ComplianceJuly 16, 2020

Helping Your Borrower Document the Path to Payroll Protection Program Loan Forgiveness

Since it was signed into law on March 27, 2020, the CARES Act’s Paycheck Protection Program (“PPP”; Pub. L. No. 116-136; the “Act”) has provided a source of vital funding to small businesses during the COVID-19 pandemic. Under the Act, a PPP-covered loan is eligible for forgiveness provided that the funds are used in specific proportions as specified by the Act to cover qualifying payroll costs, interest payments on a covered mortgage obligation, covered rent obligations, and covered utility payments. Section 1106(f) of the Act is explicit that “no eligible recipient shall receive forgiveness under this section without submitting to the lender servicing the covered loan the documentation required under subsection (e).”

The Paycheck Protection Program Flexibility Act of 2020 (Pub. L. No. 116-142; the “PPP Flexibility Act”) revised certain rules under the PPP including the minimum proportion of funds that must be spent on qualifying payroll costs in determining the amount of a PPP loan eligible for forgiveness. The documentation and related requirements that a borrower must satisfy in order to obtain forgiveness of all or a portion of a PPP loan have been criticized by various commentators and trade groups, and it is possible that they may be modified in response. It is currently anticipated that there will be millions of requests by small businesses for forgiveness of their PPP loans. 

This article provides guidance to help lenders understand important points concerning required PPP loan forgiveness documentation. PPP rules and guidance have been  moving targets and continued revisions and updates are likely. A lender should always consult with its own legal advisor and check for new or updated guidance.

Getting Prepared

The PPP, particularly when it was first launched, forced both borrowers and lenders to “burn the candle at both ends.” Small business owners scrambled to get their PPP loan applications and required documentation submitted in order to obtain financial help they needed to sustain their businesses during the early stage of the pandemic. Many lenders worked nights and weekends to accept PPP loan applications from small business owners in order to assist them in obtaining the funds to meet payroll obligations and other expenses. In the rush to get loans packaged and approved, important details about the documentation needed for PPP loan forgiveness may not have received the attention it deserved. Small business owners needed to pay their existing obligations and rehire previously laid off employees, while lenders were dealing with a flood of applications.

Lenders now need to prepare for the onslaught of forgiveness requests. In anticipation, lenders should start now by understanding the documentation needed under the Act, the PPP Flexibility Act, and current SBA guidance. Lenders should know that some of the documentation in the original application may be relevant in determining the documentation required to apply for PPP loan forgiveness.

Loan Forgiveness Application

As was required with PPP loan applications, Section 1106(e)(3) of the Act requires that the borrower must provide specific certifications when requesting loan forgiveness. The certifications required by Section 1106(e)(3) are included on the Loan Forgiveness Application, SBA Forms 3508 and 3508EZ (the Loan Forgiveness Application was originally released by the SBA on May 15, 2020 and was later amended on June 16, 2020 with the release of Loan Forgiveness Application, SBA Forms 3508 and 3508EZ). 

The Loan Forgiveness Application (3508) includes four components: 1) the PPP Loan Forgiveness Calculation form; 2) PPP Schedule A; 3) PPP Schedule A Worksheet; and 4) PPP Borrower Demographic Information form (optional).  The Loan Forgiveness Application spans 5 pages with an additional instruction document. The Loan Forgiveness Application EZdesigned for sole proprietors, independent contractors and self-employed individuals; businesses that did not reduce annual salary or wages or reduce the number of employees; or businesses that did not reduce annual salary or wages but were unable to operate during the Covered Period at the same level of activity before February 15, 2020can be used if certain criteria are met.

Lenders should use care to understand the Loan Forgiveness Application forms, instructions, and required documentation. Lenders must also understand the borrower eligibility criteria and related limitations that must be satisfied in order for a borrower to use the new Form 3508EZ instead. To support the forgiveness process, lenders should consider developing a documentation and process checklist that can be provided to borrowers to assist in completing the Loan Forgiveness Application forms.

Payroll and Non-Payroll Costs

Section 1106 of the Act lists specific documentation required for payroll expenses, such as Internal Revenue Service tax filings and state income, payroll, and unemployment insurance filings. Additionally, the SBA Loan Forgiveness Applications (3508 and 3508EZ) require submission of bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees and payment receipts, and cancelled checks or account statements documenting employer contributions for employee health insurance and retirement plans. 

Similar to the restrictions applicable in determining payroll for calculating the loan amount of a PPP loan, certain payroll costs are not allowed in the forgiveness calculation, such as compensation of an individual employee in excess of an annual salary of $100,000. Interim guidance issued by the SBA[1] also provides that self-employed individuals must submit their 2019 Form 1040 Schedule C that was provided at the time of the PPP loan application and that net profit from the 2019 Schedule C is used to document owner's compensation as a substitute for payroll costs for computing the amount of the PPP loan that can be forgiven. The Loan Forgiveness Application forms and related instructions do not provide detailed information and guidance regarding non-allowable payroll costs and other expenses, as well as specific documentation requirements for self-employed individuals and owner employees. However, SBA’s Interim Final Rule on Loan Forgiveness (85 Fed. Reg. 105, 3304, June 1, 2020) provides additional guidance regarding payroll costs and caps that limit the forgiveness allowed for self-employed individuals and owner-employees. PPP borrowers and lenders should make sure they understand the additional guidance so that they can properly complete and review forgiveness submissions.

Note that this Interim Final Rule was not issued until April 14, 2020, therefore some applications may have applied for a PPP loan without that documentation.  Additionally, the Loan Forgiveness Application forms and related instructions do not require the 2019 Form 1040 Schedule C specifically.  As of last count, there were 4,907,655 PPP loans.

To evidence expenditures relating to non-payroll costs, Section 1106(e)(2) of the Act requires submission of copies of cancelled checks, payment receipts, or transcripts of accounts to document mortgage interest on real or personal property, lease, or utility payments made during the covered period. However, the Loan Forgiveness Application form instructions list additional documentation to verify non-payroll expenses: a copy of the lender’s amortization schedule or lender account statements to support the mortgage interest paid; copies of the current lease agreements or lessor account statements to support rent or lease payments; and copies of the utility invoices.

To have a loan forgiven, it is necessary to prove that at least 60 percent of the PPP loan proceeds incurred during the covered period were used towards payroll costs and not more than 40 percent for allowable expenses, such as utility, rent and mortgage interest payments. Although PPP loan proceeds can be expended for other purposes besides qualifying payroll, mortgage interest, rent and utilities, only the use of loan proceeds in the manner described is eligible for loan forgiveness.

Employee Retention and Limits on the Amount of Forgiveness

Section 1106(d) of the Act requires that the expected loan forgiveness amount will be reduced by two situations:

  • A reduction in the average number of full-time equivalent employees per month during the covered period1 versus the comparison period2 (the “employee reduction”); and
  • A reduction by more than 25 percent of any employee’s annualized salary or wage during the most recent full quarter before the covered period versus the comparison period (the “wage reduction”).

These reductions are not easy to calculate and must be supported through documentation for the covered period and comparison period to determine any potential reduction in the expected loan forgiveness amount. Such documentation could include a listing of employees during the covered period and the earlier comparison period. Also, documentation is required to determine the salary and wage information for each employee whose salary is below $100,000 annually to determine if the reduction of any one employee’s salary exceeded the 25 percent threshold. 

A concern was raised regarding the consequences to a borrower under the employee reduction if employees did not return to work. The PPP Flexibility Act favorably addressed this issue. The new law created an exemption based on employee availability if the borrower, in good faith, is able to document an inability to rehire individuals who were employed on February 15, 2020 and an inability to hire qualified employees for unfilled positions on or before December 31, 2020, or if the borrower is able to document the inability to return to the same level of business activity due to compliance with standards for sanitation, social distancing or other worker/customer safety requirement. The exemption relating to a documented inability to return to the same level of business activity is discussed in more detail below.

With respect to offers of employment, documentation could include a written offer of rehire to an employee for the same number of hours and compensation on or before December 31, 2020. If the employee rejects the offer, the employer will not be penalized for failing to rehire for that position. The borrower will need to provide proof of a written offer for employment and document the candidate’s rejection of that offer. The Loan Forgiveness Applications and Interim Rule on Loan Forgiveness also list documentation to support firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.

Documentation, such as the Centers for Disease Control and Prevention’s (CDC) travel restrictions that limited a borrower’s ability to meet with clientsand thereby showing how the business was impacted due to restrictions related to COVID 19will support the borrower’s claim of an inability to return to the same level of business activity. A business may have experienced limitations set by local, county or state government authority that were more restrictive that CDC’s guidelines.

While outside the PPP Flexibility Act’s safe harbor, the SBA issued guidance expanding the interpretation of the exemption to include limitations set by state or local government authorities. This allows a business to document the limitations set by a local, county or state government authority and still receive the exemption. Again, a lender should ensure its documentation checklist covers the requirements for the employee retention used to determine any limitations on the forgiveness amount or eligibility for an exemption.

Other Documentation Considerations

The Act prohibits forgiveness without the proper documentation. The SBA’s guidance (Interim Final Rule on Forgiveness and Interim Final Rule on Revisions to Loan Forgiveness and SBA Loan Review Procedures Interim Final Rule) requires that a lender render the forgiveness decision to the SBA within 60 days from receipt of a complete application. So, what happens when a borrower fails to provide all of the necessary documentation after submitting a request for forgiveness? What if the borrower used the loan proceeds for non-allowable costs and the request must be declined? A lender may consider issuing a Notice of Incompleteness similar to what the Equal Credit Opportunity Act (“ECOA”) described in 1002.9(c), which requires a lender to issue a notice within 30 days after receiving an application that is incomplete. Lenders should give the borrower sufficient time to receive, gather and provide that information before a forgiveness request is denied. Additionally, should the lender or SBA decline the borrower’s request for forgiveness, SBA guidance explicitly provides that the lender is responsible for notifying the borrower in writing. A lender should consider providing the borrower with reasons why they were declined and their rights to request that the SBA review the lender’s decision.

