Nontransparent PPP Loan Necessity Process Presents Substantial Risks for Borrowers and Lenders
November 30, 2020
By: Mark A. Mangano
All borrowers under the Paycheck Protection Program (PPP) certified that “current economic uncertainty makes this loan request necessary to support the ongoing operation of the Applicant.”1 The Small Business Administration (SBA) has long planned to review borrower eligibility for all loans in excess of $2 million, in addition to other loans as appropriate, following a lender’s submission of the borrower’s loan forgiveness application.2 The SBA promised guidance on implementing the procedure. The SBA is now implementing the eligibility review procedure but is not making guidance available to PPP borrowers.
On November 25, 2020, the SBA issued a letter and instructions to PPP lenders on using the SBA Loan Necessity Questionnaires. SBA Form 3509 is a questionnaire for for-profit borrowers and SBA Form 3510 applies to non-profit borrowers. Neither form has been officially released to the public. Below are links to unofficial copies of the forms.3 The letter states that the questionnaires are for all PPP borrowers that, together with their affiliates, received loans of $2 million or more and that a request to complete a questionnaire does not mean that the SBA is challenging a borrower’s certification.
A borrower’s obligation to complete a questionnaire will generally be triggered after submission of a forgiveness application when the lender receives a loan review notice from the SBA. The lender must provide an appropriate questionnaire to the borrower within five days of the notice. The borrower has ten business days from the date it received the questionnaire from the lender to complete it.
Significantly, failure to timely respond to the questionnaire may result in delay in remittance of a loan forgiveness amount or determination that the borrower is ineligible for the loan or the amount of forgiveness claimed. If the questionnaires were composed of a few simple questions, this might not be a significant issue. However, the questionnaires are composed of over 20 multi-part questions regarding actual business and liquidity activity for periods both before and after receipt of the PPP loan. In addition, borrowers must collect and submit supporting documentation. For some borrowers responding to the questionnaire within the ten-day window may prove challenging.
There is justifiable concern among borrowers who have reviewed the questionnaires, that they may be used to adjust the standards for necessity. The original certification was based upon “uncertainty” due to the emerging pandemic. The questionnaires focus on hindsight comparisons of pre-pandemic and post-pandemic performance. Reviewing the questionnaires in detail is beyond the scope of this article. Borrowers should consult in advance with their legal and financial advisors to assist in preparing their responses.
The SBA’s decision to withhold the questionnaire form from a borrower until the borrower receives a request from its lender is puzzling. It unnecessarily places substantial time pressure on a borrower to complete a document critical to its financial viability. This presents significant risks to both the borrower and the lender. The risk to the borrower is that it cannot adequately respond to the questionnaire and is denied forgiveness and potentially subjected to other sanctions. The risk to the lender is that the borrower’s ability to service other debts owed to the lender may be substantially impaired by the burden of unexpectedly servicing a PPP loan.
Crafting responses to necessity questionnaires will be demanding. Borrowers should take great care in their preparation. It is in the interest of both the borrower and lender, that the borrower set forth the most compelling response possible consistent with the facts. Borrowers do not have a means of direct access to the official questionnaires until they are received from the lender. Lenders should alert their customers to the questionnaire requirements before sending an actual request and encourage borrowers to prepare in advance.
1 PAYCHECK PROTECTION PROGRAM LOANS Frequently Asked Questions (FAQs) Question 31 https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf
2 PAYCHECK PROTECTION PROGRAM LOANS Frequently Asked Questions (FAQs) Question 39 https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf