Paycheck Protection Program (PPP) Loan Review Procedures: What Borrowers and Lenders Need to Know

Introduction

Concurrently with SBA’s and Treasury’s issuance of the Interim Final Rule on Forgiveness (see our client alert here; for our full PPP coverage, click here), on May 22, 2020, SBA issued the Interim Final Rule on Loan Review Procedures, which supplements the Interim Final Rule on Forgiveness by providing information for borrowers and lenders regarding SBA’s process for reviewing PPP loan applications and loan forgiveness applications. When taken together with the PPP Loan Forgiveness Application and the Interim Final Rule on Forgiveness, the Interim Final Rule on Loan Review Procedures (discussed below) provides much needed guidance for PPP borrowers and lenders.

SBA Review of PPP Loans

SBA may begin a review of a PPP loan of any size at any time. The Interim Final Rule on Loan Review Procedures identifies the following areas to be reviewed by SBA:

• Borrower Eligibility: SBA may review 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 loan application (consistent with PPP FAQ 17), and the terms of the borrower’s loan application. The Interim Final Rule on Loan Review Procedures states these review procedures include, but are not limited to, SBA’s regulations under 13 CFR 120.110 (as modified and clarified by the PPP interim final rules), and 13 CFR 121.301(f), as well as the information, certifications, and representations on the borrower’s PPP Loan Application Form and the borrower’s PPP Loan Forgiveness Application.
• Loan Amounts and Use of Proceeds: SBA may review whether a borrower calculated the loan amount correctly and used loan proceeds for the allowable uses specified in the CARES Act.
• Loan Forgiveness Amounts: SBA may review whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s PPP Loan Forgiveness Application, or if a lesser forgiveness amount or denial of forgiveness is warranted.

If SBA notifies a lender that it is reviewing a loan, the lender must:

• notify the borrower in writing within five business days of the lender’s receipt of a notice of review from SBA;
• within five business days of receipt of SBA’s notice, the lender must transmit to SBA electronic copies of the following:
  • the Borrower Application Form (SBA Form 2483 or lender’s equivalent form) and all supporting documentation provided by the borrower;
  • the PPP Loan Forgiveness Application, and all supporting documentation provided by the borrower (if the lender has received such application);
  • a signed and certified transcript of account;
  • a copy of the executed note evidencing the PPP loan; and
  • any other documents related to the loan requested by SBA;
• if the lender receives the PPP Loan Forgiveness Application after it receives notice that SBA has commenced a loan review, transmit electronic copies of the application and all supporting documentation provided by the borrower to SBA within five business days of receipt; and
• request that the borrower provide the lender with a copy of the Schedule A Worksheet to the PPP Loan Forgiveness Application, and the lender must submit the worksheet to SBA within five business days of receipt from the borrower.

Once SBA notifies the lender that SBA has commenced a loan review, the lender cannot approve any application for loan forgiveness for such loan until SBA notifies the lender in writing that SBA has completed its review.

As part of its review, SBA may contact borrowers directly or require lenders contact borrowers in writing to request additional information. The lender must provide SBA with any additional information provided to it by the borrower. SBA will consider all information provided by the borrower in response to SBA’s inquiry. A borrower’s failure to respond to SBA’s inquiry may result in SBA determining that the borrower was ineligible for a PPP loan or ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower.

If SBA determines a borrower was ineligible for a PPP loan, SBA will direct the lender to deny the borrower’s loan forgiveness application. If SBA determines the borrower was ineligible for the loan amount it received or is ineligible for the loan forgiveness amount it requested in its PPP Loan Forgiveness Application, SBA will direct the lender to deny the loan forgiveness application, in whole or in part, as appropriate. In either case, SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.

A borrower may appeal SBA’s determination that the borrower is ineligible for a PPP loan or ineligible for the loan amount or the loan forgiveness amount claimed by the borrower. The Interim Final Rule on Loan Review Procedures notes that SBA intends to issue a separate interim final rule addressing the appeal process.      

