Best Practices: Current Guidance on Lender Servicing Responsibilities for PPP Loans and SBA Guaranty Purchases

In SBA Procedural Notice 5000-812316 effective July 15, 2021 (“Notice”), the Small Business Administration (“SBA”) sets forth a lender’s responsibilities for servicing and resolving unforgiven Paycheck Protection Program (“PPP”) loans, and it provides guidance on the processes required in order for SBA to purchase the PPP loan and honor its 100% guaranty.

The Notice makes clear that SBA will only honor its 100% guaranty and purchase any outstanding balance of a PPP loan if the lender has complied with all “PPP Loan Program Requirements,”[1] including the underwriting, document collection, and retention requirements described in the lender application forms. This article summarizes key elements of the Notice with respect to a lender’s servicing responsibilities.

A lender must actively service a borrower’s PPP loan until the loan is fully forgiven, paid in full, or, until SBA purchases the guaranty and charges off any uncollectable remaining balance in the event of a default or other qualifying event.

As part of its general servicing responsibilities, a PPP lender is required to:

• Keep an accurate record under its direct control of each loan;
• Collect and apply loan and forgiveness payments;
• Submit separate monthly SBA Form 1502 reports;
• Document all loan modifications, including changes of ownership; and
• Issue a decision to SBA (in accordance with PPP loan program requirements) when the borrower submits a forgiveness application.

However, multiple scenarios can occur prompting various lender responsibilities:

• If a borrower does not submit an application for forgiveness within 10 months of the end of the covered period, a lender must communicate with the borrower (and document all attempts and results) to determine the status of the business and notify the borrower of the date the first payment on the loan is due.
• If (i) a borrower does not submit a forgiveness application within 10 months of the end of the covered period; or (ii) the PPP loan is partially forgiven or forgiveness on the PPP loan is denied in full, the borrower must make payments in accordance with the note, and the lender must continue servicing the loan until it is paid in full or SBA purchases the guaranty;
• If the borrower becomes more than 60 days past due, the lender should make demand for payment in full and submit a request for guaranty purchase and charge off;
• If a balance remains after a lender receives a forgiveness payment from SBA, the lender must submit the SBA Form 1502 and report: (i) the principal and interest reduction from the forgiveness remittance; and (ii) any loan payments received from the borrower before the lender submits a guaranty purchase request;
• If a borrower does not receive full forgiveness on the loan, and the Lender receives any post-guaranty purchase payments from the borrower, the lender must send the full payments to SBA via Pay.Gov (https://www.pay.gov/) using the payment code 172.
• Unless the loan has been fully forgiven, if the borrower files bankruptcy other than a Chapter 7 no asset bankruptcy, then a lender must provide SBA with a notice of the bankruptcy filing, file a proof of claim, and continue to monitor the bankruptcy.
• If a lender receives a forgiveness application from the borrower after requesting guaranty purchase, the lender must submit its forgiveness decision to SBA in accordance with “PPP Loan Program Requirements.”
  • If SBA has not yet completed the guaranty purchase and charge-off process (if applicable), the lender must immediately withdraw the request so that SBA can complete its review of the forgiveness decision prior to reviewing the guaranty purchase request.
  • If SBA has purchased the guaranty, the lender must comply with the PPP forgiveness processes in effect on the date that the loan forgiveness application is received from the borrower and submit its forgiveness decision to SBA. If the borrower is eligible for loan forgiveness in any amount, SBA will not remit a forgiveness payment to the lender. Rather, the SBA-approved forgiveness amount (if any) will be applied to reduce the outstanding amount of the loan owed by the borrower.

The takeaway here is that a lender must abide by PPP Loan Program Requirements and remain involved in servicing its PPP loans until the loans are fully forgiven, paid in full, or, until SBA purchases the guaranty and charges off any uncollectable remaining balance.  For assistance with lender servicing responsibilities for PPP Loans, please contact the attorneys at Starfield & Smith, PC at (215) 542-7070 or visit us at www.starfieldsmith.com.

[1] “PPP Loan Program Requirements” includes regulations and guidance set forth under the CARES Act, the PPP Flexibility Act, the Economic Aid Act, Sections 7(a)(36) and 7(a)(37) of the Small Business Act, the rules and guidance that have been issued by SBA implementing the Paycheck Protection Program, including any rule, notice, form, FAQ as well as any other applicable Loan Program Requirements set forth in 13 CFR § 120.10, as amended.