SBA Issues Notice Relating to Its Assessment of Economic Uncertainty

The Small Business Administration (SBA) recently issued a Notice providing additional details that may affect companies participating in the Paycheck Protection Program (PPP) offered in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The SBA Notice, published in the Federal Register on October 26, 2020, asks for public comment regarding drafts or revisions of various forms that the Agency intends to use in reviewing the original applications for loans, as well as those to be utilized currently requesting forgiveness under the PPP.

While it is likely that the forms being reviewed (see list at end of article) will affect a broad swath of borrowers that participated in the Program, the guidance is particularly directed at those businesses that borrowed more than $2 million in loan proceeds that “certified” economic uncertainty at the date of application.

To address this issue, the SBA has requested approval from the Office of Management and Budget (OMB) to release two Loan Necessity Questionnaires, Form 3509 (For-Profit Borrowers) and, Form 3510 (Non-Profit Borrowers), to gather supporting information for these larger loans. Though not officially released by the SBA, draft copies of the forms have been distributed by the media. The forms are expected to be issued after the 30-day comment period ends. These questionnaires will be administered by the SBA through PPP lenders and are intended to provide support for the borrower’s good-faith certifications as to economic need for their loans.

Those borrowers required to complete these questionnaires will find a substantial number of questions regarding the disclosure of significant financial and operational information. A failure to adequately confirm to the Agency’s satisfaction that the proceeds were borrowed by in response to “economic uncertainty” could result in disqualification from the PPP or result in a total denial of loan forgiveness offered under the CARES Act.

Borrower Assessment of “Loan Necessity”

Borrowers will recall that the initial PPP Loan application required a “good-faith” certification at the time of application that the economic uncertainty caused by the national and worldwide pandemic made the loan necessary to support ongoing operations. No further explanatory guidance was provided with application for use by borrowers, or lenders, in evaluating the need for the loan.

In later guidance, included in PPP FAQ #46 and PPP Interim Final Rues issued on May 13, 2020, the SBA provided a “safe harbor” that stated 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.” Of course, the safe harbor does not serve to protect those borrowers who enjoyed loans in excess of the $2 million threshold.

The new Loan Necessity Questionnaire requires each borrower that, along with affiliates, borrowed $2 million or more under the PPP to complete the form, along with supporting documents, and return it to the Lender servicing the PPP loan. Borrowers will have 10 business days after receipt from their lenders to complete and return the forms to the lenders, which will submit them to the SBA.

Borrowers will find that a substantial amount of information will be required to facilitate its completion to the satisfaction of the SBA. As currently drafted, Form 3509 includes a detailed financial assessment of the financial condition of the borrower, which includes the following sections:

Business Activity Assessment (8 questions, many with multiple parts)

This section appears to evaluate second quarter performance by comparing 2019 revenue to 2020 revenue for that quarter as well as requesting detailed narrative responses on how the borrower’s business was voluntarily or involuntarily altered due to the Coronavirus.  The questionnaire also asks for the borrower’s six-digit industry code and if the borrower had begun any new capital improvement projects unrelated to Covid-19 and the approximate cash outlays for these projects.

Liquidity Assessment (13 questions, many with multiple parts)

As one would expect with a liquidity assessment, this section requires that the borrower disclose on the last day of the quarter preceding the application for  the PPP loan its cash and cash equivalents balances, along with supporting documentation. The form further asks if the borrower paid any dividends or other capital distributions (other than for pass-through estimated tax payments) between March 13, 2020, and the end of the loan forgiveness covered period. If such payments were made, detail is requested.

Borrowers are also required to disclose compensation beyond $250,000 on an annualized basis and whether they prepaid other debt. If such payments were made, details are requested. The form also requires disclosure with respect to affiliation, public market ownership and private equity ownership.

Objectives of Questionnaire

It is clear that the thought behind this form and the request for additional information is intended to aid the SBA in meeting its obligation to “maximize program integrity and protect taxpayer resources.” Even excluding loans under $2 million from these requirements leaves an incredible number of loans which require administrative review and consideration. The new questionnaire is intended to streamline that process to a degree.

Obviously, completion of these forms should not be taken lightly. It is expected that, at a minimum, the SBA will use the information gathered in this process to provide sufficient evidence leading to a potential denial of loan forgiveness and, perhaps, harsher penalties such as a requirement that proceeds be returned. For larger borrowers, the loan necessity requirement and the lack of clarity in defining this terminology at the time of the PPP loan application present a number of unusual challenges.

Unfortunately, few borrowers could be expected to fully (if at all) understand the future ramifications of the pandemic at the date of the application. To that end, borrowers can be expected to argue that no one could have known of the economic outcomes at the outset of the program. Further, given the general ease of qualifying for the funds, it could be argued that Congress and the President encouraged participation in the PPP at that time, and that a failure to do so could have been challenged as a lack of fiduciary duty.

Given the lack of clarity as to exactly how the SBA intends to use the information gathered on these new forms, and the uncertainty as to what (if any) future guidance may come out of SBA or Treasury relating to these matters, we recommend that borrowers without proper expertise consult with their advisors in planning to complete this form in the most succinct and prudent means possible. At a minimum, any borrower who received $2 million or greater in PPP loan proceeds should be expecting this form in their future and begin planning accordingly.

Additional PPP Forms on which the SBA is Seeking Comment

The Notice indicates that the Agency is looking for comments on almost every form that they have developed during the course of the program, including:

  • SBA Form 2483, Paycheck Protection Program Borrower Application Form
  • SBA Form 2484, Paycheck Protection Program Lender’s Application for 7(a) Guaranty
  • SBA Form 3507, CARES Act Section 1102 Lender Agreement – Non-Bank and Non-Insured Depository Institution Lender
  • SBA Form 3508, Paycheck Protection Program Loan Forgiveness Application
  • SBA Form 3508S, Paycheck Protection Program Loan Forgiveness Application Form 3508S
  • SBA Form 3508EZ, Paycheck Protection Program Loan Forgiveness Application Form 3508EZ
  • [Form Number N/A], Lender Reporting Requirements for SBA Loan Borrowers
  • SBA Form 3509, Loan Necessity Questionnaire (For-Profit Borrowers)
  • SBA Form 3510, Loan Necessity Questionnaire (Non-Profit Borrowers)

We find it interesting that excepting the last three forms listed, most of these forms have been available, and more importantly, in use, for many months dating back to the earliest days of the program in late March and early April. It is somewhat surprising that comments from the user community are being solicited at this time. Click here to submit a comment before the period ends on November 25, 2020.

If you have questions about PPP loan forgiveness, please contact Bob Grossman, Don Johnston or Mike Weber at 412-338-9300.

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Bob Grossman

Bob, one of the firm’s founding partners, has over 40 years of experience in public accounting. He specializes in tax and valuation issues that affect businesses as well as their stakeholders and owners. Bob has extensive experience working with the Internal Revenue Services and also serves as an expert witness in litigation matters.
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