By Andy ScauzilloThe historic Paycheck Protection Program has been a lifeline for small businesses across America throughout the COVID-19 pandemic. In late March, the Small Business Administration reported more than 8 million loans have been issued to small businesses, totaling more than $700 billion. However, like all loans, PPP loans are beginning to come due, and lenders now must navigate the ever-evolving labyrinth of loan forgiveness rules in order to stay in compliance.
The Consumer Financial Protection Bureau and the SBA jointly issued an interim final rule amended to reflect the rules established by the passage of the Economic Aid Act on December 27. Along with outlining the forgiveness application process for borrowers, the rule also lays the foundation for lenders to comply with PPP loan forgiveness. Requirements include:
- What the lender should review.
- How the lender should determine forgiveness amounts.
- How the lender should communicate forgiveness decisions to the SBA and the borrower.
Regulators will be expecting lenders to follow these requirements for first and second draw PPP loans, although the requirements are not very explicit and may be difficult to interpret (stop me if you’ve heard this before).
This article attempts to break down the requirements in a straightforward and concise manner for compliance professionals.
What to review?
When a borrower submits a loan application for forgiveness, the borrower must certify that the information submitted is complete and accurate. Thus, as a lender, your first responsibility when reviewing a submitted application is to confirm that the borrower has completed this certification. If the borrower has failed to certify, you should follow up with the borrower and explain that the SBA will not accept their forgiveness application without this certification.
Next, review the borrower’s submitted loan forgiveness application and supporting documentation for completeness. If key fields on the application are not filled out (such as forgiveness amount requested, eligible payroll and non-payroll amounts, covered period, etc.), notify the borrower to complete the missing items and send the application back. I recommend developing an online forgiveness application experience with built-in automated flags. This can prevent the borrower from submitting the application if they have not completed all fields (more on this below). Additionally, the borrower’s supporting documentation should provide a clear picture of how the borrower determined their eligible payroll and nonpayroll costs.
Taking it one step further, the requirements also expect the lender to confirm the borrower’s calculations of applicable payroll and nonpayroll costs and verify that eligible payroll costs are not less than 60 percent of the total forgiveness amount. This is one of the main requirements for PPP loan forgiveness.
To throw a wrench into all this, SBA makes it clear that the accuracy of these calculations is the responsibility of the borrower and that the lender is expected only to perform a “good-faith review.” Completing this good-faith review is how the lender can determine whether the borrower is eligible for forgiveness. Check whether your bank requires a formal review of the loan submission package by a third-party accounting firm if loans are over a certain dollar threshold.
Determining forgiveness eligibility
As I mentioned above, lenders can rely on borrowers’ representations. They are not required to verify the borrowers’ reported information independently. However, it is key to define your “good-faith review” of forgiveness applications in order to evidence your compliance in the event of a regulatory review.
Since guidance from the SBA is limited, here are some steps to consider:
- Develop an online forgiveness platform with automated flags built-in to prevent applications from being submitted incompletely or with inaccurate calculations.
- Use a risk-based approach to review the borrower’s supporting documentation. If a borrower’s supporting documentation is from recognizable and credible sources, minimal review may be needed. However, if supporting files are not from recognized sources or are incomplete, you should perform a more extensive review of the calculations and data entered to ensure that the data reported ties back to supporting evidence.
- If errors are identified in the borrower’s calculations or the borrower is lacking supporting documentation, work with the borrower to remedy the issues prior to submission.
- For second-draw loans only, verify that the supporting documentation reconciles to the borrower’s revenue reduction calculation. (The SBA’s requirements for second-draw PPP loans likely will not come due until this summer at the earliest.)
Lenders have 60 days from receipt of a complete application to issue a decision on forgiveness to the SBA. Decisions made must be one of the following: approval in whole, approval in part, or denial. Approval in part would happen if the lender determined that the borrower is not eligible for the entire amount of forgiveness requested—for example, if payroll costs do not exceed 60 percent of total eligible costs. To finalize its decision, the lender is required to notify the SBA and the borrower of what was decided.
Communicating forgiveness decisions with the SBA and borrower
Although loan forgiveness must be determined by the lender, all loan decisions must be submitted to the SBA. The SBA gets final say on loan forgiveness for PPP loans which it chooses to review. In order to finalize, the lender must follow separate processes for loans that are approved (in whole or in part) and loans that are denied.
Approved loans. Approved loans must be submitted by the lender to the SBA with the initial application form and loan forgiveness form attached. The lender is required to confirm that the information provided to the SBA accurately reflects the lender’s records, similar to the borrower’s attestation and confirmed via its good-faith review. The lender also is responsible for requesting payment from the SBA at the time of its decision. Once received, the SBA will remit the appropriate forgiveness amount to the lender plus interest, no later than 90 days after receipt of the payment request, subject to any SBA review of the borrower’s loan. The lender is then responsible for communicating to the borrower the remittance by the SBA and total loan forgiveness amount.
Denied loans. On the other hand, if the lender determines that the borrower is not entitled to forgiveness in any amount, the lender is required to provide the SBA with the reason for its denial. Reasons can include inaccurate, incomplete, or falsified records; borrower PPP loan ineligibility; or misuse of PPP funds (such as funds not being spent on payroll or applicable non-payroll costs). Similar to approved loans, the lender must confirm that the information provided by the lender to the SBA accurately reflects the lender’s records.
The lender must also notify the borrower regarding its decision to deny the loan forgiveness application, including the reason for denial. This triggers a 30-day window in which the borrower can appeal the lender’s decision directly to the SBA. It is up to the discretion of the SBA whether it wishes to review the borrower’s appeal. The SBA will notify the lender if it does intend to perform a review. If so, the lender is responsible for acting as the intermediary in this situation, informing the borrower of the SBA’s intent to review and providing any documentation the SBA requires until its review is complete.
You’re almost there
Do not feel stressed by the overwhelming amount of guidance issued by the SBA related to PPP loan forgiveness. The core of the requirements is focused around making sure that the borrower’s forgiveness application is complete, accurate and tied to supporting documentation—and that submitted costs comply with eligibility requirements. It is also important that communications with the SBA and borrower are clear and completed timely. At the same time, stay on the lookout for updated guidance from the SBA as the PPP continues to evolve.
Lastly, do not lose sight of the vital role your institution has played in helping small business owners keep their heads above water as we all continue to battle through this pandemic. The light at the end of the tunnel is growing brighter by the day.
Andy Scauzillo is an associate director with CNM LLP, a technical advisory firm located in Southern California and New York.