PPP Update – Important Information for Loans over $2 Million

It has been more than 7 months since the CARES Act, which housed the PPP Loan provisions, was signed into law. We have learned a lot over the last 7 months and continue to learn more as information becomes available. The information below is applicable for recipients of PPP Loans in excess of $2 million.

Current Event

On October 26, 2020, the Small Business Administration (SBA) issued a notice in the Federal Register that announced two new forms, 3509 and 3510, related to the Paycheck Protection Program (PPP). Form 3509 applies to for-profit businesses, while 3510 applies only to non-profit entities. The public has until November 25 to submit comments.

As of November 3, Forms 3509 and 3510 are still not available on either the SBA or Treasury website. However, there are copies of the forms circulating the internet through non-governmental news sources. Attached is a copy of the Form 3509 being circulated on the internet. Please receive this attachment, and the comments below based on the attached, as not coming directly from SBA. As a result, please interpret the attached and information presented below as not final, not verified with SBA, and potentially subject to change. The American Institute of Certified Public Accountants (AICPA) is in the process of following up with Treasury/SBA on PPP loan necessity 3509 & 3510 forms, so that they can better understand the SBA’s thought process on the forms. AICPA does not think the information requested is in line with the intent of the CARES act. Given that the document attached has not been directly made available to us from SBA/Treasury, this information does seemingly provide insight into SBA’s thought process on their evaluation of PPP loans in excess of $2 million. Within that context, a review of the information it contains can provide value as you consider the impact it has on your business.

According to the attached, the purpose of these Forms is to evaluate a borrower’s good-faith certification on their economic need and in doing so provide SBA with a roadmap by which they will approach an audit of companies that received loans in excess of $2 million. Conversely, review of the forms leads one to believe that these Forms may attempt to retroactively modify PPP regulations. According to the attached, the Form will be sent by PPP lenders only to PPP borrowers who received a principal loan amount of $2 million or more, and borrowers will have ten days to complete it.

Favorable Observations

• We now have some insight into SBA’s approach to the audit of companies that received PPP Loans in excess of $2 million.
• Half of the questions deal with whether or not the applicant is a public entity, owned by a public entity, etc. So, that seems to be where some of the focus is in terms of liquidity and necessity.
• There is a question about any owners or employees who are paid over $250k annualized during the covered period. For businesses who had a good year, presumably their bonuses, etc. will fall outside their covered period if they are issued at year-end.

Concerning Observations

• The very first question is about comparing Apr-Jun revenue from 2020 to 2019. This implies that SBA is considering the impact COVID-19 on business operations as a factor in evaluating loan eligibility, which is a concept that had not previously been presented to borrowers.
• This is a lot of questions, when the only requirement was a good faith certification as to the uncertainty of operations due to the pandemic. Considering everyone had rampant uncertainty, and most still do, using hindsight months later is troublesome
• They ask about NAICS code, which was also on the loan doc but will presumably be another way to determine if they were negatively impacted (restaurants, hospitality, entertainment being obviously impacted).
• Note the confidentiality boxes with each question. Presumably, not specifying an item as confidential, could leave information on the form and information submitted with the form open to the public.

APPROACH

• Businesses will need to be ready to document everything they’ve done from a change of protocol standpoint and if that’s hurt profitability at all.
• Question 13 can be used to describe some key facts relating to matters not specifically identified on the questionnaire.
• Read through the attached and become familiar with it, so that you are prepared to receive the form from your bank with the requirement that it, along with supporting documentation, be returned in short order. Due to the public comment period, it seems that this will likely not happen until sometime after the end of November and the final version could be different than what is attached.
• Consider waiting to file loan forgiveness applications until the impact of Forms 3509 and 3510 is better known.

Some background into how we got here

The CARES Act was signed into law by President Trump on March 27, 2020. The CARES Act noted under the borrower requirements section that an eligible recipient applying for a PPP loan must make a good faith certification that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient. The subjectivity necessitated by the ambiguous language of the law, left many otherwise eligible businesses asking, “Am I eligible for a forgivable PPP Loan?” or “How do I know if current economic conditions makes necessary the loan request to support the ongoing operations of my company?”. These were very real questions being asked by businesses with integrity all across the country. COVID-19 and the uncertainty surrounding it had business owners concerned about the impact it would workforce, supply chain, and customer demand. Those concerns were expanded as Federal, State, and Local governments began closing down certain business sectors.

The PPP Loans were offered on a first-come, first-served basis. The program rules were rushed through the approval process and provided to participating banks and lenders less than a day before the program was set to officially start. On Tuesday, 3/31, the Small Business Administration (SBA) announced that it would begin accepting applications from lenders to small businesses and sole proprietorships beginning on April 3, 2020. As a result of the expectation that funds would run out in short order, and due to the first come first serve nature of the funds, businesses rushed to submit applications. The days surrounding April 3 were challenging for business owners trying to protect themselves from the uncertain COVID-19 would have on their businesses. They were forced to make a decision whether current economic conditions made necessary the loan request to support the ongoing operations of their business. No business owner wanted to think their ongoing operations were in jeopardy, but many acknowledged the reality that it was a possibility. All applicants were required to certify that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” On their loan application.

By April 16, the first round of PPP funds had run out, leaving many business owners who desired to take advantage of the program without a PPP loan.

On April 23, the SBA warned that businesses with substantial access to liquidity may not qualify for PPP loans through FAQ #31, and several larger companies returned their PPP funds. Question 31 said that all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspended the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still had to certify in good faith that their PPP loan request was necessary. Specifically, before submitting a PPP application, all borrowers should have reviewed carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers had to make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Borrowers who applied for a PPP loan prior to April 24, 2020 and repaid the loan in full by May 7, 2020 were deemed by SBA to have made the required certification in good faith. The May 7 date was later extended to May 14 and yet again extended until May 18.

On April 27, SBA began accepting applications for the second round of PPP funds. Those funds never ran out.

On April 28, Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza announced that the SBA would review all PPP loans in excess of $2 million to make sure borrowers’ self-certification for the loans was appropriate. According to the SBA, borrowers with loans below the $2 million threshold are less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers who obtained larger loans. The SBA said the safe harbor promoted economic certainty for PPP borrowers with limited resources as they worked to retain and rehire employees. The $2 million threshold also was to help the SBA conserve its resources and focus its reviews on larger loans. At that time, FAQ 39 stated “Additional guidance implementing this procedure will be forthcoming.”.

On May 13, SBA issued an FAQ that stated “borrowers with loans greater than $2 million … may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request…”.