As per our earlier articles, in late 2020, the SBA began requiring borrowers with First Draw PPP loans $2 million or greater to complete a PPP Loan Necessity Questionnaire (Form 3509 (For Profit Borrowers) or Form 3510 (Non-Profit Borrowers)) as part of the forgiveness process. These forms were the subject of a lawsuit in December 2020 advanced by the Associated General Contractors of America (“AGC”).
On June 23, 2021 and June 24, 2021, the AGC announced as part of its settlement negotiations that the SBA was expected to withdraw the forms. It now appears that on June 21, 2021, the SBA requested the Office of Management and Budget’s (“OMB”) approval to discontinue Forms 3509 and 3510. The SBA letter states:
“… The Loan Necessity Questionnaires had a deterrent effect and prevented program abuse by applicants that could not make the loan necessity certification in good faith. Now that SBA’s program authority has expired, such deterrence is no longer necessary. Furthermore, SBA has been conducting loan necessity reviews, using the Loan Necessity Questionnaires, on loans of $2 million or greater where borrowers have submitted forgiveness applications. A significant number of these reviews have shown that borrowers met the good faith certification requirement.
…Discontinuance of these two forms will reduce the burden on PPP borrowers with loans of $2 million or greater, as they will no longer be required to complete the Loan Necessity Questionnaires to obtain forgiveness of their loans. SBA will also be able to conserve its finite audit and review resources and be better positioned to process forgiveness decisions within the statutory deadlines.”
In the first two weeks of July, the SBA began notifying PPP lenders that the lenders will not be required to obtain the Necessity Questionnaires as part of the forgiveness process. 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.
Necessity Review Continues: As a result, First Draw PPP Loan borrowers with loans $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.)
Support and Documentation Are Still Needed: 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,” and in particular, use the information requested in the Forms as a possible checklist. See “First Draw Loans $2 Million and Up and the PPP Necessity Questionnaires.” Borrowers should be prepared to present their narrative or rationale on “necessity” if it is requested or during a review. Borrowers should also assemble and maintain information for eligibility, the calculation of the loan amount, and the use of funds. See “Updated Key Considerations for PPP Documentations under the Economic Aid Act.”
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.