Best Practices: Servicing and Liquidating PPP Loans

Lenders face uncharted territory when servicing and liquidating (“S&L”) Paycheck Protection Program (“PPP”) loans.  This article explains the unique challenges lenders face with these unsecured facilities, and offers suggestions until SBA offers formal guidance geared to PPP S&L issues.  

The CARES Act’s PPP was designed by Congress to preserve employment by providing capital to small businesses to help them meet their short term ongoing expenses during the COVID-19 national emergency.  The law provides that, to the extent the statute does not modify SBA program requirements, lenders will be bound by existing SBA rules and regulations.  But the CARES Act also contemplated that the purpose of the PPP was different from traditional SBA lending programs; these are unsecured loans, not subject to typical underwriting, leaving lenders dependent on SBA guidance in order to engage in prudent S&L based upon these unique circumstances.

Today, as lenders grapple with forgiveness issues, they are also starting to encounter various servicing requests from PPP borrowers.  Furthermore, lenders are needing to develop strategies when facing liquidation issues arising when PPP borrowers pass away, file for bankruptcy protection, enter into assignments for the benefit of creditors or close their businesses.  Because SBA has yet to provide special guidelines for the S&L of PPP loans, one must assume that PPP loans are subject to the existing S&L guidelines set forth in SBA’s Servicing and Liquidation SOP 50 57 (2) (the “SOP”) and in its Servicing and Liquidation Actions 7(a) Lender Matrix (the “Lender Matrix”).  

For example, with respect to a change of ownership servicing request, lenders should be aware that if a PPP borrower is proposing a change of ownership within the first twelve months after disbursement of the PPP loan, lenders are required to obtain SBA’s prior written approval for the change in ownership.  With respect to PPP loan borrowers who have filed for bankruptcy protection, lenders are in a peculiar situation.  Because PPP lenders are not “secured,” a different outcome may result.  This means that lenders may wish to consult with legal counsel to discuss options for handling each bankruptcy case and whether claims should be filed or other actions taken to protect the interests of the lender and the SBA.   

Lenders who have a PPP loan borrower who has entered into an Assignment for the Benefit of Creditors need to evaluate their options for filing a claim.  Lenders may wish to consider filing a claim for the full PPP loan balance until such time that the PPP borrower can apply for loan forgiveness.  If the PPP loan is fully or partial forgiven, then the lender’s claim may be withdrawn or amended as needed, but the lender should be taking appropriate steps to  protect both its own institution and the interests of SBA.

If a lender has discovered that a PPP borrower’s business has permanently closed, the lender should determine if the PPP loan borrower is going to apply for – or has applied for – forgiveness of the PPP loan.  If not, lenders will need to engage in a liquidation analysis based on the PPP loan being unsecured to determine if there is any source for recovery before taking affirmative steps towards litigation.  Although these unsecured loans are 100% guaranteed, there is still not guaranty purchase process in place, leaving lenders wondering how far they must go in order to keep the guaranty in place.   Reaching out to SBA or NAGGL for guidance should be considered until formal guidance from the Agency is provided.

Lenders should continue to record any loan action taken, document their PPP loan files and refer to the SOP and the Lender Matrix until such time as the SBA provides formal guidance specifically addressing S&L issues involving PPP loans.  If you have questions regarding PPP loan servicing or liquidation issues, please contact this firm.