SBA begins to articulate the PPP loan necessity review process
December 10, 2020
By: Mark A. Mangano
On December 9, 2020, the Small Business Administration (SBA) issued an update to its Paycheck Protection Program Frequently Asked Questions (FAQs)1 to address why some Paycheck Protection Program (PPP) borrowers are receiving a Loan Necessity Questionnaire2 (Questionnaire). For over a month, draft questionnaires have been circulating and used by the SBA without official publication or explanation. The SBA has now published updated Questionnaires.
Since early in the PPP, the SBA made it clear it would review loans to borrowers and their affiliates receiving loans with an original principal balance of $2 million or more. The SBA would pay particular attention to the required good faith certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” (Certification).
Questionnaires are being sent to borrowers that have applied for PPP loan forgiveness. Lenders submit the Questionnaires to borrowers at the direction of the SBA. The SBA notes that a request to complete a Questionnaire does not mean the SBA is challenging a borrower’s Certification. The Questionnaire is composed of over 20 multipart questions on liquidity and business activity both before the pandemic and between March 13, 2020 and the end of the borrower’s loan forgiveness covered period. Some of the questions require collection and submission of supporting documentation. Questionnaires must be completed within 10 days of receipt from the lender.
The SBA states that its assessment of a borrower’s Certification will be based on the totality of the borrower’s circumstances through a multi-factor analysis. The SBA does not detail specific factors or how they will be assessed. The SBA will consider a borrower’s circumstances and actions both before and after the borrower’s Certification in determining good faith at the time of the Certification.
The SBA provides a rather vague description of a multi-step approach for assessing the borrower’s basis for a good-faith Certification. It appears that the first step is review of a forgiveness application and the completed Questionnaire. If these do not prove adequate for the SBA to accept the good faith Certification, in the second step the SBA may request additional information. At that point the borrower may submit a narrative response explaining the circumstances that provided the basis for their good-faith Certification. The SBA further suggests a borrower may submit any further information it wishes before the SBA makes a final determination that the borrower lacked an adequate basis for its loan necessity Certification.
Publishing FAQ 53 and the Questionnaires is a step forward in making the loan necessity certification review process more transparent. However, it does not provide significant guidance to borrowers on the standard of review. The SBA references a multi-factor analysis but does not reveal more than very general standards. The SBA does not discuss how it will use hindsight gathered from the Questionnaire to assess good faith in the past.
Borrowers with PPP loans $2 million or greater should begin preparing their response to the Questionnaire along with their forgiveness application. Preparing a Questionnaire response within 10 business days of receipt may prove challenging for some borrowers. Failure to submit a timely response could jeopardize a forgiveness application.
Prepare to take advantage of the opportunity to tell your story. If your business successfully weathered the COVID-19 pandemic to this point through hard work, initiative, or good fortune, that does not reflect on what you were assessing at the time you applied for a PPP loan. If you have not already done so, collect and record your deliberations in the darkest moments of the onset of the first world-wide pandemic in over 100 years. Don’t forget to include consideration of many things that could have gone wrong but did not. Our collective experience from the Great Financial Crisis taught us that credit and commercial markets can seize up in a world-wide recession. Be prepared to detail your deep concerns about the future that existed before the story was written.
1 Paycheck Protection Program Loans Frequently Asked Questions (FAQs) https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf
2 SBA Form 3509 Paycheck Protection Program Loan Necessity Questionnaire (For-profit Borrowers) https://home.treasury.gov/system/files/136/SBA-Form-3509-PPP-Loan-Necessity-Questionnaire-For-Profit.pdf;
SBA Form 3510 Paycheck Protection Program Loan Necessity Questionnaire (Non-Profit Borrowers) https://home.treasury.gov/system/files/136/SBA-Form-3510-PPP-Loan-Necessity-Questionnaire-Non-Profit.pdf