Again, following ECOA 1002.9(a-b), which requires the lender to issue a Notice of Adverse Action if the lender declines the forgiveness application, is a good guideline. Should the lender decline the forgiveness request, an independent second review is recommended before communicating the decision to the borrower. The second review should ensure that 1) the borrower was given every opportunity to provide the required documentation; 2) the calculations are accurate, and; 3) the final decline decision was made objectively, and not on a prohibited basis. 

Maintaining the borrower’s forgiveness calculations is also very important. Ensure the numbers that the borrower used in the calculation can be mapped back to the support documentation provided. Ensure that the calculation tool used is functioning properly, double check each request’s calculation and documentation, and address any inconsistencies with the calculation and documentation before finalizing the forgiveness decision and submitting the request to the SBA. The Interim Final Rule SBA Loan Review Procedures and Related Borrower and Lender Responsibilities requires lenders to perform a good-faith review of the Loan Forgiveness Application and borrower’s certifications, the borrower’s calculations, and supporting documentation. Under that Interim Final Rule, if a lender identifies an error in the borrower’s calculation or lack of substantiation in the borrower’s supporting documents, the lender must work with the borrower to remedy the issue.

OCC Bulletin 2020-45 provides insight into regulator expectations surrounding PPP. Banks are “encouraged to collect and track information provided during the application process regarding borrowers’ annual revenue, and for loans made in LMI census tracts, distressed areas, and underserved areas, and that benefit LMI individuals, families, and communities.” The OCC further encourages banks to document their implementation processes and business decisions surrounding the PPP, track and document their PPP loan decisions, and identify and track PPP loan volumes. The FDIC and the Federal Reserve also issued FAQs and other guidance related to PPP[2].

Establishing and following a consistent workflow for processing forgiveness requests will ensure all requests are handled in a timely manner. Lenders have 60 days after receipt of a complete loan forgiveness application from the borrower to issue a decision to the SBA. Note, however, that the term “complete” is not defined in the law or regulations. A lender should establish its own standards for determining when a forgiveness application is complete and apply them consistently to manage risk regarding compliance with the 60-day deadline.

Additionally, establishing an effective communication plan is essential for lenders in maintaining communication with their borrowers. Provide your borrowers with a documentation and process checklist, the Loan Forgiveness Application forms, and inform your borrowers that the SBA requires that the borrowers retain all documentation supporting forgiveness for six years after the date the loan is forgiven or repaid in fulland provide access to those documents when requested by the SBA. Lenders are also required to maintain all loan and loan forgiveness documentation based on their retention schedule and SBA requirements.


PPP loan forgiveness requests may be overwhelming for many borrowers and lenders, so lenders should do some advance planning right now. Lenders should develop a PPP loan forgiveness application process and workflow consistent with program requirements. A high degree of care should be used in assessing and testing forgiveness calculations. Lenders should communicate clearly and inform borrowers of the Loan Forgiveness Applications, certification, documentation and retention requirements now rather than later. Use of the Interim Rules and the Loan Forgiveness Applications as guides can ensure a lender’s documentation checklist provides a detailed list of required documents to support allowable payroll and non-payroll costs and the required timing of those costs with respect to when they were incurred and paid. The documentation checklist should also include guidance for what defines a full-time equivalent employee and the covered periods and comparison periods.

Lenders should watch for additional guidance from the SBA and adjust processes, checklists and calculators accordingly. Remember, PPP loan forgiveness is prohibited under the law without the required documentation. The PPP is an important relief option for small business, but the hard work for both borrowers and lenders is far from over. 

[1] Interim Final Rule-Additional Eligibility Criteria and Requirements for Certain Pledges of Loans


DISCLAIMER: The information and views set forth in this Wolters Kluwer Financial Services’ communication are general in nature and are not intended as legal or professional advice. Although based on the law and information available as of the date of publication, general assumptions have been made by Wolters Kluwer Financial Services that may not take into account potentially important considerations to specific businesses. Therefore, the views and information presented in this Wolters Kluwer Financial Services’ communication may not be appropriate for you. Readers must also independently analyze and consider the consequences of subsequent developments and/or other events. Readers must always make their own determinations in light of their specific circumstances.


Senior Regulatory Consultant
Lori Lennemann is a Senior Regulatory Consultant with Wolters Kluwer, U.S. Advisory Services.
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