Recent Guidelines on PPP Loan Forgiveness
Kerry M. Lavelle • April 29, 2020
On Tuesday, April 28, 2020, Treasury Secretary Steven Mnuchin indicated that certain borrowers of Paycheck Protection Program (“PPP”) loans will face scrutiny through a loan audit process to ensure that the loan proceeds are being used properly prior to forgiveness of the loan and that borrowers are able to, in good faith, certify the business necessity of the loan.
The loan “audit” is not the same as a federal tax audit; it is not intended to be a federal tax audit, but rather, to ensure that the PPP loan proceeds are being spent properly, the conditions for forgiveness were met, and that other borrower covenants made with the PPP loan application were accurate.
Mnuchin stated that PPP loans of more than $2M would face full audits with spot checks for smaller loans. Currently, the government is issuing about $660B in loans that can be forgiven if borrowers use them to retain or rehire employees along with other conditions.
Typically, the SBA relies on lenders to service and manage SBA loans. However, in this case, in order to expedite the loan process for small businesses to take advantage of keeping employees on the payroll, the federal government has given local banks and servicers an indemnity where they will not be liable for the fraud of borrowers. Borrowers need only to provide the necessary documentation to its lender required pursuant to the law.
With $660B at stake, that leaves the responsibility to the SBA for ensuring that businesses use the loan money properly.
The SBA has proven to be poor auditors of their own loans in the past. In a 2011 audit of lending to combat the global financial crisis, the agency’s inspector general found “documentation deficiencies” in 40% of the loans it reviewed, resulting in inappropriate, unsupported loan approval.
The general rules are that as long as 75% of the loan is used for salaries, you maintain the same number of employees, and maintain the same payroll, the loan is to be forgiven. But the poorly drafted and hastily passed legislation created many questions among lenders, borrowers, and other professionals. As evidence, the Treasury Department and the SBA have updated their guidance for the program, issued interim rules, modified the application and published FAQs, multiple times since the program started accepting loans on April 3, 2020.
On April 29, 2020, the SBA added that borrowers with adequate sources of liquidity would be unlikely to qualify for the PPP loans, without further detail. The SBA did not address the PPP loans that were already funded but not yet forgiven.
The media has also been reporting cases of large, sometimes public, corporations properly qualifying for the PPP loans, but now returning the money to the government. Many smaller businesses despite submitting applications, failed to receive a loan because the program ran out of funds.
What are the take-aways?
- As of this writing, if your loan is over $2M, you are being told in advance, that you will be audited.
- If your loan is less than $2M, it is probably unlikely that you will be audited, but proceed as though you will be audited.
- Continue to monitor press releases, news stories, and PPP loan updates from your professionals on updates to the loan program. The changes are not done, and the forgiveness detail is still in a state of flux.
- Gather substantiation on all disbursements of PPP loan proceeds.
- At the end of the covered period, you will be asked to prepare a certification that the money was used properly. Have it reviewed by your legal or financial professionals.
Continue to be aware of the constant updates of the law, and if you have any questions contact Kerry Lavelle at klavelle@lavelle.com.
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