Best Practices: Correcting PPP Loan Discrepancies Before a Partial or Full Forgiveness Denial

Now that SBA has established regulations and guidance for PPP, and lenders have moved into the PPP loan forgiveness process, they are identifying some PPP compliance issues that may have not been fully vetted or missed during the PPP loan origination process.

SBA Interim Final Rule Docket No. SBA-2020-0033 (May 22, 2020) (“IFR 2020-0033”) states, “If the lender identifies errors in the borrower’s calculations or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue.”  See IFR SBA-2020-0033, pg. 12.  Pursuant to IFR 2020-0033, a Lender should work with a PPP borrower to address issues in the forgiveness application prior to submitting a partial or full PPP loan forgiveness denial to the SBA.

In accordance with new SBA Procedural Notice 5000-20077 issued on January 15, 2021, a lender may resubmit a loan forgiveness application if a borrower could have used SBA Form 3508S, but applied for forgiveness using either SBA Form 3508EZ or 3508, only until such time as the SBA notifies the lender of a final loan review decision or remits the loan forgiveness payment.  While the Procedural Notice addresses some of the challenges that lenders and PPP borrowers may have encountered in the loan forgiveness process, there does not appear to be a formal mechanism for a lender to withdraw and re-submit its PPP forgiveness decision to SBA’s portal if the Borrower provides more information or if lender made a mistake in its initial forgiveness decision submission.

Further, there is limited opportunity in the loan forgiveness procedural process for a PPP borrower to challenge a forgiveness decision made by lender or SBA.  If a lender issues a full denial of loan forgiveness it has five (5) business days to notify the borrower of such decision and the reason for denial.  The borrower then has thirty (30) days to request that SBA conduct its own review of the lender’s forgiveness decision.

There are significant issues with this procedural guidance: first, there is no mechanism for a borrower to request SBA review of a lender recommendation for a partial denial of forgiveness; second, in accordance with SBA Interim Final Rule Docket Number SBA-2020-0038 (July 23, 2020), SBA is under no obligation to agree to conduct a review of any loan, as that decision is strictly within the SBA’s discretion; and third, there is no time frame within which SBA must decide to exercise (or not exercise) its review authority.

There is no mechanism for a borrower to request a SBA loan review of a lender’s partial denial of forgiveness decision.  In accordance with SBA Procedural Notice 5000-20077, a PPP borrower may only appeal to the Office of Hearings and Appeals (“OHA”) for reconsideration a final SBA loan decision that finds the PPP Borrower is ineligible: (i) for the PPP loan, (ii) for the PPP loan amount received or for using PPP loan proceeds for an unauthorized use; (iii) for the amount of PPP loan forgiveness approved by lender and/or (iv) for a complete denial of loan forgiveness.  This guidance creates another hurdle for PPP Borrowers in that they cannot contest a Lender’s forgiveness determination, only a “final” SBA decision.

Next, although a lender is required to notify the PPP borrower within five (5) business days of receipt of SBA notification to lender that SBA is initiating a review of the loan, there appears to be a significant gap in the procedural process, in that there is no requirement that SBA undertake a requested loan review, nor is there any time period within which SBA must make a decision on whether or not to conduct such a loan review.  The fact that SBA is not required to conduct a review and is not required to even issue a decision as to whether or not it will conduct a review or decline to do so, creates a situation where a PPP Borrower could be left in “legal limbo” due to agency inaction.

If a PPP borrower is not able to utilize the OHA appeal process, then the only recourse for a PPP borrower may be to look to the lender.  In fact, Interim Final Rule Docket No. SBA-2020-0042 (August 11, 2020) (“IFR 2020-0042”) states “A borrower may exercise any other rights it has under applicable law against a PPP lender regarding a lender decision.”  See IFR 2020-0042, pg. 6.  The effect of these rules appears to allow SBA to shift liability for forgiveness decisions that PPP borrowers may disagree with from the SBA onto the PPP lenders themselves.  Such a result seems contrary to the intent of the program.

While the PPP loan program appears to have limited a lender’s liability in making the PPP loans, when it comes to a PPP loan forgiveness decisions, it seems to place the liability back on the lender since a PPP borrower may have no other avenue for recourse.  This is a concern for lenders and may influence lender’s forgiveness review process and ultimately involvement with the PPP if they fear they may face a lender liability claim from a PPP borrower in state court.

The best result would be for SBA to set a time period by which it will make a decision on whether or not it will conduct a SBA loan review, and expand reviews to partial denial decisions. Also, since there does not appear to be an option for a lender to withdraw a PPP loan forgiveness decision once it is submitted to SBA, aside from the limited circumstance set forth above, SBA should make clear that any loan forgiveness application can be withdrawn any time prior to SBA’s loan review decision or payment.  In the meantime, lenders should be sure they are working with PPP borrowers to correct inconsistencies or issues with calculations and resolve any differences between the parties before the lender submits its PPP loan forgiveness decision to the SBA.

For more information regarding PPP loans and the forgiveness process, contact the attorneys at Starfield & Smith, PC at 215.542.7070.