Enter to open, tab to navigate, enter to select
CARES Act: SBA Issues PPP Loan Review Procedures and Related Borrower and Lender Responsibilities
Practical Law Legal Update w-025-7302 (Approx. 7 pages)
CARES Act: SBA Issues PPP Loan Review Procedures and Related Borrower and Lender Responsibilities
by Practical Law Finance
| Published on 27 May 2020 • USA (National/Federal) |
The Small Business Administration (SBA) issued an interim final rule (IFR) that informs borrowers and lenders of the SBA’s process for reviewing Paycheck Protection Program (PPP) loan applications and loan forgiveness applications. The IFR clarifies that the SBA may review PPP loans and related documentation to determine the borrower's eligibility for a PPP loan and loan forgiveness. This IFR supplements the interim final rule on Loan Forgiveness Requirements that the SBA issued contemporaneously with this IFR.
On March 27, 2020, the US government passed the CARES Act in response to the COVID-19 crisis. Under the CARES Act, the Small Business Administration (SBA) is offering loans under the Paycheck Protection Program (PPP). On April 2, 2020, the SBA issued an interim final rule (Initial Rule) outlining the key provisions for implementing the PPP. Subsequently, the SBA has issued additional interim final rules (see Practice Note, Road Map to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act): Paycheck Protection Program (PPP).
On May 22, 2020, the SBA issued an interim final rule (Requirements IFR) providing borrowers and lenders with guidance on requirements governing the forgiveness of PPP loans (see Legal Update, CARES Act: SBA Releases PPP Loan Forgiveness Requirements).
Also on May 22, 2020, the SBA issued an interim final rule (IFR), contemporaneously with the Requirements IFR, that informs borrowers and lenders of the SBA's process for reviewing PPP loan applications and loan forgiveness applications. The SBA may review a PPP Borrower Application Form (SBA Form 2483 or lender's equivalent form) (Loan Application), Loan Forgiveness Application Form (SBA Form 3508 or lender's equivalent form) (Loan Forgiveness Application) and related documentation to determine if the borrower may be ineligible for a PPP loan or to receive the loan amount or loan forgiveness amount claimed by the borrower, at any time, in its discretion. This IFR is effective immediately. Public comment on the proposed rule must be received on or before July 1, 2020.
The IFR sets out the following guidance and procedures for PPP borrowers and PPP lenders:
SBA Reviews of Individual PPP Loans
Loan Provisions Subject to Review
The SBA may review any PPP loan for the following:
- Borrower Eligibility: 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 application, including the information, certifications, and representations in the Loan Application and Loan Forgiveness Application.
- Loan Amounts and Use of Proceeds: Whether a borrower calculated the loan amount correctly and used loan proceeds for the allowable uses specified in the CARES Act.
- Loan Forgiveness Amounts: Whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s Loan Forgiveness Application.
When Loan Review Will Be Undertaken
The SBA may undertake a review of a PPP loan of any size, at any time, in its discretion.
For example, the SBA may review a loan if the loan documentation or any other information indicates that the borrower may be ineligible for a PPP loan or to receive the loan amount or loan forgiveness amount claimed by the borrower.
Borrowers must retain PPP documentation in their files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access the files upon request.
Lenders must comply with applicable SBA requirements for records retention:
- Federally regulated lenders must comply with the requirements of their federal financial institution regulator.
- SBA supervised lenders (as defined in 13 CFR § 120.10 and including PPP lenders with authority under SBA Form 3507) must comply with 13 CFR § 120.461.
Responding to the SBA's Questions in a Loan Review
If the PPP loan documentation or any other information indicates that the borrower may be ineligible for a PPP loan or to receive the loan amount or loan forgiveness amount claimed by the borrower, the SBA will require the lender to contact the borrower in writing to request additional information. The SBA may also request information directly from the borrower. The lender will provide any additional information provided to it by the borrower to the SBA. The SBA will consider all information provided by the borrower in response to the inquiry. Failure to respond to the SBA's inquiry may result in a determination that the borrower was ineligible for a PPP loan or to receive the loan amount or loan forgiveness amount it claimed.
Treatment of Ineligible Borrowers, Loan Amounts, and Loan Forgiveness Amounts
If the SBA determines that a borrower is ineligible for the PPP loan, the SBA will direct the lender to deny the loan forgiveness application.
If the SBA determines that the borrower is ineligible for the loan amount or loan forgiveness amount claimed by the borrower, the SBA will direct the lender to deny the loan forgiveness application in whole or in part, as appropriate.
The SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.
The Loan Forgiveness Process for Lenders
Lenders' Review Requirements
For all PPP Loan Forgiveness Applications, each lender shall confirm:
- Receipt of the borrower certifications contained in the Loan Forgiveness Application.
- Receipt of the documentation for payroll and nonpayroll costs specified in the instructions to the Loan Forgiveness Application.
