Since its inception in March of this year, the Paycheck Protection Program ("PPP") has provided hundreds of billions of dollars in SBA-guaranteed loans to help American small businesses through the COVID-19 pandemic. These loans were particularly attractive to many borrowers due to provisions making them fully forgivable under certain conditions. But now that the funds have been allocated (over 5.2 million loans totaling more than $525 billion as of August 8, 2020), many PPP borrowers are beginning to think about what comes next. Specifically, what happens if their loan forgiveness application is denied, or partially denied, by the SBA? What happens if the government decides the borrower wasn't eligible for a loan after all? Will they have to pay back the money? Will there be other penalties or consequences? And what rights does the borrower have to challenge these types of decisions?
On April 28, 2020, U.S. Treasury Secretary Steven Mnuchin made headlines by pledging to conduct a "full audit" of all PPP loans over $2 million and threatening to refer bad faith borrowers to the Department of Justice for criminal prosecutions. While many borrowers were understandably concerned about the Secretary's comments, subsequent administrative guidance from the Treasury and the SBA shed some additional light on how these audits will proceed. Two sets of regulations from the SBA, in particular, have provided important information for borrowers to be aware of as they look towards defending and/or appealing a potential audit of their PPP loan. First, on May 28, 2020, the SBA published a detailed interim final rule titled "SBA Loan Review Procedures and Related Borrower and Lender Responsibilities." Those regulations clarified that the SBA may review any PPP loan (not just those over $2 million and not just those that apply for forgiveness) in its sole discretion and revealed that the SBA is authorized to review any of the following in an audit: (a) borrower eligibility for a PPP loan; (b) loan amounts received and the use of loan proceeds; and (c) loan forgiveness amounts claimed on a forgiveness application. Borrowers should be aware of three (3) important take-aways from these May 28 regulations that will impact a potential audit:
- Audit Deadline and Record Retention. An audit may be conducted at any time, in the SBA's sole discretion, and PPP borrowers are required to retain all of their PPP documentation for six (6) years after the date their loan is forgiven or repaid in full. The more documentation the borrower keeps, the better their chances of defending an audit. Borrowers should thus err on the side of being over-inclusive with such records.
- Eligibility. Borrower eligibility (a major concern after Secretary Mnuchin's strong warnings in April) will be reviewed as of the time of the borrower's application. In other words, a borrower's current financial situation should be irrelevant to whether that borrower was eligible for the PPP under the need-based criteria; the question that matters is whether economic uncertainty made the loan necessary based on the facts known to the borrower at the time of their PPP application.
- Response to SBA Inquiry. If the SBA raises any flag during its review of a PPP loan or a forgiveness application, it will request additional information from the borrower concerning that issue (either through the PPP lender or directly from SBA itself). Failure to respond to such a request for additional documentation may result in an adverse determination, so a quick response from the borrower is essential.
Next, on August 11, 2020, the SBA released its long-promised interim final rule outlining the regulations for "Appeals of SBA Loan Review Decisions Under the PPP." This latest interim final rule for the PPP creates specific rules and procedures for an appeals process that can be invoked by a borrower after it receives an adverse review decision from the SBA. Borrowers should be aware of five (5) key provisions from these August 11 procedures.
- Scope of Appeal. A borrower has the right to appeal to the SBA Office of Hearings and Appeals any final, written decision from the SBA that finds the borrower: (1) was ineligible for a PPP loan; (2) was ineligible for the PPP loan amount received or used the PPP loan for unauthorized uses; (3) is ineligible for PPP loan forgiveness in the amount determined by the lender in its full approval or partial approval decision issued to SBA; and/or (4) is ineligible for PPP loan forgiveness in any amount when the lender has issued a full denial decision to SBA. But the borrower cannot appeal a forgiveness determination made by the lender (only the final decision from SBA) or any determination about a PPP loan made by the SBA's Office of Inspector General.
- Deadline. The deadline for filing an appeal petition is the earlier of thirty (30) calendar days after: (1) the borrower's receipt of the final SBA loan review decision; or (2) the borrower's receipt of notification from its lender of the final SBA loan review decision. Because this 30-day window is so small and an untimely appeal is subject to mandatory dismissal by the administrative judge, time is of the essence in filing a formal appeal if one becomes necessary.
- Expedited Procedure. Subject to certain extensions that might apply, the appeal will generally be fully concluded, and the assigned administrative judge will issue a preliminary opinion, within ninety (90) days. Discovery and admission of evidence beyond the administrative record (i.e. relevant documents the SBA considered in making its decision) are severally restricted and there will not normally be an oral hearing.
- Further Review. Either party may request reconsideration, under certain circumstances, of an initial decision within ten (10) calendar days. Otherwise (or after the request for reconsideration is resolved), any party may file a request for review by the SBA Administrator within thirty (30) calendar days. If the borrower has still not prevailed following both of these steps, they may then seek review of the decision from a United States District Court.
- Protection of Confidential Information. Any filings made during one of these appeal proceedings that contain confidential business and financial information, personally identifiable information, source selection sensitive information, income tax returns, documents and information covered under 13 CFR 120.1060, or any other exempt information are not subject to a Freedom of Information Act request from the public. Further, either party may seek a protective order from the administrative judge for any document filed in the appeal or exchanged in discovery as necessary to protect this type of information.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.