On March 27, 2020 the United States government signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. A key part of this legislation included the Paycheck Protection Program (PPP), which provided two-year loans of up to $10 million with an interest rate of 1%. Individual small businesses were permitted to borrow up to 2.5 times the borrower’s average monthly payroll for the past 12 months.
These loan proceeds could be used to cover expenses for the period of February 15, 2020 through June 30, 2020 to include payroll expenses, group healthcare benefits, mortgage interest payments, rent, utilities, and interest on other debt incurred during this period.
A significant benefit of the PPP loan program was that the loan, as long as it was used for the covered expenses mentioned above, would be eligible for loan forgiveness.
As expected, the funds devoted to this loan program, guaranteed through the Small Business Administration (SBA), were completely exhausted after only a short period of time. As a result, on April 23, 2020, the U.S. Congress passed the Paycheck Protection Program and Health Care Enhancement Act (Enhancement Act) expanding funding for the Paycheck Protection Program.
The total amount of funding authorized under both legislative acts to the SBA for PPP loans was $659 billion.
Process of Applying for Loan Forgiveness
As the impending June 30, 2020 deadline on use of loan proceeds grew closer, the U.S. Treasury Department issued an Interim Final Rule on Loan Forgiveness on May 22, 2020. In addition, the Treasury Department also issued the Interim Final Rule on SBA Loan Review Procedures and Lender Reporting on May 22, 2020.
To apply for loan forgiveness, the borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508) to its lender. At this point, the lender has 60 days from receipt of a complete application to issue a decision to the SBA.
Following receipt of the SBA Loan Forgiveness Application and its accompanying documentation from the lender, the SBA will issue the appropriate forgiveness amount to the lender no later than 90 days after the lender issues its decision to the SBA regarding loan forgiveness.
Therefore, in total, the entire process of loan forgiveness could take up to 150 days.
What if the Application for Loan Forgiveness is Denied?
Under the Interim Final Rule, if the application for loan forgiveness is denied by the SBA, the lender will notify the borrower. As a result of this decision, any remaining balance due on the loan must be repaid by the borrower on or before the two-year maturity of the loan to the lender.
What Will the SBA Review as Part of its Decision to Approve or Deny an Application for Loan Forgiveness?
As mentioned above, the Loan Forgiveness Application will be reviewed by the lender and submitted to the SBA with the lender’s decision. However, the ultimate decision making will be with the SBA to approve or not approve a borrower’s application for loan forgiveness.
SBA Can Review Eligibility Under the CARES Act
Under the Interim Final Rule, the SBA may review any PPP loan which is deemed appropriate. Specifically, the SBA may review whether a borrower was eligible for the PPP loan based on the provisions of the CARES 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. Under the CARES Act, it was determined that the SBA would only review loans over $2 million. However, the specific language of the CARES Act provides that the SBA may review any loan application and loan forgiveness application. As such, we anticipate that the SBA loan forgiveness applications will be carefully reviewed and scrutinized.
SBA Can Review the Loan Amounts and Use of the Loan Proceeds
The SBA is entitled to review whether the borrower should have received the loan forgiveness amount requested on the Loan Forgiveness Application.
When Will the Loan Review Process Occur by the SBA?
Unfortunately, the SBA may undertake a review of the Loan Forgiveness Application at any time in the SBA’s discretion. This does not just include when the lender sends the Loan Forgiveness Application to the SBA for review and repayment. As such, the borrower must retain the PPP documentation in its files for a total of six years after the loan was forgiven or repaid in full. In addition, under the terms of the CARES Act and Interim Final Rule, the borrower must provide access to their files upon request by the SBA and Inspector General.
If the SBA Determines That You May Be Ineligible for Loan Forgiveness, Will You Have an Opportunity to Respond?
If the SBA makes this determination upon initial review that the borrower may be ineligible for loan forgiveness, the SBA will direct the lender to contact the borrower to request additional information. In addition, the SBA may contact the borrower directly for this additional information. If after this process the SBA concludes that the borrower is ineligible for a PPP loan, the SBA will direct the lender to deny the loan forgiveness application. Further, the SBA may also seek repayment of the outstanding PPP loan balance or pursue other remedies against the borrower. Therefore, the ramifications of being denied the loan forgiveness application can be quite extensive.
Can a Borrower Appeal the SBA’s Decision to Deny the Loan Forgiveness Application?
If the SBA makes the determination to deny a Loan Forgiveness Application, in whole or in part, the borrower may appeal the SBA’s decision. However, the process of appealing the SBA’s decision has not been addressed and we anticipate that an Interim Final Rule regarding this process will be issued in the future by the United States Department of Treasury. Further, if the SBA denies the application, the borrower may also issue a request for the SBA to reconsider its application and decision so long as the SBA has not made the determination that the borrower is ineligible for a PPP loan.
There were numerous small businesses which applied for loans to cover their payroll costs and other related expenses under the Paycheck Protection Program with the understanding that the loans would be eligible for forgiveness under the CARES Act. However, as the recently issued Interim Final Rules make clear, the prospect of loan forgiveness will be reviewed, along with the original underlining PPP loan, and heavily scrutinized.
The SBA has made clear that these processes are to ensure that the purpose of the PPP loan and the CARES Act are followed and not subject to abuse. It is for these reasons that we are recommending our clients contact our office to discuss their PPP Loan Forgiveness Application and supporting documentation. This is to ensure that a proper analysis can be conducted regarding the possibility of loan forgiveness denial and to develop a strategy for reconsideration and appeal of these decisions.
For more information
For more information, please contact our office at (513) 241-0400 or use our contact form form to schedule a time to speak with one of our attorneys!