Lender Review of PPP Loans

Generally

Under the Interim Final Rule on Loan Review Procedures, each lender must confirm the following:

• receipt of the borrower certifications contained in the Loan Forgiveness Application Form;
• receipt of the documentation borrowers must submit to aid in verifying payroll and nonpayroll costs, as specified in the instructions to the PPP Loan Forgiveness Application Form;
• the borrower’s calculations on the borrower’s Loan Forgiveness Application by reviewing the documentation submitted with the Loan Forgiveness Application; and
• 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 thereof by 0.75.

Scope of Review

While confirming it is the borrower’s responsibility to provide accurate calculations and that the lender may rely on the borrower’s representations, the Interim Final Rule on Loan Review Procedures requires lenders “to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness.” Lenders are authorized to conduct a more limited review where supporting payroll information is a payroll report by a recognized third-party payroll processor. The Interim Final Rule on Loan Review Procedures states a more extensive review of the borrower’s calculations and data would be appropriate where the relevant supporting documentation has not been prepared by such recognized third party payroll providers. SBA directs lenders that identify errors or a material lack of substantiation in the borrower’s supporting documents to work with the borrower to remedy the issue.

The Interim Final Rule on Loan Review Procedures confirms that 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.

Forgiveness Timeline

A lender must issue to SBA a decision on a borrower’s PPP Loan Forgiveness Application no later than 60 days after the lender’s receipt from the borrower of a complete PPP Loan Forgiveness Application and required other documentation.

The lender’s decision on a borrower’s PPP Loan Forgiveness Application may be an approval (in whole or in part), a denial, or, if directed by SBA, a denial without prejudice due to a pending SBA review of the loan.

• Approvals:
  • If the lender issues a decision to SBA approving the borrower’s PPP Loan Forgiveness Application in whole or in part, the lender must (1) include (A) the PPP Loan Forgiveness Calculation Form, (B) PPP Schedule A, and (C) if submitted to the lender by the borrower, the optional PPP Borrower Demographic Information Form, and (2) request payment from the SBA at the time the lender issues its decision to SBA.
  • 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 SBA.
  • If the borrower received an emergency advance under the Economic Injury Disaster Loan (EIDL) program, SBA will deduct the amount thereof from the borrower’s loan forgiveness amount.
• Denials: If the lender issues a decision to SBA denying the borrower’s forgiveness in whole or in part, the lender must provide SBA with the reason for its denial, together with (1) the PPP Loan Forgiveness Calculation Form, (2) PPP Schedule A, and (3) the (optional) PPP Borrower Demographic Information Form (if submitted to the lender). The lender must also notify the borrower in writing that the lender has issued a decision to SBA denying the borrower’s application for loan forgiveness.
• Denials without prejudice. SBA may direct a lender to deny a borrower’s application for forgiveness pending SBA’s completion of the PPP loan for which forgiveness is sought. The borrower may subsequently request the lender to reconsider a denial without prejudice unless SBA determines that the borrower was ineligible for a PPP loan.
• Confirmation by the Lender. The lender must confirm that the information provided by the lender to SBA accurately reflects the lender’s records for the loan, and that the lender has made its decision in accordance with the requirements set forth in Section 2.a of the Interim Final Rule on Loan Review Procedures.
• SBA review of lender decisions. SBA reserves the right to review the lender’s decision in its sole discretion.
• Appeal by Borrower. Within 30 days of notice from the lender, the borrower may request that SBA review the lender’s decision by reviewing the loan in accordance with Section 2.c. of the Interim Final Rule on Loan Review Procedures.         

Lender Fees

The Interim Final Rule on Loan Review Procedures also provides requirements and guidance for lender processing fees for PPP loans. This guidance includes the circumstances under which a lender will not be eligible for a processing fee and when the processing fee is subject to clawback.

Conclusion

The Interim Final Rule on Loan Review Procedures, together with the Interim Final Rule on Forgiveness, provides new detailed guidance and requirements for the forgiveness of PPP loans. We anticipate additional guidance will be issued relating to PPP loan forgiveness and the appeals process in the event a PPP loan forgiveness is denied. Lewis Rice will continue to monitor these developments and provide updates as needed.

Our attorneys are closely monitoring these developments as they occur and will make regular updates to our COVID-19 Resource Center. If you have any questions about the implications and disruptions of COVID-19 on your business, please reach out to one of the authors above or another member of the Task Force.