May 26, 2020
Just as we were heading out to celebrate Memorial Day weekend, last Friday night the SBA issued an
Interim Final Rule
on Payroll Protection Program (PPP) Loan Forgiveness for borrowers and lenders. It seems like the SBA is trying to address unanswered questions before the covered period for the first group of PPP loans is over in two weeks.
This interim final rule informs borrowers and lenders of SBA’s process for reviewing PPP loan applications and loan forgiveness applications. This interim final rule supplements the previous interim final rule on Loan Forgiveness. It provides much needed clarification for both lenders and borrowers. The first PPP loans were disbursed after April 3. This interim final rule provides borrowers with some certainty on SBA’s process for reviewing PPP loan applications and loan forgiveness applications. This guidance also gives more direction to help borrowers determine whether, and to what extent, they should apply for PPP loans and loan forgiveness, while at the same time taking necessary steps to maximize eligible loan forgiveness amounts. This interim final rule is effective immediately.
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, 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 the program requirements. SBA’s review of borrower certifications and representations regarding the borrower’s eligibility for a PPP loan and loan forgiveness, and the borrower’s use of PPP loan proceeds, is essential to ensure that PPP loans are directed to the entities Congress intended. It also ensures that PPP loan proceeds are used for the purposes Congress required, including the CARES Act’s central purpose of keeping workers paid and employed.
SBA Review of a Borrower
SBA may review any PPP loan as follows:
- Borrower Eligibility: The Administrator may review whether a borrower is 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.
- Loan Amounts and Use of Proceeds: The Administrator may review whether a borrower calculated the loan amount correctly and used loan proceeds for the allowable uses specified in the CARES Act.
- Loan Forgiveness Amounts: The Administrator may review whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s Loan Forgiveness Application.
For a PPP loan of any size, SBA may undertake a review at any time in SBA’s discretion. For example, SBA may review a loan if the loan documentation submitted to SBA by the lender or any other information indicates that the borrower may be ineligible for a PPP loan, or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower.
Record Retention
As noted on the Loan Forgiveness Application Form, the borrower must retain PPP documentation in its files for six years after the date the loan is forgiven or repaid in full. Authorized representatives of SBA, including representatives of its Office of Inspector General, must be allowed to access such files upon request.
Lenders must comply with applicable SBA requirements for records retention. Federally regulated lenders must be in compliance with the requirements of their federal financial institution regulator and the requirements for SBA supervised lenders.
Ineligibility for a PPP Loan
If loan documentation submitted to SBA by the lender or any other information indicates that the borrower may be ineligible for a PPP loan, the loan amount or the loan forgiveness amount claimed by the borrower, SBA will require the lender to contact the borrower in writing to request additional information. SBA may also request information directly from the borrower. The lender will provide any additional information provided to it by the borrower to SBA. SBA will consider all information provided by the borrower in response to such an inquiry.
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.
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.
Section 1106(b) of the CARES Act provides for forgiveness of a PPP loan only if the borrower is an “eligible recipient.” However, the rules and guidance available at the time of the borrower’s loan application will be taken into consideration. This requirement 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. Accordingly, the PPP Loan Forgiveness Application (SBA Form 3508 or lender’s equivalent form) notes that SBA may direct a lender to disapprove a borrower’s loan forgiveness application if SBA determines that the borrower does not qualify as an eligible recipient for the PPP loan.
The SBA intends to issue a separate interim final rule for borrows on an appeal process.
The Loan Forgiveness Process for Lenders
For all PPP Loan Forgiveness Applications, each lender shall:
- Confirm receipt of the borrower certifications contained in the Loan Forgiveness Application.
- Confirm receipt of the documentation borrowers must submit to aid in verifying payroll and nonpayroll costs, as specified in the instructions to the Loan Forgiveness Application Form.
- Confirm the borrower’s calculations on the borrower’s Loan Forgiveness Application, including the dollar amount of the cash compensation, non-cash compensation, and compensation to owners claimed on lines 1, 4, 6, 7, 8, and 9 on PPP Schedule A; and business mortgage interest payments, business rent or lease payments, and business utility payments claimed on lines 2, 3, and 4 on the PPP Loan Forgiveness Calculation Form, by reviewing the documentation submitted with the Loan Forgiveness Application.
- Confirm that the borrower made the calculation on line 10 of the Loan Form.
- Confirm that the borrower completed the Forgiveness Calculation Form correctly by dividing the borrower’s Eligible Payroll Costs claimed on Line 1 by 0.75.
