Payroll Protection Program Loan Audit Considerations and Guidance
On May 22, 2020, the U.S. Small Business Administration (SBA), in consultation with the Department of Treasury, issued an interim final rule on review procedures and related borrower and lender responsibilities with respect to Payroll Protection Program (PPP) loans. This interim final rule provides information to borrowers who have received a PPP loan as to what to expect in the SBA’s review of an individual PPP loan and/or audit of a PPP loan. Additionally, the interim rule expressly states the SBA may review any size PPP loan issued under the PPP loan program at any time (and noting that borrowers must retain PPP documentation for six (6) years after the date the loan is forgiven or repaid in full) and provides information as to what the SBA may review.
REPRESENTATIONS AND STATEMENTS OF BORROWERS
Specifically, the interim rules states the SBA may review borrower eligibility requirements for a PPP loan based on the provisions of the CARES Act, the rules and guidance (FAQs) available at the time of the borrower’s PPP loan application. Thus, eligibility requirements for borrowers (and certain borrower’s representations and statements) will be reviewed according to the standards issued at the time of the borrower’s application for a PPP loan. If subsequent regulations or guidance (FAQs) would have made a borrower later ineligible, that borrower is provided a safe harbor for eligibility so long as the borrower was eligible at the time of its loan application based on the rules and guidance available at the time of filing. The FAQ list (as of May 23, 2020), which can be found at the end of the blog post here, is a summary and timeline of the guidance (FAQs) issued by the SBA. This FAQ timeline should be reviewed to confirm a borrower’s eligibility for a PPP loan at the time of application.
The SBA states that it may also review whether a borrower calculated its loan amount correctly and used loan proceeds for the allowable uses (generally, payroll, mortgage interest, rent obligations and utilities). In its consideration of use the use of loan proceeds, the SBA may also review whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s forgiveness application. The interim rules states that it is the responsibility of the borrower to provide an accurate calculation of loan forgiveness and to attest to the accuracy of its reported information.
With respect to the certification all borrowers made at application stating “[c]urrent economic uncertainty make this loan request necessary to support the ongoing operations of the Applicant,” guidance published on May 13, 2020 has confirmed that any borrower, together with its affiliates, who received a PPP loan with an original principal amount of less than $2 million will be deemed to have made this required certification in good faith.
SBA REVIEW PROCESS AND WHAT TO EXPECT
In the event the SBA reviews/audits a borrower’s PPP loan, the SBA will notify the lender, who is required to notify the borrower in writing within five (5) business days of receipt of notice from the SBA and to request information from the borrower, if requested by the SBA. The SBA may also request information directly from the borrower. A borrower’s failure to respond to the SBA may result in a determination that the borrower was ineligible for a PPP loan or ineligible to receive the loan amount or loan forgiveness claimed by the borrower. While the interim rules did not specify how much time a borrower has to respond, it does require that the lender respond to the SBA with all requested documents within five (5) business days of the request from the SBA. The SBA intends to issue a separate interim final rule addressing any appeal process granted to a borrower after a SBA review/audit.
If the SBA determines that a borrower was ineligible for a PPP loan, the loan amount granted or total loan forgiveness claimed, the SBA will direct the lender to deny the loan forgiveness (in whole or in part) and may seek repayment of the outstanding PPP loan balance or pursue other available remedies, depending on the determination of ineligibility made by the SBA.
All borrowers should review and confirm their eligibility based on the FAQs issued at the time their PPP loan application was submitted. Borrowers should document this review and confirmation. All PPP related information and documentation should be maintained for six (6) years after the date the loan is forgiven or repaid in full, whichever is later. If a borrower receives written notice from its lender that the SBA is reviewing the borrower’s PPP loan, the borrower should respond to all correspondence in a timely manner and strongly consider engaging counsel to assist/support the borrower in the review/audit process by the SBA.