First Draw PPP Loans $2 Million and Up and the PPP Necessity Questionnaires
Starting around October 26, 2020, the Small Business Administrations (the “SBA”) asked Paycheck Protection Program (“PPP”) lenders to provide certain questionnaires to PPP borrowers with loans of $2 million or greater. There are two questionnaire forms on the Treasury: Form 3509 for for-profit borrowers and Form 3510 for non-profit borrowers. On December 9, 2020, the SBA released FAQ 53, which provides some clarifications on the questionnaire (the “FAQ #53”).
Update: As of early July 2021, the SBA is discontinuing the use of the Necessity Questionnaires (Form 3509 and Form 3510) and informed lenders that the forms are no long required. On July 29, 2021, the SBA deleted FAQs #46 and #53, stating that they are deleted “due to the discontinuance of the use of the Loan Necessity Questionnaire (SBA Form 3509 and 3510)[,]” and added the following new FAQ #69:
Question: Why is SBA discontinuing use of the Loan Necessity Questionnaire (SBA Form 3509 or 3510)?
Answer: In October 2020, SBA issued two Loan Necessity Questionnaires (SBA Forms 3509 and 3510) to facilitate the collection of supplemental information that would be used by SBA loan reviewers to evaluate the good faith certification made by PPP borrowers on their loan application that economic uncertainty made the loan request necessary to support ongoing operations. Each borrower, that together with its affiliates, received PPP loans with an original principal amount of $2 million or greater was required to complete the form.
On October 26, 2020, SBA published a 30-day notice soliciting comments on the information collection that included the Loan Necessity Questionnaires (85 FR 67809). Additionally, on January 4, 2021, SBA published a 60-day notice soliciting comments on the information collection that included the Loan Necessity Questionnaires (86 FR 172). SBA received 61 comments from members of the public regarding the Loan Necessity Questionnaires, and the majority of the comments raised objections to the questionnaires.
Based on the results of loan reviews that it has completed thus far SBA believes audit resources will be more efficiently deployed across all loans if the loan necessity questionnaire is discontinued. The loan necessity reviews, including the review of the borrower’s completed Loan Necessity Questionnaire, are lengthy and have caused delays beyond the 90-day statutory timeline for forgiveness, thus negatively impacting those borrowers that made their loan necessity certification in good faith.
For these reasons, SBA is discontinuing any reliance on the Loan Necessity Questionnaires.
As a result, First Draw PPP Loan borrowers with loans of $ 2 million or greater that have not applied for forgiveness are the primary beneficiaries of the discontinuance of the forms. However, the withdrawal of the forms does not change the SBA review process for PPP loans. With that said, the deletion of FAQ #53 leaves some uncertainty as to what the SBA will review. By deleting FAQ #53, the SBA removed the wording that it would take into account “the borrower’s circumstances and actions both before and after the borrower’s certification to the extent that doing so will assist SBA determining whether the borrower made the statutorily required certification in good faith at the time of the First Draw PPP loan application.” Emphasis added (see former FAQ #53). As the SBA review procedures have not changed, but there appears to be a shift in focus, all PPP borrowers are encouraged to continue to assemble, document and retain their information that supports “necessity”. See First Draw Loans at or Over $2 Million – SBA Discontinues Use of Necessity Questionnaires and What is Next.”
The remainder of this article discusses the history of the forms.