Providing 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.
Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness. 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. The borrower shall not receive forgiveness without submitting all required documentation to the lender.
Loan Forgiveness Decision
The lender must issue a decision to 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 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 SBA has determined that the borrower is ineligible for a PPP loan.
The Administrator has determined that this process appropriately balances the need for efficient processing of loan forgiveness applications with considerations of program integrity. This includes affording SBA the opportunity to ensure that borrower representations and certifications (including concerning eligibility for a PPP loan) were accurate.
CARES Act
When the lender issues its decision to SBA determining that the borrower is not entitled to forgiveness in any amount, the lender must provide SBA with the reason for its denial, together with (1) the PPP Loan Forgiveness Calculation Form; (2) PPP Schedule A; and (3) the (optional) PPP Borrower Demographic Information Form (if submitted to the lender). The lender must confirm that the information provided by the lender to SBA accurately reflects lender’s records for the loan, and that the lender has made its decision in accordance with the requirements of the CARES Act. The lender must also notify the borrower in writing that the lender has issued a decision to SBA denying the loan forgiveness application.
SBA reserves the right to review the lender’s decision at its sole discretion. Within 30 days of notice from the lender, a borrower may request that SBA review the lender’s decision.
Enabling SBA to use the statutory 90-day period to review the PPP loan and forgiveness documentation is an appropriate procedural protection to prevent fraud or misuse of PPP funds. It also ensures that recipients of PPP loans are within the scope of entities that the CARES Act is intended to assist. Furthermore, if confirms compliance with the PPP requirements set forth in the statute, rules, and guidance. This protection is also important considering the large number and diverse types of PPP lenders, many of which were not previously SBA participating lenders. SBA will use the 90-day period to help ensure that applicable legal requirements have been satisfied.
SBA will issue additional procedures on the process for advance purchase of PPP loans.
SBA Lender Review
SBA may begin a review of any PPP loan of any size at any time in SBA’s discretion. If SBA undertakes such a review, SBA will notify the lender in writing and the lender must notify the borrower in writing within five business days of receipt.
The lender shall transmit within five business days to SBA electronic copies of the following:
- The Borrower Application Form (SBA Form 2483 or lender’s equivalent form) and all supporting documentation provided by the borrower.
- The Loan Forgiveness Application (SBA Form 3508 or lender’s equivalent form), and all supporting documentation provided by the borrower (if the lender has received such application). If the lender receives a Loan Forgiveness Application after it receives notice that SBA has commenced a loan review, the lender shall transmit electronic copies of the application and all supporting documentation provided by the borrower to SBA within five business days of receipt. The lender must also request that the borrower provide the lender with a copy of the Schedule A Worksheet to the Loan Forgiveness Application, and the lender must submit the worksheet to SBA within five business days of receipt from the borrower.
- A signed and certified transcript of account.
- A copy of the executed note evidencing the PPP loan.
- Any other documents related to the loan requested by SBA.
If SBA has notified the lender that SBA has commenced a loan review, the lender shall not approve any application for loan forgiveness for such loan until SBA notifies the lender in writing that SBA has completed its review.
Lender Fees
If SBA conducts a loan review and determines that the borrower was ineligible for a PPP loan, the lender is not eligible for a processing fee.
If within one year after the loan was disbursed SBA determines that a borrower was ineligible for a PPP loan based on the provisions of the CARES Act or applicable rules or guidance available at the time of the borrower’s loan application, or the terms of the loan application, SBA will seek repayment of the lender processing fee from the lender. However, SBA’s determination of borrower eligibility will have no effect on SBA’s guaranty of the loan if the lender has complied with its obligations under the First Interim Final Rule and the document collection and retention requirements described in the lender application form (SBA Form 2484).
If a lender fails to satisfy the requirements applicable to lenders that are set forth in section the First Interim Final Rule or the document collection and retention requirements described in the lender application form (SBA Form 2484), SBA will seek repayment of the lender processing fee from the lender and may determine that the loan is not eligible for a guaranty.
Additional Information
Feel free to contact any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ) with questions. Rich Higgins, CPA, managing principal – New Jersey office can be contacted at
Richard.Higgins@MCC-CPAs.com
. I can be reached at
Marty.McCarthy@MCC-CPAs.com
. As always, we are happy to help. Have a good Memorial Day weekend.
Stay safe,
Marty McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company
Source: Small Business Administration
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
