Best Practices: Underwriting the PPP Loan to a “Forgiveness Standard.”

The Paycheck Protection Program (“PPP”) has been a challenge for many SBA lenders, both in terms of the speed with which it has necessarily been implemented as well as the significant changes in its requirements from standard SBA 7(a) loans.  SBA Lenders have been processing PPP guidance that has been changing on a daily, and sometimes an hourly, basis.  To say the challenge presented to both the SBA and the industry to both implement and deliver this program in a few short weeks is “unprecedented” is an understatement for the ages.  With the frenzy to digest the guidelines for the program, produce documents, get loans vetted, approved, closed and funded within a very short window, lenders have been scrambling to make sure that they are making decisions that are both compliant and prudent.  Sometimes, however, with the speed of the changes, it has sometimes felt a little bit like trying to nail Jell-o to the wall.

Some lenders have taken solace in the fact that they are allowed to rely on borrowers’ certifications as to their compliance with the requirements of the PPP.  Indeed, the guidance in the Frequently Asked Questions and Interim Final Rules for the PPP has repeatedly indicated that lenders may rely on borrowers’ certifications as to loan amount, necessity of the loan, payroll calculation, affiliation, eligibility, and authority to sign.  However, lenders should be cautious about over-relying on the certifications of borrowers in connection with the PPP loan program.  One area was highlighted yesterday when the Treasury Secretary indicated that SBA would do a “full review” of all loans over $2 million before offering forgiveness of the loans.  This is a key point to which savvy lenders should pay close attention.

PPP borrowers may apply for forgiveness of amounts spent within the eight weeks after initial disbursement on the PPP loan for eligible payroll costs, mortgage interest, rent and utilities.  However, the standards to be applied by the SBA in reviewing an application for forgiveness are still fairly undefined.  With his comments that loans over $2 million would get a “full review” before forgiveness would be granted, the Treasury Secretary has made it clear that Lenders need to be thoughtful about the extent to which they rely on a borrower’s certifications alone.  The reason is this: amounts not forgiven will need to be repaid by the borrower over an amortized term of 18 months (when factoring in the automatic 6 month deferment period).  For many borrowers, this repayment may not be feasible, even at the PPP interest rate of 1%.  If the SBA, as part of their “full review” includes an evaluation of the accuracy of the borrower’s certifications, and these certifications are found to be lacking, it is entirely likely that the forgiveness application will be denied in whole or in part.  In this event, lenders may find themselves with significant (and unanticipated) unsecured, non-recourse loan balances remaining on their balance sheets.  This is certainly not what most lenders that are participating in the PPP were bargaining for.

Accordingly, knowledgeable SBA lenders will perform a sufficient level of diligence on their PPP applicants to ensure that the certifications that the borrowers are making in their applications will pass muster with the SBA when it comes to the forgiveness application.  Borrowers that do not qualify for the program on the basis of size, eligibility, or need should be weeded out so that PPP lenders do not end up with these loans for longer than anticipated.

For more information of the Paycheck Protection Program, contact Ethan at 267-470-1186.