On March 11, 2021, the American Rescue Plan Act of 2021 (“ARP Act”) was enacted and an additional $7.25 billion was set aside for PPP Loans. Previously, on December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act” or “PPP2 Act”) contained in the Consolidated Appropriations Act, 2021 (“2021 Appropriations Act”) was enacted. The PPP2 Act and 2021 Appropriations Act included several changes to forgiveness documents and processes, and the Economic Aid Act set aside $284 billion for PPP loans, both new First Draw and Second Draw PPP Loans. See our articles "What to Know about the Paycheck Protection Program, Round Two" and "Economic Aid Act: 10 Things to Know about Second Draw PPP Loans." Subsequently, and as a result of the Economic Aid Act, the SBA has released a number of forms and Interim Final Rules regarding amendments to PPP rules, Second Draw Loans, loan forgiveness, and the loan review procedures. On March 3, 2021, the SBA updated the Frequently Asked Questions (“FAQs”) to reflect changes made by the Economic Aid Act, but the FAQs are in the process of being revised to reflect changes made by the Interim Final Rule on Revisions to Loan Amount Calculations and Eligibility posted on the SBA’s website on March 3, 2021.
Takeaway: Borrowers with First Draw PPP Loans of $2 million or greater (or with affiliates that received First Draw PPP Loans totaling $2 million or more) should gather the requested information in anticipation of the lender’s request. The updated FAQ #53 clarifies that the SBA is reviewing all First Draw PPP Loans of $2 million or more and as part of the process, the SBA is requiring the Loan Necessity Questionnaire. The updated FAQ #53 and the SBA’s prior guidance that the “necessity” certification must have been made in good faith at the time of the loan application. However, the updated FAQ #53 also states: "That in its review, SBA may take into account the borrower’s circumstances and actions both before and after the borrower’s certification to the extent that doing so will assist SBA in determining whether the borrower made the statutorily required certification in good faith at the time of its First Draw PPP Loan application.” Updated FAQ #46 and #53 confirmed that Second Draw PPP Loan borrowers will be deemed to have made the required certification concerning necessity and the loan amounts for First Draw PPP Loans and Second Draw PPP Loans will not be aggregated. As such, only First Draw PPP Loans meeting the threshold will be subject to the “necessity” questionnaire. Given the uncertainty as to how this process will be administered and how the information will be used, and there are tight timelines, borrowers should seek legal advice prior to submitting a questionnaire or responding to a request for additional information. Borrowers should also consider delaying submission of their First Draw PPP Loan forgiveness application until they are in a position to respond to the questionnaire. As a reminder, a determination that the borrower did not have a good-faith basis to make the certification will render the borrower ineligible for the loan (and ineligible for forgiveness).
Timing Considerations: If the borrower does not apply for loan forgiveness within 10 months after the last day of the maximum covered period of 24 weeks, or if the SBA determines that the loan is not eligible for forgiveness (in whole or in part), payments on the PPP loan are no longer deferred and the borrower must begin paying principal and interest. Many borrowers received PPP loan disbursements in April-May 2020. Using the maximum covered period of 24 weeks (September-October 2020) and adding 10 months, the deferral runs out in July-August 2021. If the borrower does not apply for loan forgiveness within 10 months after the last day of the maximum covered period of 24 weeks, or if the SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. Deferral may be a good reason to file for forgiveness.
Challenges to the Questionnaire: On December 8, 2020, the Associated General Contractors of America filed a lawsuit in the United States District Court for the District of Columbia seeking, in addition to other remedies, to declare that the questionnaire is arbitrary and capricious, to enjoin the SBA from basing a decision to deny an application for PPP loan forgiveness, or challenging a borrower’s certification, solely or exclusively on the information provided in response to the questionnaire, and to order the SBA to adopt a revised questionnaire that permits borrowers to explain the totality of the circumstances as much as reasonably necessary. FAQ #53 was originally published on December 9, 2020, and revised on March 3, 2021. On January 4, 2021, the SBA announced that it was providing an additional 60 days for public comment on the questionnaire. On March 5, 2021, the AGC provided comments on the form, and the public comment period ended on March 5, 2021. On March 25, 2021, the AGC entered into negotiations with the SBA hoping to settle the pending lawsuit. On May 13, 2021, the AGC stated in a press release: “… the association will continue to talk to the agency about the potential for a settlement of the lawsuit that the association filed against the agency last December.”
