrowers should return the completed questionnaire form to their lender within 10 business days of receipt, and within 5 business days thereafter the lender is required to upload the form and any related documentation to the SBA PPP Forgiveness Platform.
The Forgiveness IFR does not cite to FAQs #46 and #53 or the Loan Necessity Questionnaire, or otherwise address the SBA’s review process for PPP loans of $2 million or more. However, as noted in Footnote 1, the SBA has advised that the FAQs are in the process of being revised and updated to reflect the changes made by the Economic Aid Act, so the SBA may yet provide additional guidance in the days and weeks to come.
*Things are changing quickly and the measures and interpretations described herein may change. Our analysis is necessarily limited by the time sensitivities of the current crisis, as well as the absence of precedent for some of what is contained here. This analysis represents our best interpretation and recommendations based on where things currently stand.*
FOOTNOTES
[1] On January 29, 2021, the SBA issued updated FAQs with the following header in bold red at the top of each page: “FAQs 1 – 53 are in the process of being revised and do not yet reflect changes made by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act enacted on December 27, 2020.” The January 29 issuance only added three new FAQs to address narrow questions. The SBA did not indicate when a broader update will be available.