(As published in The Secured Finance Network’s TSL Express)
Under Section 1106 of the CARES Act, Paycheck Protection Program (“PPP”) loans can be forgiven, in whole or part, under certain conditions. The SBA has continued to release guidance with respect to the lender review process for loan forgiveness applications, most recently in the form of an Interim Final Rule published May 22, 2020.
This new rule, the SBA Loan Review Procedures and Related Borrower and Lender Responsibilities(“Loan Review Process IFR”), provides important additional guidance with respect to a lender’s responsibilities for processing loan forgiveness applications in a timely and compliant manner. The rule also describes the circumstances under which a lender may lose its processing fee, and potentially, the loan guaranty.
While further guidance is expected1, the Loan Review IFR outlines the general process for submission and processing of the loan forgiveness applications.
The borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) to its lender (or the lender servicing its loan). The borrower must submit: 1) PPP Loan Forgiveness Calculation Form; 2) PPP Schedule A; 3) PPP Schedule A Worksheet(submission by borrower optional); and 4) PPP Borrower Demographic Information Form(submission by borrower optional). It should be noted that the SBA has not yet provided guidance on the process by which lenders will submit loan PPP forgiveness applications to the SBA.
Lender Review and Decision
The lender will review the application package and make a decision regarding loan forgiveness. For all PPP Loan Forgiveness Applications, lenders must do the following:
- Confirm receipt of the borrower certifications contained in the Loan Forgiveness Application Form.
- Confirm receipt of the documentation the borrower must submit to aid in verifying payroll and non-payroll costs, as specified in the instructions to the Loan Forgiveness Application Form.
- Confirm the borrower’s calculations on the Loan Forgiveness Application, including compensation amounts and non-payroll amounts, “by reviewing the documentation submitted with the Loan Forgiveness Application.” (emphasis added)
- Confirm that 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.
The IFR does not specify the form of “receipt,” whether it be acknowledgement by the borrower is required, the timing of receipt, or the documentation requirements for these purposes.
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. The guidance provides for the following examples: “[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 are not documented with such recognized sources, more extensive review of calculations and data would be appropriate.”
If the lender identifies errors in the borrower’s calculation or lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue. It should be noted that the lack of specific details in the IFR raises a series of potential questions, including the extent of the lender’s efforts to work with the borrower necessary to satisfy the good faith effort requirement.
The Loan Review IFR states that 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.”2 However, the term “complete” is not defined in the IFR and there is no guidance issued to date for lenders as to what constitutes a complete application. Details regarding the form of delivering the decision to the SBA or the notice that the lender must provide the borrower are not provided in the guidance issued to-date.
Lenders may presume that an application is complete—only to start the review and discover missing documentation or incorrect calculations. If this occurred, it could potentially necessitate the lender working with the borrower to fix those issues prior to submitting the application to SBA—all while the 60-day clock is ticking. Considering the tight timeline and expected wave of forgiveness applications, lenders should consider the consequences for failing to meet the statutory deadline, as described below.
SBA Compliance Review Period
Under the CARES Act, the SBA is required to 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 SBA.3 The Loan Review IFR indicates that the SBA plans to take advantage of the statutory 90-day period to review the PPP loan and forgiveness documentation to:
“[C]onfirm compliance with the PPP requirements set forth in the statute, rules, and guidance. This protection is also important in light of the large number and diverse types of PPP lenders, many of which were not previously SBA participating lenders and which were approved rapidly in order to enable financial assistance to be provided as rapidly as feasible to millions of small businesses. SBA will use the 90-day period to help ensure that applicable legal requirements have been satisfied.” (emphases added)
Potential for Loss of Loan Guaranty or Fee Clawback
In the context of the loan guaranty, under applicable existing law and program operating procedures, the SBA can refuse to honor a guaranty purchase request if, among other things, a lender “fails to comply materially with a Loan Program Requirement” or “fails to make, close, service or liquidate the loan in a prudent manner.”4
Failure to timely decision a loan forgiveness application could implicate either of these reasons. For example, as the 60-day timeline5 is in the both the statute and regulations, it could be considered a violation of a “Loan Program Requirement” to not adhere to the required timeline. Failure to meet the deadline could also be considered to not constitute servicing or liquidating the loan in a “prudent manner.”6
The Loan Review IFR includes guidance with respect to the clawback of lender fees and potentially the loan guaranty. Currently, clawback and the loss of the guaranty is limited to cases where the borrower was not eligible for the loan in the first place and where the lender failed to comply with origination and record-keeping requirements.7 However, considering the guidance that the SBA is going to “ensure that applicable legal requirements have been satisfied,” and in light of existing legal and program requirements covering the loan guaranty, it is possible that this scrutiny could result in a determination that the borrower was not eligible for the loan in the first place, or that the lender failed to comply with origination and record-keeping requirements. Thus, it would appear vitally important that lenders follow the law and decision loan forgiveness applications within the 60-day timeline.
