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May 27, 2020

COVID-19: SBA PPP Loan Review Procedures

As borrowers of Paycheck Protection Program (PPP) loans shift their attention to applying for loan forgiveness, the Small Business Association (SBA) emphasized in a recently released interim final rule that it may review any PPP loan as it deems appropriate.

The SBA is authorized to review whether the borrower is eligible for a PPP loan based on various sources, including the relevant provisions of the Coronavirus Aid, Relief, and Economic Security (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. Additionally, the SBA may review whether a borrower calculated the loan amount correctly and used the loan proceeds for allowable uses. Finally, the SBA may review whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s loan forgiveness application.

The SBA may undertake a review of a PPP loan of any size at any time in their discretion. Borrowers should be mindful that the loan forgiveness application states documentation must be retained for six years after the date the loan is forgiven or repaid in full and must allow authorized SBA representatives to access the documents upon request.

If loan documents submitted by a borrower indicate the borrower may be ineligible for a PPP loan or ineligible to receive the loan amount or loan forgiveness amount claimed, the SBA will require the lender to request additional information. The SBA will consider all information provided by the borrower. However, failure to respond to the SBA’s inquiry may result in a determination of ineligibility of the borrower or of the loan amount or loan forgiveness amount claimed.

If the SBA determines a borrower is ineligible for a PPP loan, the borrower will also be ineligible for loan forgiveness. Additionally, if the SBA determines the borrower is ineligible for the loan amount or the loan forgiveness amount claimed, the borrower’s loan forgiveness application may be denied in whole or in part, and the SBA may seek repayment of the outstanding PPP loan balance or pursue other available remedies.

Section 1106(b) of the CARES Act allows forgiveness of a PPP loan only if the borrower is an “eligible recipient.” The interim final rule states that to be an eligible recipient entitled to forgiveness under section 1106(b), the borrower must be an “eligible recipient” under 15 USC § 636(a)(36)(A)(iv) as well as rules and guidance available at the time of the borrower’s loan application. That section of the statute defines “eligible recipient” as an individual or entity eligible to receive a covered loan. In addition to small business concerns, any business concern, not-for-profit, veterans organization, or tribal business concern is eligible to receive a covered loan if the business concern, not-for-profit, veterans organization, or tribal business concern employs no more than the greater of:

a) 500 employees; or

b) If applicable, the size standard in number of employees established by the SBA for the industry in which the business concern, not-for-profit, veterans organization, or tribal business concern operates

A lender must issue a decision to the SBA on a loan forgiveness application no later than 60 days after receiving a complete loan forgiveness application from the borrower and will either approve, in whole or in part, deny or deny without prejudice due to a pending SBA review of the loan. In the case of a lender issuing a denial without prejudice, the borrower may request that the lender reconsider its application for loan forgiveness unless the SBA determined the borrower is ineligible for a PPP loan.

For all PPP loan forgiveness applications, each lender will:

a) Confirm receipt of the borrower certifications contained in the loan forgiveness application form

b) Confirm receipt of the documentation borrowers must submit to aid in verifying payroll and non-payroll costs as specified in the instructions to the loan forgiveness application form

c) Confirm the borrower’s calculations on the borrower’s loan forgiveness application, including the dollar amount of the:

I. Cash compensation, non-cash compensation, and compensation to owners claimed on lines one, four, six, seven, eight, and nine on PPP Schedule A; and

II. Business mortgage interest payments, business rent or lease payments, and business utility payments claimed on lines two, three, and four on the PPP loan forgiveness calculation form by reviewing the documentation submitted with the loan forgiveness application

d) Confirm 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 one by 0.75

Providing an accurate calculation of the loan forgiveness amount is the borrower’s responsibility, and the borrower must attest to the accuracy of its reported information and calculations on the loan forgiveness application. Lenders are expected to perform a good-faith review of the borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness in a reasonable time. For example, a minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. By contrast, if payroll costs aren’t documented with recognized sources, a more extensive review of calculations and data would be appropriate. The borrower won’t receive forgiveness without submitting all required documentation to the lender.

Once a determination is made, a borrower may appeal the SBA’s determination that the borrower is ineligible for a PPP loan or ineligible for the loan amount or the loan forgiveness amount claimed. The SBA will be publishing additional guidance on the appeals process.

If you have any questions regarding the content of this alert, please contact Roger Cominsky, Financial Institutions & Lending Practice Area chair, at rcominsky@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or Samantha Podlas, associate, at spodlas@barclaydamon.com.

We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or any member of the COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.

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