Continued Pressure by AGC for Timely Forgiveness: On May 13, 2021, the AGC submitted a detailed request for information to the SBA under the Freedom of Information Act seeking:
- The information the association requires to determine just how long SBA is taking to process applications for the forgiveness of loans over $2 million;
- How that time compares with the time SBA is taking to process applications for the forgiveness of loans under $2 million;
- Copies of all contracts with private companies for assistance in scoring or otherwise evaluating applications for the forgiveness of loans over $2 million;
- Any instructions that SBA has provided either to such companies or to its own employees; and
- Copies of all descriptions, summaries, and explanations of the “multi-factor analysis” that the agency claims to be making.
AGC expects that the SBA will require several weeks to respond, and AGC states that it is prepared to assert its legal rights to the requested information.
On June 23, 2021, AGC of America announced that it “has just learned” that the SBA intends to withdraw the “Loan Necessity Questionnaire.” In early July, the SBA started informing lenders that the Forms were not required. The SBA also asked for approval to discontinue use of the forms. As of this date, the SBA has not formally implemented the withdrawal, and the SBA indicated that it would do so through a Frequently Asked Question.
Purpose of the Forms: In the initial PPP loan applications, and now in the updated forms for First Draw and Second Draw PPP Loans, borrowers are required to make several representations and certifications. One of the certifications continues to deal with the economic conditions of the borrower. Each borrower certifies in good faith that current economic uncertainty made the borrower’s loan request necessary to support its ongoing operations.
According to the SBA, the purpose of these questionnaires “is to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that [a borrower] made on [its] PPP Borrower Application (SBA Form 2483 or Lender’s equivalent form) that economic uncertainty made the loan request necessary.” The SBA is reviewing all First Draw PPP Loans $2 million and up for eligibility (including necessity), fraud or abuse, and compliance with loan forgiveness requirements.
The updated FAQ #53 states: “A request to complete the Loan Necessity Questionnaire does not mean that SBA is challenging a borrower’s certification that is required by the CARES Act. SBA’s assessment of a borrower’s certification will be based on the totality of the borrower’s circumstances through a multi-factor analysis.” The updated FAQ further states: “This certification is required to have been made in good faith at the time of the First Draw PPP Loan application, even if subsequent developments resulted in the loan no longer being necessary. In its review, SBA may take into account the borrower’s circumstances and actions both before and after the borrower’s certification to the extent that doing so will assist SBA in determining whether the borrower made the statutorily required certification in good faith at the time of its First Draw PPP Loan application.”
The questionnaires are seen as screening tools. As discussed below, the borrower will be given an opportunity to provide a narrative response, if the SBA seeks further information. The SBA will review all additional information that the borrower chooses to submit. With that said, a properly completed questionnaire will potentially avoid delays and the need for the SBA to ask for more information.
Borrowers Affected: Each borrower that, together with its affiliates, received a First Draw Loan with an original principal amount of $2 million or greater is required to complete the applicable form and submit it, along with the required supporting documents, to the lender servicing the borrower’s PPP loan. Second Draw PPP Loan borrowers will not be subject to the questionnaire.
Scope of the Information: In the updated FAQ #31, the SBA announced 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." It also specifically stated:
"… Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere …, borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’ Borrowers must 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.” [Emphasis added]. Updated FAQ #31.
In addition, in FAQ #46 and in other interim final rules, the SBA issued guidance with a limited safe harbor providing that any First Draw PPP Loan borrower, together with its affiliates, that received First Draw PPP Loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the First Draw PPP Loan request in good faith. As such, borrowers with loans that exceed that threshold do not satisfy the safe harbor, but 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." FAQ #46. In the updated FAQ #46, the SBA clarified: “…. Because Second Draw PPP Loan borrowers must demonstrate that they have had a 25% reduction in gross revenues, all Second Draw PPP Loan borrowers will be deemed to have made the required certification concerning the necessity of the loan in good faith. The loan amounts received by borrowers for First Draw PPP Loans and Second Draw PPP Loans will not be aggregated.”
