On May 22, 2020, the Department of the Treasury, in coordination with the Small Business Administration (“SBA”), issued an Interim Final Rule – Business Loan Program Temporary Changes; Paycheck Protection Program – SBA Loan Review Procedures and Related Borrower and Lender Responsibilities (the “IFR”). The IFR describes the SBA’s process for reviewing PPP loan applications and loan forgiveness applications. The IFR is effective immediately, but could be subject to further change to address issues raised by the public comments process.

Background: The recent issuance of certain SBA guidance has intensified some borrowers’ focus on the SBA’s loan review process. On April 23, 2020, the SBA issued guidance in the form of a FAQ stating that PPP borrowers must assess their economic need for a PPP loan in light of the then current economic uncertainty in order to be able to certify that the PPP loan is necessary to support the borrower’s ongoing operations. 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. SBA guidance as to what constitutes “necessary” has been vague. It has stated that, in making the certification, “[b]orrowers must take 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.”

Then on May 13, 2020, the SBA issued further guidance in the form of another FAQ, in which it stated it will review the certifications made by PPP borrowers regarding the “necessity” of the loans. That guidance further established a safe harbor that any borrower that, together with its affiliates, received 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 loan request in good faith. For loans in the original principal amount greater than $2 million, this still remains a cloudy area. The May 13th guidance confirmed that such borrowers may still have an adequate basis for making the required good-faith certification based on their individual circumstances. It further indicated that all loans with an original principal amount in excess of $2 million will be subject to review by the SBA for compliance with program requirements. If the 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, the 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 the SBA, the 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.

May 23, 2020 Interim Final Rule: The most recent IFR issued on May 23, 2020, provides greater detail regarding the procedures for conducting PPP loan and forgiveness application reviews, and the responsibilities of both borrowers and lenders with respect thereto. Key provisions of the IFR, particularly as they relate to PPP borrowers, are as follows:

Broad SBA authority: Notwithstanding the safe harbor afforded to loans of an original principal amount of less than $2 million, the SBA may review any loan, and in so doing, may review (a) whether the PPP borrower is eligible for the loan at the time it submitted the loan application; (b) whether the borrower calculated the loan amount correctly and applied the loan proceeds for allowable uses specified in the CARES Act, and (c) whether the borrower is entitled to loan forgiveness in the amount claimed on the borrower’s Loan Forgiveness Application.

Timing: Importantly, the SBA may undertake a review at any time in its discretion. Borrowers must retain their PPP documentation for six years after the date the loan is forgiven or repaid in full, and during that time, permit SBA representatives access to such files upon request. In the course of a review, if the SBA makes a determination that the borrower may be ineligible for a PPP loan or may be ineligible to receive the loan amount or the loan forgiveness amount, the SBA will require the lender to request further documentation from the borrower; the borrower’s failure to respond to the request “may result in a determination that the borrower was ineligible for a PPP loan or ineligible to receive the loan amount or loan forgiveness amount. The combination of a lack of articulated clarity with respect to the “necessity” of the PPP loan and the lack of a more abbreviated and precise timeframe for the review could foster considerable uncertainty for businesses that may need to establish reserves in anticipation of an adverse outcome; that in turn could have the unfortunate effect of thwarting the intended purposes of the CARES Act or restarting the economy.

With respect to Loan Forgiveness Applications submitted by a borrower to its lender, the lender must issue a decision to the SBA on that application within 60 days after receipt of the completed application. That decision may be in the form of either (a) approval in whole or in part, (b) denial, or (c) a denial with prejudice due to a pending SBA review of the loan. If the lender determines that the borrower is not entitled to forgiveness in any amount, it shall so notify the SBA of its reason therefor, as well as notify the borrower. Within 30 days of notice from the lender, the borrower may request that the SBA review the lender’s decision.

Consequences of an adverse determination: If the SBA determines that the borrower is ineligible for the PPP loan, the SBA will direct the lender to deny the Loan Forgiveness Application. If the SBA determines that the borrower is ineligible for the loan amount or loan forgiveness amount claimed by the borrower, the SBA will direct the lender to deny the Loan Forgiveness Application in whole or in part, as appropriate, may seek repayment of the outstanding PPP loan balance, and may “pursue other remedies.” The IFR further suggests that the non-recourse features of PPP loans are only afforded to eligible borrowers, so that if a borrower is determined to be ineligible, it could potentially expose individual shareholders, members, or partners of the borrower to liability for the loan and its repayment.

Appeal: A borrower may appeal any adverse decision with respect to a PPP loan (eligibility, amount of the loan, or the amount of the loan forgiveness). The SBA intends to issue a separate interim final rule addressing this process.