Best Practices: Overview of PPP Loan Forgiveness Process

The Paycheck Protection Program (“PPP”) was created to help small businesses impacted by the COVID-19 outbreak to be able to retain and pay their employees, and maintain their business operation.  In return for complying with the PPP requirements set by U.S. Small Business Administration (“SBA”), the PPP loan would be forgiven. While lenders and borrowers continue to process new PPP loans, there have been many questions about how the forgiveness process would work.  On May 23, 2020, the SBA posted Interim Final Rule #15, SBA IRN 3245 AH47 (“IFR”) pertaining to SBA Loan Review Procedures and Related Borrower and Lender Responsibilities.  This latest IFR describes SBA’s procedures for reviewing PPP loan forgiveness applications in order to assist participating lenders with loan forgiveness decisions, help borrowers prepare and submit their loan forgiveness applications, and provide an overview of the process that SBA will use to review and approve said applications. 

Following borrower’s submission of a completed PPP Loan Forgiveness Application (SBA Form 3508), along with supporting documentation, a lender will have sixty (60) days to notify the SBA on their decision to approve (in whole or in part) or deny forgiveness of the loan. During this time, lender must: (i) confirm receipt of all documents from the borrower needed to verify payroll and nonpayroll expenses; and (ii) confirm the accuracy of borrower’s calculations listed on the loan forgiveness application. It is important to point out that lenders do not need to independently verify the information presented in the loan forgiveness application so long as the borrower submits supporting documentation and attests to the fact that the loan was used for eligible expenses. If loan forgiveness is approved (in whole or in part), lender must request payment from the SBA at the time of its decision. Subject to review of the loan, the SBA will then have ninety (90) days to remit forgiveness amount to lender with accrued interest.

In reviewing borrower’s eligibility, the SBA will look at the representations and certifications made by borrower to the lender and the SBA in its PPP loan and forgiveness application, which include but not limited to: (i) borrower’s eligibility as a small business; (ii) that borrower correctly calculated the loan amount, (iii) that PPP Loan proceeds were used for allowable uses as specified in the CARES Act and (iv) Borrower accurately calculated its forgiveness amount.  If SBA makes a determination that the borrower was not eligible for the PPP loan, or for the PPP loan amount, or for the PPP loan forgiveness amount, SBA may instruct lender to notify borrower, or contact borrower directly for a chance to respond.  Once SBA makes a final determination on eligibility, it may instruct the lender to deny forgiveness of the loan, in whole or part, and may require immediate repayment or monthly payments to pay off the PPP loan by its maturity date.  Further, if SBA determines the Borrower was ineligible for a PPP Loan, it may require the Lender to return its Lender processing fee.

Lastly, the SBA may audit any PPP loan, in its sole discretion, at any time. As indicated in the Loan Forgiveness Application (SBA Form 3508), it is important to point out that borrowers must retain PPP documents in their files for six (6) years after the date the loan is forgiven or repaid, and permit representatives of the SBA to inspect such files upon request. It is likely that the reasoning behind this is to allow the Office of Inspector General (“OIG”) to investigate potentially fraudulent conduct in order to ensure that the PPP funds were used for the purposes that U.S. Congress intended. 

For further assistance please contact the attorneys at Starfield & Smith, P.C. at 215-542-7070.