Although both the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and FAQ #31 instructed borrowers to assess their need for the loan at the time of application, the SBA’s forms gather information to assess the borrower’s need both at the time of application and during the use of the funds. This was a surprise for most borrowers who were prepared to provide information about “necessity” at the “time of the application” but were not anticipating scrutiny about necessity over the period of use of the funds. In FAQ #53, the SBA clarified that the certification is required to have been made “at the time of the First Draw PPP Loan application, even if subsequent developments resulted in the loan no longer being necessary.” However, the SBA went on to say that the SBA may take into account “the borrower’s circumstances and actions both before and after the borrower’s certification.” At this time, we don’t know how the information “both before and after the borrower’s certification” will be used by the SBA to determine “necessity.”
Information Requested: The information requested in the questionnaires is extensive and somewhat unclear.
Please note that for each question, the borrower may select that the information be designated as “Confidential.” That means whether the answer or information provided in response to the question is “customarily kept confidential.” This designation will be important to most borrowers because the PPP loans are part of a government program and much of the information associated with the program will likely be subject to Freedom of Information Act requests. Borrowers who designate the questionnaire responses as confidential should make sure that the supporting documentation is also marked as “CONFIDENTIAL.”
There are two categories of requested information and a certification:
- Business Activity Assessment (“BAA”) – questions and documentation:
- Documentation of Gross Revenue – the gross revenue of the borrower in the first quarters of both 2019 and 2020 and supporting documentation to justify the revenues reported. (BAA Questions 1 and 2).
- COVID-19 Impacts – since March 13, 2020:
- whether the borrower was ordered (mandatory) to shut down or to significantly alter its operations, and if yes, to provide information regarding reduced or capped number of people at any location, service restricted to outdoors, employee workplace reconfigured, cash outlays, and other information. (BAA Question 3)
- whether the borrower voluntarily ceased or reduced its operations, and if yes, to provide information regarding whether the borrower had employees who contracted COVID-19, or whether COVID-19 significantly disrupted the borrower’s supply chain, and other information. (BAA Question 4)
- whether the borrower voluntarily altered its operations, and if yes, to provide information regarding reduced or capped number of people at any location, service restricted to outdoors, employee workplace reconfigured, cash outlays, and other information. (BAA Question 5)
- Capital Improvement Projects – between March 13, 2020 and the end of the covered period, any new capital improvement projects and cash outlays, (BAA Question 6)
- NAICS code – borrowers must provide their primary six-digit NAICS code. (BAA Question 7)
- Optional – additional comments on any question in the Business Activity Assessment section (1,000-charater max). (BAA Question 8)
Practice Note: In response to BAA Questions 3, 4, 5, and 8, the forms provide “Other” boxes with a 1,000 character max to explain these situations. Borrowers should use these boxes to strategically explain their circumstances at the time of the loan application and to counterbalance any post application change in circumstances.
- Liquidity Assessment (“LA”) – questions and documentation of:
- Cash on hand – the amount of cash and cash equivalents as of the last day of the calendar quarter immediately before the date of the borrower’s PPP loan application. (LA Question 1)
- Dividends and distributions – the amount of dividends or other capital distributions (other than for pass-through estimated tax payments) paid to owners between March 13, 2020, and the end of the covered period. (LA Question 2)
- Prepaid debt –all debt prepayments made between March 13, 2020, and the end of the covered period. (LA Question 3)
- Highly paid owners and employees – the amounts paid to owners and/or employees in excess of $250,000 on an annualized basis during the covered period. (LA Questions 4 and 5)
- Value of the borrower – if publicly traded, value based on market capitalization on the date of the PPP loan application; if privately held, the book value as of the last day of the calendar quarter immediately before the date of the PPP loan application. (LA Questions 6 and 8)
- Ownership – whether their equity was owned by a publicly traded company, private equity or venture capital firm or hedge fund, whether it is an affiliate of another entity, and whether they are owned by a foreign or state-owned enterprise. (LA Questions 7, 9, 10, and 11)
- Other CARES Act benefits – whether or not they received any other benefits through the CARES Act, excluding tax benefits. (LA Question 12)
- Optional – additional comments on any question in the Liquidity Assessment section (1,000-charater max) (LA Question 13)
Practice Note: In response to LA Questions 12 and 13, the forms provide “Other” boxes with a 1,000 character max to explain these situations. Borrowers should use these boxes to strategically explain their circumstances at the time of the loan application and to counterbalance any post application change in circumstances. The boxes can also be used to reference the supplemental information discussed below.
