Numerous changes have been made to the Paycheck Protection Program (PPP) in recent months, primarily stemming from the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) signed into law in December 2020 as part of the overall Consolidated Appropriations Act, 2021, and related administrative rules and guidance issued by the Small Business Administration (SBA). In this article, we address frequently asked questions and guidance regarding updates and other reforms to the SBA’s review process of PPP loans.
Can the SBA audit PPP loans?
Yes. The SBA has the authority to review or audit a PPP loan of any size and its related documentation and records required to be maintained by both Borrowers and Lenders at any time, in its discretion.
Further, all loans (and groups of loans among affiliates) of $2 million or more will automatically be reviewed by the SBA. These Borrowers will receive a Loan Necessity Questionnaire that must be completed and returned to the Lender within 10 business days.
What documentation will the SBA review?
If the SBA decides to pursue a review of a PPP loan, it will typically review certain Borrower documentation and statements, including those regarding:
(i) Borrower eligibility – The SBA has the authority to review whether a Borrower is eligible to receive a PPP loan. This includes reviewing the information, certifications and representations in the Borrower Application Form, the Lender Application Form and the Loan Forgiveness Application Form. If a Borrower is taking a Second Draw Loan, the SBA may review whether the Borrower meets the 25 percent revenue reduction test.
(ii) Loan amounts and use of proceeds – The SBA may review whether the Borrower correctly calculated the loan amount, as well as whether the Borrower used the PPP loan proceeds for eligible covered expenses.
(iii) Loan forgiveness amounts – The SBA may review whether the Borrower is eligible for loan forgiveness and the loan forgiveness amount claimed on the Loan Forgiveness Application Form.
For PPP loans of more than $150,000, a Borrower must retain PPP documentation in its records for six years after the date the loan is either forgiven or repaid in full. For PPP loans of $150,000 or less, the Borrower must retain records that prove compliance with PPP requirements.
Because the SBA may review any PPP loan and its related documentation at any time, it is important for the Borrower to work closely with the Lender throughout the lifecycle of the PPP loan process to ensure all Applications and forms are completed accurately, any mistakes are corrected in a timely manner and any additional documentation that may be requested is timely provided.
Has the SBA made changes to the Necessity Questionnaire?
Under its recently revised FAQs (linked below), the SBA has noted it will review all First Draw Loans of $2 million or more, and other loans as appropriate, for eligibility, fraud or abuse, and compliance with loan forgiveness requirements. Any Borrower that, together with its affiliates, received a First Draw Loan with an original principal amount of less than $2 million will be deemed to have made the required certification concerning loan necessity of the First Draw Loan request in good faith.
SBA is providing the Loan Necessity Questionnaire (Questionnaire) to Lenders to provide to Borrowers. Borrowers should return the completed questionnaire to their Lender within 10 days of receipt. Note, however, that a request to complete the Questionnaire does not mean that the SBA is challenging a Borrower’s certification, and the SBA’s assessment of the Borrower’s certification will be based on the totality of the Borrower’s circumstances through a multi-factor analysis.
After a Borrower submits the Questionnaire, the SBA may request additional information to complete its review. If this occurs, the Borrower will have the opportunity to provide a narrative response to the SBA explaining the circumstances that provided for the basis for their good-faith loan necessity certification. Borrowers should be careful to consult legal counsel and other advisors as appropriate when reviewing and responding to inquiries from the SBA.
What if I have made a good faith error in calculating the loan amount?
In a Procedural Notice issued on January 15, 2021 (see the link below), the SBA provides guidance on how Borrowers and Lenders should handle "excess loan amount errors," which it defines as "a borrower or lender error made in good faith that caused a borrower to receive a PPP loan amount that exceeds the borrower's correct maximum loan amount." An excess loan amount error specifically excludes knowing misstatements, which are still subject to fraud charges and other additional actions.
The Procedural Notice makes clear that a Borrower may not receive forgiveness for any excess loan amount, regardless of whether such overage was caused by Borrower error or Lender error. The Borrower will be required to begin making payments on any excess loan amounts in accordance with the Program's repayment schedule.
Can I respond to the SBA’s questions if my PPP loan is under review?
Yes. If the SBA preliminarily determines that a Borrower is ineligible for a PPP loan or is ineligible for the loan amount or the loan forgiveness amount, the SBA may request additional information from the Borrower, either through the Lender or by contacting the Borrower directly. If a Borrower fails to respond to the SBA’s inquiry, the Borrower could be deemed entirely ineligible for the loan, the loan amount or the loan forgiveness amount claimed by Borrower. As noted previously, Borrowers should be careful to consult legal counsel and other advisors as appropriate when reviewing and responding to inquiries from the SBA.
Below are useful links to necessary forms. Forms and additional guidance can be found on the SBA and Department of Treasury’s websites. We have also included links below to our other articles in this series.
- SBA’s FAQs
- SBA’s IFR on Loan Forgiveness Requirements and Loan Review Procedures
- SBA’s Procedural Notice for PPP Excess Loan Amount Errors
- Loan Necessity Questionnaire for For-Profit Borrowers
- Loan Necessity Questionnaire for Nonprofit Borrowers