Borrowers that participated in the Paycheck Protection Program (PPP) are aware there are two primary certifications that have been and will be made with respect to their PPP loan. To receive the loan, borrowers had to make a certification of need. As they apply for loan forgiveness, the certification of forgiveness of the loan will need to be included when the application for forgiveness is submitted. Both certifications are critical in the audit process and for loan forgiveness.
Fast Action Leaves Open Questions
Due to the immediate need to get cash to businesses so companies could continue to keep employees on payroll, Congress had to act quickly and draft the CARES Act and, in conjunction with the Small Business Administration (SBA), implement the PPP loan program in great haste. (Well, you know it can’t be fast and have all the bugs worked out.)
The SBA was tasked with keeping up and provide guidance on the program, but as guidance was slow in coming and there were/are many unanswered questions from borrowing all the way through the loan forgiveness process. As a result of borrowers and lenders trying to understand the CARES Act and the intent of the SBA coupled with a fair amount of public and administrative scrutiny, the SBA decided that compliance measures should be executed.
Compliance Measure – SBA PPP Loan Review
So, the SBA decided that it will review all loans in excess of $2 million after the lender submits the borrower’s loan forgiveness application to the SBA. In addition, the SBA will sample and review loan forgiveness applications that are less than $2 million as an additional compliance measure.
Gleaning from interim guidance issued by the SBA, the Administration will likely examine the following items:
- Eligibility – Determine if the borrower is eligible for a PPP loan at under the CARES Act and SBA rules available at the time of the borrower’s application.
- Loan Amount – Review to see if the loan amount was calculated correctly.
- Use of Loan Proceeds – Determine if the borrower deployed the loan proceeds in accordance with the CARES Act’s main purpose of keeping employees on payroll. Then, determine if the funds were used on other allowable expenses such as mortgage interest, rent, utilities, etc.
- Loan Forgiveness Application (Form 3508) – Analyze whether the application form was completed accurately regarding full-time equivalent (FTE) calculations, compensation calculations, and the Reduction Quotient as well as the proper use of safe harbors.
What Happens Next
If the SBA has questions resulting from an audit, they will notify the lender to contact the borrower and request additional information. If this happens to you, be sure to respond to all inquiries from your bank and provide additional information as it is conceivable that a no response may lead to an SBA determination that the borrower was ineligible for the loan, or the loan is not forgivable in whole or in part based on the information the SBA has at the time.
The Appeals Process
Finally, if the SBA and borrower have an unreconciled difference upon audit that did not get worked out, there is an appeal process. Appeals will be heard by the SBA Office of Hearings and Appeals. The appeal must be filed within 30 days of the earlier of 1) notification by the lender of the SBA’s loan review decision, or 2) the borrower/appellant’s receipt of the final SBA loan review decision.
After the appeal is filed, an Administrative Judge will be assigned to the appeal. During this process, the judge will consider the SBA’s decision and administrative record and the merits of the borrower/appellant’s petition. Then, within 45 days after the close of record, the judge will issue an initial decision and the borrower/appellant will have 30 days to file a request for review. Otherwise, the initial decision will become final after 30 days.
We recommend getting both your CPA/accounting firm and your legal team involved if you need to navigate the appeals process.
We’re Here to Help
If you have questions about PPP loan forgiveness, the application, process, or other issues related to the CARES Act, contact the Barnes Dennig COVID-19 Advisory Team. We can review your current situation (take the PPP Loan Forgiveness Quick Test if your loan is less than $2 million and you’re targeting the 8 week period), provide insight and advice, and help you maximize your PPP loan forgiveness potential. We’re here to help.