Supplemental Memorandum, Addendum, or Additional Narrative: Due to the uncertainty about how the information will be used and how the process will unfold, it is highly recommended that the borrower submit a supplemental memorandum, addendum, or additional narrative to accompany the Questionnaire to explain why the company certified that its “current economic uncertainty” made the PPP loan request “necessary to support the ongoing operations,” at the time of the application, and to explain any other items highlighted in the Questionnaire. This may be especially critical if the company performed financially well or better than expected after the date of the application. In this way, a borrower can explain its thought process and considerations that influenced the need for the loan, including the nature of the business, workforce considerations, relevant events, customer and supplier considerations, and other factors. It also helps show good faith. The advice of counsel is recommended to review the Form and the supplemental information prior to sending to the lender and the SBA.
Information Not Specifically Requested: Although FAQ #31 and FAQ #37 discussed the borrower’s “ability to access other sources of liquidity,” or “adequate sources of liquidity to support the business’s ongoing operations for a PPP loan[,]” the forms do not ask about this item. We recommend that borrowers be prepared to answer questions related to sources of liquidity and provide documentation if it is requested. In addition, although the for-profit form does not discuss “expenses,” a borrower should consider highlighting or explaining expenses as part of the optional disclosure.
Certifications: The certifications are made by an “Authorized Representative” and address authority, confirmation, of the accuracy of the information in all material respects (after reasonable inquiry of people, systems, and other information available), and acknowledgement of the consequences of a false statement.
Process: The completed form and related information are due to the PPP lender servicing the PPP loan within 10 business days of receipt from the lender. The lender must then submit the borrower’s completed information to the SBA within five business days. At this point, we don’t know if borrowers will receive the request at the time of submission of a forgiveness application or at another time. It appears that submission of the First Draw PPP Loan forgiveness application triggers the questionnaire request. After the form is submitted, the SBA may request additional information, if necessary, to complete the review. In updated FAQ #53, the SBA stated: “When additional information is requested, borrowers will have an opportunity to provide a narrative response to SBA explaining the circumstances that provide the basis for their good-faith loan necessity certification.” The SBA will make a final determination “that a borrower lacked an adequate basis for its loan necessity certification after reviewing any additional information that the borrower chooses to submit.” The SBA’s determination will be based on the totality of the borrower’s circumstances through a multi-factor analysis and a targeted, multi-step approach. Failure to complete the form and provide the required supporting documents may result in the SBA’s determination that the borrower was ineligible for either the First Draw PPP Loan, the First Draw PPP Loan amount, or any forgiveness amount claimed, and the SBA may seek repayment of the loan or pursue other available remedies.
PPP Questions: Because of the many variables that affect each borrower differently, a borrower should consider discussing the loan forgiveness process with legal counsel before submitting the application and other documentation. Schwabe is committed to providing our clients with up-to-date resources to understand the CARES Act and navigate the COVID-19 pandemic. For more information about the PPP Loan Forgiveness Applications, visit our PPP Portal. This article summarizes aspects of the law relevant to the PPP program, it does not constitute legal advice. For legal advice for your situation, you should contact an attorney.
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