PPP Loan Insights: Forgiveness Does Not Mean Forgotten – Part III  

August, 2021 - Jonathan Feld and Thomas Vaughn

Shortly after the passage of the CARES Act, the SBA announced that it would be auditing every borrower with a PPP loan in excess of $2 million. What is meant by 'audit’ remains to be seen. To assist with its reviews, the SBA implemented a Loan Necessity Questionnaire known as Form 3509 and Form 3510 (“Questionnaire”)“… to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that borrowers, who together with their affiliates, received PPP loans totaling $2 million or greater, made on their PPP Borrower Application (SBA Form 2483 or Lender’s equivalent form) that economic uncertainty made the loan request necessary.”Recently, the SBA withdrew the Questionnaire and many borrowers have heard from the SBA that their loan is forgiven.

However, that does not mean that PPP borrowers (including those who have obtained forgiveness) are out of the woods and no longer need to concern themselves with substantiating that they made loan certifications in good faith. The SBA requires that borrowers maintain documents supporting their applications for six years and the SBA has six years to audit borrowers from the date forgiveness is granted. In contrast, the SBA established a 90-day timeframe within which they must make a determination concerning whether a borrower’s loan may be forgiven. It is unclear whether the SBA considers its forgiveness review to be its 'audit' or whether additional procedures will be performed. Many experts believe the forgiveness process to be an administrative assessment whereas the audits may focus on whether or not the borrowers had sufficient basis to make the necessity certification in good faith.

In connection with its rescission of the Questionnaire, the SBA recently revised its Frequently Asked Questions (“FAQs”) which has raised even more questions. For example:

  • FAQ 46 was eliminated, which previously described a safe harbor which assumed that the necessity certification was made in good faith for borrowers with loans in an amount less than $2 million and for all Second Draw PPP borrowers. The SBA has not said whether or not these safe harbors remain.
  • FAQ 69 was added, which explains why the Questionnaire was discontinued, uses the terms “loan review,” “loan necessity review” and “audit” but is unclear as to whether all are one and the same or different processes.

The scope of an eventual audit may be very broad. For example:

  • The SBA has requested from some borrowers“[a]ll records relating to the Borrower’s PPP loan, including documentation submitted with its PPP loan application, documentation supporting the Borrower’s certifications as to its eligibility for a PPP loan, documentation necessary to support the Borrower’s loan forgiveness application, and documentation demonstrating the Borrower’s material compliance with PPP requirements.”
  • The CARES Act provided that, along with their application for forgiveness, borrowers applying for forgiveness must submit“… any other documentation the Administrator determines necessary.”

People depart organizations and memories fade. Given the time lag that may exist between loan origination and an ultimate audit, borrowers would be well served to prepare for an audit now while documents and knowledge of events surrounding loan origination are readily available.

Further, on July 30, 2021, the SBA issued a new Interim Final Rule that provides for continued deferral of the start of required payments on PPP loans that are the subject of a timely appeal of any final SBA loan review decision until the SBA’s Office of Hearings and Appeals (OHA) issues a final decision on the appeal. The borrower should notify the lender of the appeal to extend the deferment period. Appeals must be filed with OHA within 30 calendar days after receipt of the final SBA loan review decision. While this is a logical step by the SBA, it seems to signal an expectation from the SBA that there are going to be increasing numbers of forgiveness denials in the near future. Also, the SBA’s reminder of the 30‑day appeal period is putting borrowers on notice that they will need to act quickly to protect their position.

As the timeframe for borrowers to appeal adverse decisions is short, borrowers should start to prepare now for a possible adverse decision.

Recommendation: Whether or not your PPP loan has been forgiven at this point, if you are a “higher-risk” PPP borrower, [1] we recommend that you (i) assemble the information listed in Part I of this series, (ii) fill out a Questionnaire, including comprehensive explanations and context where applicable (i.e., where the response on its own may be perceived as raising a “red flag” without additional information), although do not file it, and (iii), to the extent you have not done so, prepare a “white paper” setting forth the reasons why, at the time of your PPP loan application, current economic conditions made obtaining the loan necessary to support your ongoing operations. You also may want to include a discussion of actual performance and need. While the focus of the discussion should be on the facts and circumstances, including actual performance leading up to applying for the loan through May 18, 2020 (i.e., the Safe Harbor Date, or, if the loan was applied for after that date, then the date the loan proceeds were received), if your actual performance was better than expected, include an analysis of the reasons why the events leading to positive actual performance were not certain or known at the time of your PPP loan application.

In preparing your PPP loan white paper, consider the following:

  • Attorney-Client Privilege Protection. In order to have your PPP loan white paper subject to the protection of the attorney-client privilege, it should be prepared to provide your attorney with information required by them to provide you with legal advice. Dykema has developed a list of questions to help guide borrowers in the preparation of the PPP loan white paper.
  • Assistance of Advisors. The PPP loan white paper will include a significant amount of financial and legal analysis. Your accounting, financial and legal advisors can assist you in putting together the analysis and in reviewing and commenting on the analysis. Your advisors can assist you in a variety of other ways.

Stout professionals have developed a list of more than 60 factors that they believe the SBA, and/or any other government entity, will likely analyze in making their own determination as to whether a borrower had a need for the PPP loan at the time of its loan application. Stout’s team then uses independent analysis of those 60+ factors to identify any potential issues or red flags, and/or develop a comprehensive independent report analyzing your economic need for the loan at the time of the application that can be provided to the SBA or other government agency if the loan necessity is ever challenged.

Both Dykema and Stout have professionals on staff who have handled similar government reviews, both for the government in areas outside of PPP and against the government, and are able to apply that experience and knowledge to help you assess your position under the PPP. We also are able to provide otherad hocassistance to meet the needs of our clients based on each client’s specific facts and circumstances, including cases where the SBA or other agencies challenge loan eligibility.

Watch for our PPP Loan Insights:

Please contact Tom Vaughn, Dykema, (313-568-6524); Jonathan Feld, Dykema, (312-627-5680); Steve Sahara, Stout, (312-763-6229); Jesse R. Morton, Stout, (678-573-2686); Steve Lovoy, Jr., Stout, (678-573-2685); or your regular Dykema attorney or Stout advisor.

[1] Higher risk PPP borrowers include those that obtained a loan of $2 million or more, are publicly traded, are private equity or venture capital firm-owned, have foreign ownership, obtained a loan at or close to the maximum amount of $10 million, have a complicated corporate structure or have numerous affiliates.




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