$249 billion in loans have now been allocated pursuant to the CARES Act’s Paycheck Protection Program. (“PPP”) The volume of the loans is attributable both to the scale of the economic disruption caused by the Coronavirus and the extraordinarily generous forgiveness provision of the PPP. Loans under the PPP are eligible for forgiveness if employers maintain headcount and salaries and they use the money for eligible expenses, including payroll, rent, and utilities. CARES Act Section 1106(b). Amounts forgiven are treated as a normal SBA-guaranteed loan that is defaulted in that they are purchased by the SBA and the lender is thereby repaid. Section 1106(c). Under the PPP, the SBA guarantees and pays principal and interest in the event of forgiveness. 1106(c).
Under the PPP, the borrower submits the forgiveness application to the lender, and not the SBA. 1106(e). The lender then determines whether the loan is forgivable based only upon supporting documentation and borrower certification.1 1106(f)-(h). Under the PPP, the SBA has no clear textual role in this process, other than to pay the amount of forgiveness to the lender. However, both the statute and the Interim Rule promulgated thereunder imply SBA review of lender determinations. Section 1106(e)(4) (calling for “any other documentation the Administrator determines necessary”); SBA Business Loan Program Temporary Changes; Paycheck Protection Program, Interim Final Rule, Docket No. SBA-2020-0015, 13 CFR Part 120, III(4)(e) (referring, in the context of the advance purchase provision, to a requirement of “and any additional information the Administrator may require to determine whether the expected forgiveness amount is reasonable.”) The lender benefits from a “safe harbor” provision that allows a lender receiving and reviewing all required documentation to rely upon such documentation in determining loan forgiveness without fear of later penalties or enforcement action by the SBA. 1106(h).
Because the lender can be repaid before the covered period ends,2 or shortly thereafter, the lender has a strong incentive to determine that the loan is forgivable. If the lender determines that the loan is not forgivable, it will anger a customer. Further the borrower, who will owe the lender a large sum, will perceive that the lender has thwarted its claim for loan forgiveness and will inevitably assert a defense or counterclaim in any collection action. Lastly, any controversy surrounding the forgiveness will inevitably call into question the lender’s underwriting process.3 Thus, lenders are strongly incentivized to determine that all eligible loans are forgivable.4
In the event the lender, perhaps due to informal SBA pressure, refuses to treat a loan as forgivable, the PPP creates no explicit right of action or process for the borrower to contest this determination.5 However, borrowers have litigated the forgivability of loans under other emergency SBA programs without any party questioning the procedural right to do so. See e.g. Pottharst v. Small Business Administration, 329 F.Supp. 1142 (E.D. La. 1971) (allowing forgiveness of loan due to property damage that could have been insured but was not insured due to the borrower’s neglect). When litigating other loan forgiveness programs, such as student loan forgiveness, courts have also reviewed such claims on the merits without suggesting that the suffer from any procedural infirmity. See e.g. Chavez-Romero v. DoE, 6:11-1639-MGL (D.S.C. Nov. 28, 2012) (discussing pro se claim on the merits without discussing cause of action); and Drake v. DoE, 3:14CV30 DPJ-FKB (S.D. Miss. Feb. 17 2015) (suggesting that a borrower might contest forgivability under the Administrative Procedures Act after an administrative garnishment proceeding by attacking the agency action as arbitrary and capricious.)
Although it is unlikely that a lender would rule against the forgiveness of a government guaranteed loan it has extended to its customer, in such an event, or in the event that the SBA, for whatever reason, disagrees with the lender’s determination, it is likely that the borrower could litigate that determination, via a declaratory judgment, defense to a collection action, or under the Administrative Procedures Act.
Businesses who have not yet applied for a PPP loan are encouraged to contact counsel for advice regarding their application and use of PPP funds to ensure that their entire loan amount is eligible for forgiveness.
¹The delegation appears on the face of the statute, not under an SBA rule. Binding Supreme Court caselaw supports a Congressional delegation of such adjudication to a private entity. Schweiker v. McClure, 456 U.S. 188 (1992) (holding that Congress may provide hearings on disputed Medicare payments held by private insurance carriers without further right of appeal outside the private company, without violating due process). However, there is no evidence that Congress intended to create such a procedure in the CARES Act, as, unlike in McClure, there is no specified procedure at all, and it is not clear, as explained later, why a lender would rule against a borrower. As discussed infra, a borrower may contest a determination by the government agency administering a loan forgiveness program.
²The CARES Act has an “Advance Purchase” provision that allows lenders with loans that are expected to be forgiven to sell such loans to the SBA toward the end of the 8-week covered period after the loan closes. 1106(c)(4).
³Here too, however, the lender receives the benefit of a safe harbor provision. SBA Business Loan Program Temporary Changes; Paycheck Protection Program, Interim Final Rule, Docket No. SBA-2020-0015, 13 CFR Part 120, III(3)(c). If the lender receives the required documentation and attestation, the lender may rely on the documents and attestation. Id. The SBA has specifically found that this rule regarding underwriting is consistent with the safe harbor applicable to loan forgiveness. Id.
4Borrowers, of course, remain liable for any false claims for either loans or forgiveness. https://www.ansalaw.com/the-benefits-and-risks-of-the-cares-act-small-business-paycheck-protection-program/
5Remedies for businesses denied for loans in the first instance are discussed in my separate article, Remedies for Disappointed Prospective Borrowers Under the Paycheck Protection Program, available at: https://www.ansalaw.com/remedies-for-disappointed-prospective-borrowers-under-the-paycheck-protection-program/