By: Charles D. Dunbar and Mark A. Mangano
Many banks have participated in providing loans under the Paycheck Protection Program (PPP). A key feature of PPP loans for most borrowers is the prospect of having the debt forgiven. Bankers are currently in a difficult position in responding to customer requests for guidance on forgiveness.
Understandably, PPP borrowers wish to clearly understand the conditions that must be met to receive loan forgiveness. PPP borrowers are making complex hiring, compensation, cashflow, balance sheet, and operational decisions. It is natural that they are looking to their trusted advisors for guidance. No advisor is likely more trusted than a community banker.
There are three reasons that bankers should be cautious in providing advice to customers regarding their forgiveness planning:
- The requirements for loan forgiveness are currently far from clear;
- Borrowers disappointed by forgiveness results may later attempt to hold bankers accountable for their advice; and
- Bankers occupy a position very different from other trusted advisors in that they will be called upon to make the final determination of loan forgiveness (subject to review by the Small Business Administration (SBA).)
Lack of clarity
The calculation of loan forgiveness under the CARES Act is on its face complex. The process involves assessing employment statistics from five different time periods, applying four separate constraints on potential forgiveness, resolving the order of assessing constraints, and administering recovery tests that potentially eliminate certain constraints.
There are many unanswered questions that require significant interpretation of the statutory language. Future guidance could lead to very diverse forgiveness outcomes. Strategies adopted by borrowers in response to advice based upon one set of assumptions could be ineffective or detrimental to the business if the assumptions prove incorrect.
The lack of SBA guidance leaves a frustrating lack of clarity that bankers cannot remedy.
Accountability
Bank customers are dealing with high levels of financial stress brought on by efforts to control the COVID-19 pandemic. The stakes for many customers are very high. The room for error may be very slim.
Customers choosing a strategy based upon banker advice may later be disappointed by lower than expected forgiveness. If the quality of the advice provided is later undermined by subsequent interpretations of the law, borrowers may seek to hold bankers accountable for their advice. A borrower’s ability to prevail on claims that banker advice caused the borrower harm for which the banker is responsible is unclear. However, at the very least defending such claims may be expensive and time consuming.
Different position
Bankers should consider being more cautious than other trusted advisors in providing PPP forgiveness advice. Bankers are not only in the position to provide advice but in the position to make the ultimate determination on forgiveness. The reputation and legal risk of disappointing a borrower’s critical expectations by applying rules inconsistent with previously provided advice is a risk that other trusted advisors including accounts and lawyers do not face.
Bankers will be delivering judgements on a complex forgiveness calculation. There is little way of knowing at this time the amount of discretion bankers will be called upon to exercise. In any case, dealing with customer expectations of debt forgiveness puts bankers and their customers in an adversarial situation. Borrower assertions of reliance on bank provided advice has the potential to make dealing with this situation more difficult.
Suggestions
Bankers feel an obligation to meet the important and legitimate concerns of their customers. The PPP has placed bankers in a rare and difficult position where attempting to meet their customer’s desire for information and guidance may later undermine the banker’s relationship with the customer.
We recommend the following guidelines in responding to customer requests for guidance on forgiveness standards:
- Avoid making statements that suggest that the rules for forgiveness assessment are settled;
- Recommend that customers consult their other trusted advisors (accountants and lawyers) for guidance in formulating strategies to achieve optimal loan forgiveness;
- Ensure that any guidance provided clearly indicates that the standards are unsettled and that the bank is in no position to opine on how the law will ultimately be interpreted;
- Suggest best practices that will be useful regardless of how the law is ultimately interpreted (record keeping, account segregation, types of records likely needed to demonstrate compliance with forgiveness standards); and
- Reference to relevant government issued rules and guidance.
Bankers are in the business of helping their customers. This a rare instance in which providing less advice may be in the best interests of bankers’ long-term relationships with their customers.