On May 22, 2020, the Small Business Administration (SBA) released its latest round of FAQs, clarifying lender responsibilities for Paycheck Protection Program (PPP) loans.
The guidance covered the following areas:
- SBA reviews of individual loans
- Loan forgiveness process for lenders
- Lender fees
Below, explore how the guidance impacts lenders in particular as well as considerations for financial institutions as they assess their readiness for processing borrower forgiveness applications.
SBA Reviews of Individual PPP Loans
What did the guidance clarify?
Reviews
The guidance indicated the SBA could review any PPP loan deemed appropriate. It also stated reviews would focus on the following:
- Borrower eligibility
- Loan amount
- Use of proceeds
- Forgiveness amount
The SBA indicated the loans could be of any size and it could undertake the review at any time at its discretion.
If the SBA review generates questions or potential issues, the SBA will either require lenders to contact the borrower for additional information, or the SBA may require additional information from the borrower.
If the SBA determines the borrower is either ineligible for the PPP loan, the loan amount, or forgiveness amount claimed, the SBA will direct the lender to deny the loan forgiveness application in whole or in part, as appropriate. The SBA may also seek repayment of the loan or pursue other remedies.
Documentation
While borrowers are required to retain PPP documentation for six years after the date the loan is forgiven or paid in full, lenders are also required to comply with applicable SBA requirements for records retention.
What should lenders keep in mind?
While the SBA may go directly to the borrower with questions or requests, they can also use the lender as an intermediary in the process.
Lenders should be prepared for the possibility of the SBA contacting them with questions and requests related to individual loans. Policies and procedures should be established to help ensure a uniform approach to the SBA requests, interactions with borrowers, and information provided.
The Loan Forgiveness Process for Lenders
What did the guidance clarify?
The Lenders’ Role in the Forgiveness Process
The guidance helped provide more detail on what lenders should obtain from a borrower, including certifications contained in the Loan Forgiveness Application Form, underlying documents to help verify accurate completion of the form, and calculation confirmations on the form.
The guidance provides specific examples of support to obtain and portions of the form, which can be used for verifying accuracy.
Providing an accurate calculation of the loan forgiveness amount is the borrower’s responsibility, according to the guidance, but it reaffirms that lenders are expected to perform a good-faith review of the calculations and supporting documentation. Also included is an example of review required for payroll costs. Costs supported by a report from a recognized third-party payroll provider would require less review than payroll costs supported with other documentation.
The lender should work with the borrower to remedy errors in the borrower’s calculation or a material lack of documentation to support the borrower’s application. However, the lender may rely on the borrower’s representations and doesn’t need to independently verify information provided by the borrower with third parties.
Timing of Lender and SBA Reviews
A lender must review the borrower’s forgiveness application and submit a decision to the SBA within 60 days of receipt of a complete loan forgiveness form from the borrower.
Subject to the SBA’s review of a loan and application, the SBA will remit the forgiveness amount to the lender, plus any interest accrued through the date of payment, no later than 90 days after the lender provides the SBA with its decision.
What to Submit
When a lender provides the SBA its decision for forgiveness, it must include the following:
- The PPP Loan Forgiveness Calculation Form
- PPP Schedule A
- The PPP Borrower Demographic Information Form
The third item is optional for the borrower to complete, but if they do, it must be provided to the SBA by the lender.
The lender must also confirm the information in the form matches the lender’s records for the loan. If the lender determines the borrower isn’t eligible for any forgiveness, the lender must provide the SBA the above information and notify the borrower in writing that they’ve denied the loan forgiveness application.
When the SBA Selects Loans to Review
If the SBA reviews a loan, the lender is required to notify the borrower within five days that the loan is being reviewed. Additionally, the lender must provide the SBA with the following:
- Borrower Application Form, including all supporting documentation received by the lender
- Loan Forgiveness Application, including all supporting documentation received by the lender
- Copy of the Schedule A Worksheet from the borrower
- Signed and certified transcript of the account
- Copy of the executed note evidencing the PPP loan
- Any other documents related to the loan requested by the SBA
Any information received by the lender from the borrower must be forwarded to the SBA within five days.
What should lenders keep in mind?
The guidance provided clarification in many areas for lenders, but there are still open questions and items to consider.
Policies and Procedures
The guidance clarifies that the lender’s role involves more than accepting forms from the borrower, and they should be prepared for the SBA’s review of loans.
Lenders should set policies and procedures for consistently collecting and storing accurate and complete documentation from borrowers. This will help them verify that they’re submitting consistent documents to the SBA during the review process.
Supporting Documentation
The SBA guidance helped provide some clarity around expectations for lenders related to appropriate levels of documentation; however, there are still many questions.
At a minimum, lenders must make sure there isn’t a material lack of substantiation of support from a borrower. The SBA’s definition of a material lack of support and the level of support lenders would want to collect aren’t clear.
In some cases, what would be considered an appropriate level of documentation, such as third-party reports, is provided as an example of what would meet the SBA’s criteria. However, lenders will have to plan for differing documentation sources given each borrower and expense category. The ease in substantiating a payroll report is likely to be different than rent expense, for example.
Lenders will need to set guidelines for appropriate levels of supporting documentation in advance of the forgiveness process. They will want to consider each expense category, and what level of documentation will be available to the borrower and acceptable to the lender, well in advance of the forgiveness process.
Recourses
Lenders should make sure they have sufficient recourses to navigate the forgiveness process.
After the initial rounds of PPP loan funding, many lenders noted that the process was cumbersome and difficult on lending staff. Consider looking at technical and staffing resources to evaluate the need for increased resources, either internal or external, to verify their ability to meet the SBA’s requirements and borrowers’ expectations.
Learn more about this process and possible solutions.
Lenders also discussed the possibly of staggering the forgiveness application submission from borrowers to smooth the flow of applications through the lenders’ review process; however, it isn’t clear if this will be allowed, or if the submission timing must be driven by the borrower.
Lender Fees
What did the guidance clarify?
The guidance clarified if the SBA determines the borrower was ineligible for a PPP loan, that the lender isn’t eligible to receive the processing fee.
The fee is subject to a clawback for one year from disbursement if the SBA subsequently performs a review and determines the borrower was ineligible for a PPP loan. The SBA determination that a borrower is ineligible won’t impact the guarantee on the loan if the lender met its obligations under PPP regulations.
If the SBA determines the lender didn’t meet its obligations under PPP regulations during the origination of the loan, the SBA will seek repayment of the lender processing fee from the lender and may determine that the loan is ineligible for a guaranty.
What should lenders keep in mind?
This portion of the guidance helps demonstrate how important it is for the lender to fulfill its obligations under PPP regulations for the origination of the loan and processing of forgiveness.
Lenders should be proactive to make sure they have sufficient documentation available from the loan origination and to educate borrowers of expectations for the documentation needed in the forgiveness process.
We’re Here to Help
For more details about the PPP program, contact your Moss Adams professional. Additionally, if you’d like assistance in the PPP forgiveness process for your institution, explore our tools and solutions.