As we move through the second round of Paycheck Protection Program (“PPP”) approvals and disbursements, recent developments remind lenders and borrowers that forgiveness may not be guaranteed, and lenders have been left to wonder what exactly should be the scope of their loan forgiveness review for PPP loan files.
On April 28, 2020, Treasury Secretary Mnuchin and SBA Administrator Jovita Carranza issued a joint statement, which stated that all PPP loans in excess of $2 million will be audited upon submission of borrower’s loan forgiveness application. Further, loans with principal amounts less than $2 million will be audited “as appropriate.”
This announcement comes in the wake of news stories regarding numerous large, public companies (e.g., Shake Shack, Ruth’s Chris Steak House, etc.) that received PPP loans meant to assist small businesses with limited access to capital. As such, the corresponding April 29th FAQ No. 39, which states that the SBA will be looking to ensure that the certifications borrowers made when applying for the PPP loan were accurate and made in good faith, comes as no surprise.
Just the week prior, FAQ No. 31 clarified that in applying for PPP loans, borrowers were expected to take into account (i) their current business activity and (ii) their ability to access other sources of liquidity to support ongoing operations in a manner not significantly detrimental to the business. Lenders were assured in multiple sources of guidance for PPP loans that they did not need to conduct independent due diligence on a borrower, but rather could rely on the borrower’s certification at the time of application that the borrower was eligible for the PPP loan.
Now, almost a month after lenders first began funding PPP loans, the government is announcing audits of lender files that are submitted for forgiveness without providing guidance as to what SBA’s audits will entail. For example, it is unclear what documentation will be reviewed and whether it will be limited to the borrower’s application and payroll reports or if the audit will extend to lender’s underwriting documents, or an analysis of the borrower’s business activity and access to other sources of liquidity.
The CARES Act states that as long as the lender receives the required documentation and certifications from the borrower, the lender will not be subject to SBA enforcement action or penalties if it chooses to forgive the loan. Therefore, lenders need further clarification as to the likely consequences if it is determined in a post-closing audit that the borrower was ineligible or the loan proceeds were not used for a forgivable purpose.
While many questions remain regarding the scope and substance of any PPP file audit, it would be prudent for lenders to develop a process for reviewing its PPP files to ensure that at a minimum, all necessary certifications and documentation required under the CARES Act and other PPP guidance have been obtained from borrower. For assistance with PPP loans and SBA compliance matters, contact the attorneys at Starfield & Smith at 215.542.7070.