- The borrower's calculations on the 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. - The borrower made the calculation on Line 10 of the Loan Forgiveness Calculation Form correctly, by dividing the borrower's Eligible Payroll Costs claimed on Line 1 by 0.75.
It is the borrower's responsibility to provide an accurate calculation of the loan forgiveness amount. The borrower attests to the accuracy of its reported information and calculations on the Loan Forgiveness Application.
Lenders must perform a good-faith review, in a reasonable time, of the borrower's calculations and supporting documents for eligible loan forgiveness amounts. 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 will not receive forgiveness without submitting all required documentation to the lender.
Lenders may rely on borrower representations. If the lender identifies errors in the borrower's calculation or material lack of substantiation in the borrower's supporting documents, the lender should work with the borrower to remedy the issue. The lender does not need to independently verify the borrower's reported information if the borrower submits documentation supporting its request for loan forgiveness and attests that it accurately verified the payments for eligible costs.
Timeline for Lender's Decision on a Loan Forgiveness Application
A lender must issue a decision to the 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 be:
- An approval, in whole or in part.
- A denial.
- If directed by the SBA, a denial without prejudice due to a pending SBA review of the borrower's loan. In this case, the borrower may subsequently request that the lender reconsider its application for loan forgiveness, unless the SBA has determined that the borrower is ineligible for a PPP loan.
When the lender issues its decision to the SBA approving the application, in whole or in part, it must include:
- The PPP Loan Forgiveness Calculation Form.
- The PPP Schedule A.
- The (optional) PPP Borrower Demographic Information Form (if submitted to the lender).
The lender must confirm that the information it provided to the SBA accurately reflects its records for the loan, and that the lender has made its decision in accordance with the requirements set out in Lenders' Review Requirements.
If the lender determines that the borrower is entitled to some or all loan forgiveness, it must request payment from the SBA when it issues its decision to the SBA. The SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to the SBA. If applicable, the SBA will deduct EIDL Advance Amounts from the forgiveness amount remitted to the lender as required by section 1110(e)(6) of the CARES Act.
When the lender determines that the borrower is not entitled to any loan forgiveness, the lender must provide the SBA with the reason for its denial, together with:
- The PPP Loan Forgiveness Calculation Form.
- The PPP Schedule A.
- The (optional) PPP Borrower Demographic Information Form (if submitted to the lender).
The lender must also:
- Confirm that the information provided by it to the SBA accurately reflects its records for the loan, and that the lender has made its decision in accordance with the requirements set out in Lenders' Review Requirements.
- Notify the borrower in writing that it has issued a decision to the SBA denying the loan forgiveness application.
The SBA reserves the right to review the lender's decision in its sole discretion. Within 30 days of notice from the lender, a borrower may request that the SBA review the lender's decision by reviewing the loan in accordance with Lender Requirements When SBA Reviews a Loan.
Lender Requirements When SBA Reviews a Loan
The SBA may review any PPP loan of any size, at any time, in its discretion. If the SBA undertakes a review, it will notify the lender in writing and the lender must notify the borrower in writing within five business days of receipt. Within five business days of receipt of the SBA notice, the lender will transmit to the SBA electronic copies of the following:
- The Loan Application and all supporting documentation provided by the borrower.
- The Loan Forgiveness Application, if received, and all supporting documentation provided by the borrower. If the lender receives the Loan Forgiveness Application after it receives notice that the SBA has begun a loan review, the lender must transmit electronic copies of the application and all supporting documentation provided by the borrower to the SBA within five business days of receipt. The lender must also request a copy of the Schedule A Worksheet to the Loan Forgiveness Application from the borrower, which the lender must submit to the SBA within 5 business days of receipt.
- 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 the SBA.
If the SBA has notified the lender that the SBA has commenced a loan review, the lender will not approve a Loan Forgiveness Application for the loan until the SBA notifies the lender in writing that the SBA review is completed.
Lender Fees
Ineligible Borrowers
The lender is not eligible for a processing fee if the SBA conducts a loan review and determines that the borrower is ineligible for a PPP loan.
Processing Fee Clawbacks for Ineligible Borrowers
For any SBA-reviewed PPP loan, if within one year after the loan was disbursed, the 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, the SBA will seek repayment of the lender processing fee from the lender. However, the SBA will still guaranty the loan if the lender has complied with its obligations under section III.3.b of the Initial Rule and the document collection and retention requirements described in the lender application form (SBA Form 2484)(Lender Application).
Processing Fee Clawbacks for Lender Non-Compliance
If a lender fails to satisfy the lenders' requirements set out in section III.3.b of the Initial Rule or the document collection and retention requirements described in the Lender Application, the SBA will seek repayment of the lender processing fee from the lender and may determine that the loan is not eligible for a guaranty.