The CARES Act provides for fully forgivable Paycheck Protection Program (“PPP”) loans to qualifying businesses. On June 1, 2020, after roughly two months of operating the PPP, the SBA finally promulgated both (1) Forgiveness Requirements and (2) Review Procedures.¹ PPP Loan Forgiveness Requirements, 85 Fed. Reg. 33004 (to be codified at 13 C.F.R. Pt. 120) (“Forgiveness Requirements”); Paycheck Protection Program-SBA Loan Review Procedures and Related Borrower and Lender Responsibilities, 85 Fed. Reg. 33010 (to be codified at 13 C.F.R. Pt. 120) (“Review Procedures”). The Rules are effective immediately, despite a two-month delay in their promulgation. Both Rules contain identical language noting that “[a]n immediate effective date also is necessary for PPP lenders who generally will make the loan forgiveness determinations as provided in the CARES Act.” Forgiveness Requirements at 33005, Review Procedures at 33011.
The Forgiveness Requirements provide that the borrower must submit a Loan Forgiveness Application (“LFA”) to the lender, which is in turn reviewed by the lender for a decision on loan forgiveness. Id. at 33005. The lender has 60 days from receipt of the LFA to issue a decision on loan forgiveness to the SBA. Id. If the lender denies the loan forgiveness application, the borrower may request review by the SBA. Review Procedures at 33013. The lender must request payment from the SBA at the time it issues its decision to the SBA. Forgiveness Requirements, id. at 33005. The SBA may then review the loan and loan application and must then pay the lender the forgiveness amount within 90 days. Id. at 33005. Thus, the forgiveness process can take up to 5 months to complete. Id. The recently passed Paycheck Protection Program Flexibility Act (“PPPFA”) extends deferment of any payments on a PPP loan until the time that any forgiveness payment is remitted to the lender. Section 3(c), to be codified at 15 U.S.C. § 636(a)(36)(M)(ii)(II).
Importantly, the SBA reviews not only the claimed amount of the forgiveness, but also the borrower’s initial eligibility for the PPP loan. Review Procedures at 33011-012. The CARES Act’s nonrecourse provision, 15 U.S.C. § 636(a)(36)(F)(v), “limits SBA’s recourse against individual shareholders, members, or partners of a PPP borrower for nonpayment of a PPP loan only if the borrower is an eligible recipient of the loan.” Review Procedures at 33012-013. Furthermore, the borrower’s principals also lose any protections against recourse by the Government. If the SBA determines that the borrower was ineligible for the loan or that the borrower lacked an adequate basis for its certification of necessity at the time it received the loan, then the loan will not be eligible for forgiveness. Id. at 33005.² Although disputes over whether particular expenses give rise to loan forgiveness are likely, the most critical issue is whether a borrower was eligible for the PPP loan at the time it applied. An adverse ruling on loan eligibility could have ruinous consequences for a borrower who has already spent funds and structured its affairs in erroneous reliance on the PPP forgiveness provision.
If a borrower wishes to appeal the SBA’s determination that the borrower is ineligible for a PPP loan or the loan forgiveness amount claimed, then the borrower may further appeal that decision. The Review Procedures announce that the SBA will issue a “separate interim final rule addressing this [further] appeal process.” Id. at 33013. Because this loan forgiveness may be reviewed under a standard deferential to the initial determination, whether in a further agency process or in court, borrowers should be cautious about requesting, obtaining, and using PPP loans if there is any doubt about eligibility for the program.
¹Although these regulations were promulgated simultaneously, and are overlapping in their subject matter and language, they were promulgated as separate, but sequentially paginated rules in the Federal Register.
²Importantly, the SBA determines eligibility based upon the statutory and regulatory provisions in place at the time of the borrower’s loan application. Id. at 33006. This provides at least partial protection against post-hoc interpretations that narrow eligibility or place restrictions on PPP loans. However, the Government has also repeatedly extended an amnesty period for borrowers to return their loans if they determine that they are ineligible based upon the evolving guidance provided by the Government. Thus, borrowers should assume that the Government will apply new amendments and amended statutory language to previously issued loans and govern themselves accordingly.