As noted above, the lender must “[c]onfirm the borrower’s calculations on the borrower’s Loan Forgiveness Application…by reviewing the documentation submitted with the Loan Forgiveness Application.” And if the lender discovers missing documents or incorrect calculations, the Loan Review IFR provides that the lender should work with the borrower to fix the problems. It seems reasonable that such engagement could result in potentially lengthy delays and also impose potentially substantial additional cost to the borrower and/or the lender. As such, lenders should focus on ensuring that borrower applications and supporting documentation are as complete and accurate as possible before submission to the lender.8 Receipt of a complete loan forgiveness package with accurate calculations will help speed the review process and ensure lenders meet the 60-day deadline.
There are other reasons that it is important for lenders to adhere to the legally required 60-day timeline. For example, if a borrower encounters delays in obtaining loan forgiveness from the lender, it could potentially be viewed as having collateral consequences. The borrower might view the lender’s delay in processing the loan forgiveness application adversely and could potentially argue that the lender is to blame. Reputational risk is a concern: there were news stories reporting that small businesses were having difficulty obtaining PPP loans and it is reasonable to be concerned that there could be similar issues in connection with the loan forgiveness process. Finally, lenders will have operational risks and certain financial burdens related to continuing to service PPP loans, especially loans that borrowers applied for with the expectation that they would be forgiven. And such risks and burdens could continue if loan forgiveness determinations are delayed.
Wolters Kluwer continues to closely monitor for developments on regulatory guidance as it works with lenders to help them navigate the evolving regulatory landscape. Wolters Kluwer offers a variety of software products and services to assist lenders, including its Paycheck Protection Program Supported by TSoftPlus™ which helps lenders process PPP loan applications and its affiliated TSoftPlus™ PPP Forgiveness Module, which helps lenders process PPP loan forgiveness applications.
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.
1 On June 5, 2020, H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020 was signed into law. The Act makes several important changes to the PPP including specifically (among other changes) the extension of the covered period for making qualifying expenditures eligible for forgiveness from 8 to 24 weeks and reducing the percentage of expenditures during such period that must be payroll related from 75% to 60% (for more information on these provisions (before revision by the Act) see Interim Final Rule - Paycheck Protection Program, RIN 3245-AH34, 85 Fed. Reg. 73, 20811 (April 15, 2020)). There is nothing set forth in the Paycheck Protection Program Flexibility Act of 2020 that impacts the analysis of a lender’s PPP related compliance obligations under the Loan Review IFR that is discussed herein
2 Note that the wording of the law itself, Section 1106(g), does not include the word “complete” although its inclusion in the IFR is a helpful clarification that makes logical sense.
3 Under 13 C.F.R. § 120.10, “Loan Program Requirements,” include but are not limited to, requirements imposed upon lenders by statute; SBA regulations; government-wide regulations; SBA Standard Operating Procedures; Federal Register notices; official SBA notices and forms applicable to the loan program.
4 Section 1106(c)(3) sets forth this rule, providing that “[n]ot later than 90 days after the date on which the amount of forgiveness under this section is determined, the Administrator shall remit to the lender an amount equal to the amount of forgiveness, plus any interest accrued through the date of payment.” Note that there are potential concerns regarding the determination process for this purpose.
5 The other factors include: placing SBA at risk through improper action or inaction; failing to disclose a material fact to SBA in a timely manner; misrepresenting a material fact to SBA regarding the loan; sending a written request to SBA to terminate the guarantee; failing to pay the guarantee fee within the period required under SBA rules and regulations; failing to request that SBA purchase a guarantee within 180 days after maturity of the loan; failing to use required SBA forms or exact electronic copies; and if the borrower has paid the loan in full. (SBA SOP 50 57 2; 13 C.F.R. § 120.524)
6 Under 13 C.F.R. § 120.524(a), lenders must service 7(a) loans in their portfolio “no less diligently than their non-SBA portfolio, and in a commercially reasonable manner, consistent with prudent lending standards, and in accordance with Loan Program Requirements.” Lenders that do not maintain a non-SBA loan portfolio must adhere to the “same prudent lending standards for loan servicing followed by commercial lenders on loans without a government guarantee.”
7Interim Final Rule -SBA Loan Review Procedures and Related Borrower and Lender Responsibilities, (85 Fed. Reg. 105, page 33014, June 1, 2020)
8 “As possible” is reasonably inferred here based on the SBA’s expectation in the IFR that the lender will make a good faith effort in assisting the borrower in addressing issues with the application.