By Susan Sabo, Financial Institutions Principal, CliftonLarsonAllen North Carolina – Email T. 704.816.8452
This blog is being posted on behalf of my colleague, Todd Sprang, principal in CLA’s financial institutions practice.
On May 22, 2020, SBA and Treasury posted an interim final rule (“IFR”) to inform borrowers and lenders of SBA’s process for reviewing Paycheck Protection Program (“PPP”) loan applications and loan forgiveness applications. This IFR also provides lenders with some additional SBA expectations of a lender’s process for reviewing PPP loan applications and loan forgiveness applications. The following represents our analysis of that IFR and related considerations for PPP lenders.
Lender Review Process
Consistent with prior guidance and our expectations, this IFR states:
- The borrower is responsible for providing an accurate calculation of loan forgiveness, and attesting to the accuracy of its reported information and calculations on their Loan Forgiveness Application.
- Lenders do 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.
- Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents.
- Lenders may rely on borrower representations, but if the lender identifies errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue.
SBA also provides more direction as to the procedures they expect lenders to perform by stating that lender s should confirm receipt of the borrower certifications contained in the Loan Forgiveness Application Form and required support for payroll and non-payroll expenses.
Our Perspectives on the Calculation Guidance
We believe identifying specific line items for recalculation is helpful, however without further guidance we expect many variances in borrower definitions of certain qualifying expenses.
We also noted the IFR does not mention line number 5 on Form 3508, the payroll cost reduction amount. This would imply the lender is not responsible for performing a recalculation of this amount. We believe this to be a positive exclusion as that recalculation would be a challenging task.
Finally, we noted SBA provides a specific example of their expectations for a lender review of payroll calculations which indicates a minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be considered reasonable, but noting that payroll costs not utilizing documentation from these sources would be more appropriately accompanied by more extensive review of calculations and data. While the example provides helpful insight, it also raises the question of which providers are considered as a “recognized” payroll processor by SBA. Unless additional guidance is provided on this topic, it appears as if a lender would need to develop their own definition of “recognized third-party payroll processor” and create a listing of those processors to consistently, effectively and efficiently apply the correct level of review to the payroll calculations of each applicant.
Lender Decision on Borrower Application
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. Without an SBA definition of what constitutes a complete application, we currently assume that an application is “complete” on the date a lender receives the last documentation item requested from the borrower.
The lender decision may take the form of:
- Approval (in whole or in part);
- Denial*; or
- Denial without prejudice* (if directed by SBA) due to a pending SBA review of the loan. In the case of a denial without prejudice, the borrower may subsequently request that the lender reconsider its application for loan forgiveness, unless SBA has determined that the borrower is ineligible for a PPP loan.
*When denying an Application for Forgiveness, the lender must also notify the borrower in writing that the lender has issued a decision to SBA denying the loan forgiveness application. A borrower then has 30 days to request that SBA review the lender’s decision.
Lender Submission of Decision to SBA
When the lender decision on the application indicates either approval (in whole or in part) or denial, the submission must be accompanied by the following documentation:
- The borrower Loan Forgiveness Calculation Form
- The borrower Schedule A included with the Loan Forgiveness Calculation Form
- The PPP Borrower Demographic Information Form (if submitted to the lender as this form was optional)
- Confirmation that the information provided by the lender accurately reflects lender’s records for the loan, and that the lender has made its decision in accordance with SBA’s Loan Forgiveness Process for Lenders
- A request for payment from SBA when the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for. The IFR also indicates that subject to its review of the loan or loan application, SBA will 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.
- When the lender issues its decision to SBA determining that the borrower is not entitled to forgiveness in any amount, the lender must provide SBA with the reason for its denial
The IFR also remains consistent with previous guidance by stating that SBA has 90 days to conduct its review of the lender decision submission.
The SBA Review Process
SBA may review loans of any size and at any time and the IFR outlined the timelines for lender response in the event the SBA initiates a loan review.
According to the IFR, SBA is authorized to review borrower representations and statements for:
- Borrower Eligibility: whether a borrower is eligible for the loan based on the provisions of the CARES Act, the rules and guidance available at the time of the loan application, and the terms of the borrower’s loan application. If documentation indicates potential borrower ineligibility, then:
- SBA will require the lender to contact the borrower in writing to request additional information.
- SBA may also request information directly from the borrower.
- Any information the lender receives from the borrower will be provided to SBA.
- Loan Amounts and Use of Proceeds: whether a borrower calculated the loan amount correctly and used loan proceeds for the allowable uses specified in the CARES Act.
- Loan Forgiveness Amounts: whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s application.
Borrower Ineligibility Effects and Clawbacks
This IFR addresses the impact on borrowers and lenders if a borrower is deemed ineligible. One impact is the potential clawback of lender processing fees. Our May 22, 2020 blog on the Form 1502 Procedural Notice identifies additional scenarios that could trigger refunds of lender processing fees and potentially jeopardize the loan’s eligibility for a guaranty.
Finally, the IFR acknowledged that a borrower may appeal the SBA conclusion on eligibility and stated that guidance will be released in the future.
Lender Use of Equivalent Forms
Lenders may create equivalent forms for borrower applications for forgiveness rather than using or accepting SBA forms. The IFR makes references to a “lender’s equivalent form” when referring to the Borrower Loan Forgiveness Application Form (SBA Form 3508) and Borrower Application Form (SBA Form 2483). This implies that, like the PPP loan application forms, lenders have an ability to utilize their own form for borrower forgiveness submissions instead of only accepting borrower submissions on SBA forms.