Article written by:
Director, Accounting & Business Advisory Services
Rebekah Smith, CPA, CFF, CVA, MAFF
Director of Forensic & Dispute Advisory Services
Dustin Minton, CPA, MBA
Director, Restaurant Services
Late last week, the Small Business Administration (“SBA”) issued two new Interim Final Rules (“IFR”) describing the Paycheck Protection Program (“PPP”) loan forgiveness process and providing insight on the loan review process by the SBA.
IFR on Loan Forgiveness
The IFR on loan forgiveness set forth, in IFR format, most of the same information that was in the PPP loan application, as well as a few other clarifications. Our article on the application can be found here. Additional clarifications included:
- Bonuses and hazard pay are eligible for forgiveness. The SBA has determined that if an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness because this constitutes a supplement to salary or wages, and are a similar form of compensation.
- Salary, wages and commissions paid to nonworking employees are eligible for forgiveness. The IFR clarifies that an employee does not have to be working for their wages to count toward forgiveness.
- Employees’ hours paid, even if not working, count toward the full-time employee equivalent (“FTEE”) count. The IFR further clarified that if an employer is paying an employee for hours that the employee is not working, the hours will still count toward the inclusion of that employee as an FTEE. In other words, if you pay an employee for 40 hours but they only work 20, the employee would still count as one FTEE.
The IFR also spells out the process to obtain loan forgiveness, which includes:
- The borrower must complete and submit the loan forgiveness application (SBA Form 3508) to its lender.
- The lender will review the application and has 60 days from receipt to make a decision regarding loan forgiveness.
- SBA will, subject to any SBA review of the loan or loan application, remit the 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 the SBA (emphasis added).
- If applicable, the SBA will deduct EIDL Advance amounts from the forgiveness amount remitted to the lender.
- If only a portion of the loan is forgiven or the forgiveness request is denied, any remaining balance due on the loan must be repaid by the borrower on or before the two-year maturity of the loan.
Note that the above guidance indicates that it could be up to 150 days (60 days for the bank and 90 days for the SBA) after the submission of the application before forgiveness is obtained.
IFR on SBA Loan Review Procedures and Related Borrower and Lender Responsibilities
The second IFR sets forth the additional procedures and criteria the SBA will use when reviewing PPP loans. The IFR on the SBA loan review procedures answers the following questions:
What will the Lender and SBA Review?
The SBA has the authority to review the following:
- Borrower Eligibility: the SBA may review a loan to determine if the loan documentation submitted to the SBA by the lender (or any other information) indicates the borrower was ineligible for a PPP loan.
- Loan Amounts and Use of Proceeds: the SBA may review whether a borrower calculated the loan amount correctly and used loan proceeds for the allowable uses.
- Loan Forgiveness Amounts: the SBA may review whether a borrower is entitled to loan forgiveness in the amount applied for by the borrower.
When will the SBA undertake a loan review?
The SBA may undertake a review at any time at the SBA’s discretion. As noted in the loan forgiveness application, the borrower must retain PPP documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit inspection by the SBA to access such files upon request.
GBQ Observation: This means that your loan could be audited up to 6 years after forgiveness or paying off the loan. From a best practice perspective, we believe that you should be maintaining a thorough file including all information provided during the application process, all documents requested and suggested for the forgiveness, as well as your memo documenting the basis for your good faith certification.
Will I have the opportunity to respond to the SBA’s questions in a review?
Yes. If the SBA determines any deficiencies, the SBA will require the lender to contact the borrower in writing to request additional information or will request the information directly from the borrower. Failure to respond to an SBA inquiry could result in an unfavorable determination regarding eligibility or forgiveness.
If SBA determines that a borrower is ineligible for a PPP loan, can the loan be forgiven?
No. If the SBA determines the company was not eligible for a loan, the SBA will direct the lender to deny the forgiveness. The SBA may seek repayment or other remedies. Per the CARES Act, forgiveness is only available to eligible recipients.
May a borrower appeal the 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?
Yes. The SBA will issue a separate final rule addressing the appeals process.
The IFR then addresses questions for lenders as to what the lender should review, as well as the timeline for review. This section provides insight as to how the PPP forgiveness process might work.
What should the lender review?
- Certifications in the forgiveness application
- Confirm receipt of documentation required to be submitted
- Confirm borrowers’ calculations and amounts to supporting documentation for the following:
- Cash compensation, non-cash compensation and compensation to owners (Lines 1, 4,6 7, 8 and 9 on PPP Schedule A)
- Business mortgage interest payments, business rent or lease payments, and business utilities (Lines 2, 3 and 4 on the PPP Loan Forgiveness Calculation Form)
- Confirm that the borrower made the calculation of line 10 on the form correctly (75/25 rule application)
Providing an accurate and complete calculation is the responsibility of the borrower and part of the attestation by the borrower is the accuracy of the form and the underlying documentation.
While the IFR indicates that the lenders must do a good faith review of the application and documents, it also advises that the lender may only minimally review calculations based on a payroll report by a recognized third-party payroll processor, for example.
What is the timeline for the lender’s decision on a loan forgiveness application?
The lender must issue a decision in 60 days after the receipt of a complete loan forgiveness application. The decision will take the form of:
- An approval (in whole or in part);
- A denial; or
- If directed by the SBA, a denial without prejudice due to a pending SBA review of the loan for which forgiveness is sought. In the case of denial without prejudice, the borrower may subsequently request that the lender reconsider its application for loan forgiveness, unless the SBA has determined that the borrower is ineligible for a PPP loan.
If the decision is a denial, then the lender must notify the SBA of the reason for the denial, as well as notify the borrower in writing of the lender’s decision. The SBA reserves the right to review the lender’s decision in its sole discretion. Within 30 days of a notice from the lender, a borrower may request that the SBA review the lender’s decision. The SBA then has a 90-day period to review the PPP loan and forgiveness documentation.
GBQ Observation: Note that the 60 days does not start until a complete application has been submitted. All the more reason to be sure your application and supporting documents are complete when submitted.