Effective July 15, 2021, SBA issued Procedural Notice 5000‑812316, “SBA Guaranty Purchases and Lender Servicing Responsibilities for PPP Loans.” The Notice provides critical guidance on how lenders should service their PPP loans and submit purchase submissions. In her article published on July 28, 2021, my colleague reviewed the servicing requirements for PPP loans. In this article, we will focus on the procedures for guaranty purchase.
When can a lender request the SBA to honor its guaranty?
A lender can request the SBA to purchase and charge-off its PPP loan under the following circumstances:
- When the loan is 60 days past due and not cured, but only after making demand for payment;
- When the borrower has permanently closed and will not submit a forgiveness request;
- When the borrower has filed for Chapter 7 bankruptcy, but only after the lender has filed a proof of claim (except that a proof of claim is not required for a Chapter 7 “no asset” bankruptcy); and
- When the borrower is a self-employed individual, sole proprietor, single member LLC or independent contractor, and the owner is deceased.
A lender may also request purchase without a charge-off under the following circumstances:
- When the borrower or any 20% or more owner has been indicted or convicted of a felony related to the PPP loan; or
- When 60 days have passed since the borrower has filed an appeal of a final SBA loan review decision with the Office of Hearings and Appeals.
Per the procedural notice, the SBA will be released from liability on the guaranty 180 days after the maturity of the loan. As such, lenders should be aware of the maturity dates in their notes, especially on first draw loans.
What is the process for guaranty purchase?
The SBA has updated the existing PPP platform to allow lenders of record to request both a guaranty purchase and a charge-off. In addition to a check the box application, the Lender must upload the following documents to the PPP platform:
- Certified copy of signed Note and any modifications to the note;
- Transcript of Account; and
- An executed SBA Assignment Form for referral to Treasury.
As a PPP lender, you must also retain and provide to SBA, if requested, copies of the following documents:
The Borrower’s Application Form;
Supporting documentation confirming average monthly payroll;
For a Second Draw loan greater than $150,000 or a loan of $150,000 or less where the borrower provided documentation of revenue reduction, documentation submitted by the borrower to confirm the borrower’s 25% revenue reduction; and
Borrower’s written certification and supporting documentation relied upon to resolve hold codes and/or compliance check error messages.
Where possible, the SBA encourages lenders to process both First Draw and Second Draw PPP loans at the same time.
The procedural notice also details the following required lender certifications:
- Documentation and information provided with submission accurately reflect lender’s loan record
- Official transcript is true and accurate
- Data reported by lender in E-Tran (e.g., loan status and outstanding balance) is true and accurate
- Lender made and serviced the loan in accordance with the PPP Loan program requirements
- PPP loan was not canceled, repaid in full or forgiven in full
- PPP loan is evidenced by a legally enforceable note and made/modified in accordance with the PPP Loan program requirements
What if a borrower seeks forgiveness AFTER a lender requests guaranty purchase?
If a borrower submits an application for forgiveness after the lender has requested a guaranty purchase, the lender is obligated to process the forgiveness application. If the SBA has not yet completed the guaranty purchase and charge-off, the lender must immediately withdraw the request and not re-submit it until after the SBA completes its forgiveness review. If the SBA has already completed the purchase and charge-off, the lender must still process the forgiveness application, but the SBA will not remit a forgiveness payment to the lender, and instead will apply the eligible forgiveness amount to reduce the borrower’s outstanding loan amount.
At this time, there is no specific guidance on the timing for the SBA to honor its guaranty. However, the Notice provides PPP lenders with answers to many other important questions on how to handle future issues on PPP loans, and invites lenders to submit purchase questions to SBA at PPPLoanPurchase@sba.gov. Given the Notice’s complexity and importance, Lenders should carefully review it to ensure compliance with program requirements.
For more assistance or questions regarding SBA’s guaranty purchase processes on PPP Loans, please contact the attorneys at Starfield & Smith, PC at (215) 542-7070 or visit us at www.starfieldsmith.com.