On January 19, 2020, the Small Business Administration (SBA) issued an Interim Final Rule (IFR) titled “Business PPP Loan Forgiveness Requirements and Loan Procedures,” a 62-page document that mostly recaps guidance already issued about the First Draw Paycheck Protection Program (PPP) loans and updates and incorporates the guidance for the Second Draw PPP loans. The SBA is incorporating and restating prior IFRs relating to loan forgiveness and loan reviews and making revisions to conform these prior IFRs to the amendments made by the Economic Aid Act. Specifically, the new IFR is intended to 1) provide borrowers and lenders with guidance on requirements governing forgiveness of PPP loans, and 2) inform borrowers and lenders of SBA’s process for reviewing loan applications and loan forgiveness applications.
With respect to item 2, most borrowers, especially those over $2 million were hoping to gain more insight into the SBA’s process for auditing loans. Unfortunately, most borrowers will be disappointed to learn that a great deal of what is incorporated in this IFR is not significantly different from what was released in May 2020 (recapped at the bottom of this article). The key differences are highlighted below.
The previously issued IFRs surrounding forgiveness were updated to reflect language for the Second Draw PPP loans (commonly referred to as PPP2), including the following:
|Forgiveness Process||A borrower applying for forgiveness of a Second Draw PPP Loan that is more than $150,000 must submit the loan forgiveness application for its First Draw PPP Loan before, or simultaneously with, the loan forgiveness application for its Second Draw PPP Loan. Meaning you have to go in order, no submitting the second loan for forgiveness before the first.|
|Date by Which to Restore any FTE Reduction to Avoid Reduction of Loan Forgiveness||Similar to the First Draw, any reduction in FTEs can be “cured” by restoring those FTE levels as of a certain date. For loans made on, or after, December 27, 2020, that date is the last day of the loan’s covered period.|
|Safe Harbor for FTEs||In addition, the exemptions to the FTE reduction rules for borrowers that 1) have offered to restore employee hours at the same salary or wages, even if the employees have not accepted, 2) fired an employee for cause or have an employee that voluntarily resigns or voluntarily requests a schedule reduction is still a viable option for Second Draw PPP borrowers.|
|Loans Under $50,000||There is a further exemption to the reduction rules for borrowers that have a PPP loan of $50,000 or less. A borrower with a loan of $50,000 or less, other than any borrower that together with its affiliates received First Draw PPP Loans totaling $2 million or more or Second Draw PPP Loans totaling $2 million or more, is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in FTEs or wage rate reductions of more than 25%. Read more about the updated Form 3508S here.|
|Reference Period for Setting Baseline FTEs||Second Draw PPP loans will choose from the same reference period as First Draw PPP loans which are either (at the borrower’s choice) (i) February 15, 2019 through June 30, 2019; or (ii) January 1, 2020 through February 29, 2020.|
|Requirement to Notify State Unemployment Office||While the same rehire exemption is in place (see above), Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer.|
As described above, similar to what was published in May 2020, the SBA may review any PPP loan, as the Administrator deems appropriate, as described below. Items that differ from May 2020 guidance have been highlighted in yellow.
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 a period of time (as described below) after the date the loan is forgiven or repaid in full, and permit inspection by the SBA to access such files upon request.
Additionally, the IFR provides that SBA may review and audit PPP loans of $150,000 or less and access any records the borrower is required to retain. The SBA, in its discretion, may review a borrower’s First Draw PPP Loan and Second Draw PPP Loan at the same time or at different times.
- For loans of more than $150,000, as noted on the loan forgiveness application forms, the borrower must retain PPP documentation in its files for six years after the date the loan is forgiven or repaid in full.
- For loans of $150,000 and under, the borrower must retain records relevant to the form that prove compliance with the requirements of the PPP loan program, as applicable, for employment records, for the 4-year period following submission of the loan forgiveness application, and for other records, for the 3-year period following submission of the loan forgiveness application.
GBQ Observation: This means that your loan could be audited up to 3, 4 or 6 years after forgiveness of 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 for both First and Second Draw PPP loans.
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.
An SBA determination that a borrower is ineligible for a First Draw PPP Loan may also result in an SBA determination that the borrower is ineligible for any Second Draw PPP Loan, and SBA may direct the lender to deny any loan forgiveness application submitted for the Second Draw PPP Loan. Further, if the SBA determines that the borrower is ineligible for the loan amount or loan forgiveness amount claimed by the borrower, the SBA will direct the lender to deny the loan forgiveness application in whole, or in part, as appropriate. The SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.
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 issued an IFR in August 2020 that addressed that appeal process.
GBQ continues to monitor the guidance and will update you as new information is released. In the meantime, do not hesitate to reach out to one of our PPP team members including Rebekah Smith, Dustin Minton or Jeremy Bronson if you need assistance or have questions.
Article written by:
Rebekah Smith, CPA, CFF, CVA, MAFF
Director of Forensic & Dispute Advisory Services
Dustin Minton, CPA, MBA
Director, Assurance & Business Advisory Services
Director, Accounting & Business Advisory Services