Since its implementation as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) has generated much attention. Borrowers and lenders have sought clarification on the SBA’s process for reviewing PPP loan and remission applications. In particular, borrowers want to know if only certain loans, such as those given to large companies or those over a certain dollar amount, are subject to SBA review. Unfortunately for borrowers, the short answer is “no”.
This email alert provides a brief summary of the main points of additional regulations and guidelines issued to date regarding the SBA’s review process for PPP loan and loan forgiveness applications. Because the rules and guidelines are constantly evolving and due to the changes made to PPP by the new Paycheck Protection Program Flexibility Act (see our Alert regarding the latest guidelines on PPP loan cancellation), readers should visit the websites of SBA and Treasury Department for more complete and up-to-date information.
Additional Guidance Regarding SBA Review of PPP Loans
On May 22, 2020, the SBA issued additional guidance on its procedures for reviewing PPP loan applications and loan forgiveness and the related responsibilities of borrowers and lenders (see SBA Interim Final Rules posted at 85 FR 33010 June 1, 2020). The main points to remember are:
- The ASB can audit any PPP loan “as the SBA administrator deems appropriate.“
- The SBA Administrator is authorized to audit:
- Whether a borrower is eligible for a PPP loan under the CARES Act, SBA rules or guidelines available at the time of the borrower’s application or the terms of the borrower’s application;
- If a borrower correctly calculated the loan amount and used the proceeds for the permitted uses specified under the CARES Act (i.e. paying labor costs, interest on mortgage bonds, rent, utilities and interest on any other debt contracted before February 15, 2020); and
- Whether a borrower is entitled to a loan forgiveness for the amount claimed on the forgiveness request.
- The SBA can audit a loan of any size “at any time at the discretion of the SBA. “So even though previous SBA and Treasury Department guidelines provided a ‘safe harbor’ for loans under $ 2 million (which assumed that the borrower’s certification of the need for the loan was made) in good faith), it now seems that no borrower is immune to SBA scrutiny.
- If the SBA determines that a borrower is not eligible for a PPP loan or the loan forgiveness amount claimed by the borrower, the loan forgiveness request will be denied. The SBA can also request repayment of the outstanding balance of the PPP loan or pursue “other available remedies”. The interim final rule does not specify what these other remedies can be, which has further exacerbated borrowers’ anxiety about applying for a PPP loan and loan forgiveness.
- If the SBA conducts an audit, it will notify the lender in writing. The lender will then have five working days to notify the borrower in writing.
- If audited, the borrower will be able to answer questions from the ASB and be given the opportunity to provide additional information. The SBA can deal directly with the borrower or indirectly through the lender.
- SBA audit decisions are subject to appeal. The SBA intends to issue a separate interim final rule regarding the appeal process.
Due to the large number of PPP loans that have been issued (as of May 30, 2020, more than 4.4 million companies have received PPP loans in the two financing rounds) and the limited resources of the SBA, it is likely that borrowers who have taken on larger loans will be audited. Many business groups have lobbied aggressively for a true “safe harbor” for which loans under $ 1 million will be considered eligible and non-revisable by the SBA. However, so far they have failed in these efforts. For this reason, and based on the latest SBA guidelines, all borrowers are at risk of audit and enforcement, although, as noted above, it is not clear what enforcement actions may involve. This raised concerns among many borrowers, especially those who may have made innocent mistakes when applying as the rules and guidelines were unclear at the time. This may explain why a significant amount of PPP loan funds remain available (as of last week, over $ 120 billion was left).
To prepare for an SBA audit, it is important that borrowers keep all documentation related to their PPP loan and loan forgiveness applications, including all items referenced in point 2 above. This includes both the documents that must be submitted as part of the loan forgiveness application, as well as the documents that borrowers are required to keep for six years after the loan forgiveness or repayment date (see our last Alert concerning the PPP loan forgiveness). If borrowers have not yet compiled this documentation, they should do so now rather than waiting for the SBA to initiate an audit, as it will likely take a long time. It is also a good practice for borrowers to keep PPP funds in a separate account so that they can easily show how these funds are spent.
Since our last Alert on PPP loans published on May 8, 2020, the SBA issued additional guidance on certain issues, including (1) authorizing loan increases for a partnership that received a PPP loan that did not include any partner compensation or for a seasonal employer that received a PPP loan before the alternative criterion for determining the maximum loan amount [85 FR 29842 published on May 19, 2020]; (2) establish the eligibility of certain electric co-ops as tax-exempt PPP borrowers under Section 501 (c) (12) of the Internal Revenue Code [85 FR 29847published on May 19, 2020]; (3) the treatment of entities with foreign subsidiaries, which specifies that a borrower is taken into account with its US and foreign subsidiaries for the purposes of counting the number of employees and determining eligibility for the PPP loan, unless the membership rules are not applicable [85 FR 30835 published on May 21, 2020]; (4) Requirements for PPP loan remission [85 FR 33004 published on June 1, 2020 (see our eAlert PPP and Loan Forgiveness: Latest Guidance and Changes Under the PPP Flexibility Act)]; and (5) the eligibility of certain telephone co-ops as tax-exempt PPP borrowers under section 501 (c) (12) of the Internal Revenue Code [Interim Final Rule posted by the SBA and Department of Treasury on June 5, 2020].
 See Paycheck Protection Program Loan FAQ 46, released by the SBA on May 13, 2020.
 The SBA clarified that the reference in its guidelines to employees who reside in the United States is relevant for the calculation of the payroll for the purposes of determining the PPP loan amount and for the calculation of the loan cancellation. The SBA further indicated that due to “reasonable confusion of borrowers” based on SBA guidelines on this issue, it will not find any borrowers who applied for a PPP loan before May 5, 2020 ineligible due to the exclusion by the borrower of non-US employees from the calculation of employee headcount.