The Small Business Administration (SBA) has opened the portal for applications for forgiveness of Paycheck Protection Program (PPP) loans established under the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The commencement of the loan forgiveness application process raises two important questions for many borrowers:
- To what extent will the loan be forgiven?
- Will the loan and application be audited by the SBA?
The answer to the first question is fairly straightforward. A borrower’s loan forgiveness will be determined predominantly by its compliance with the requirements of the CARES Act in terms of its use of proceeds and the documentation it provides as part of its forgiveness application. If a borrower has used the proceeds of a PPP loan for the permitted uses as set forth in the CARES Act and applicable guidance, and provides adequate documentation of that use, the loan should be forgiven.
The question of whether or not a PPP loan will be audited is more complicated. The issue of loan audits arose following news reports on some high-profile companies that obtained PPP loans in the initial round of funding. The SBA responded by issuing somewhat murky guidance regarding the need certification borrowers were required to provide in conjunction with their loan applications. The guidance stated that it would be “unlikely that publicly traded companies that have substantial market value and access to capital markets will be able to make the required certification [regarding need] in good faith.” The combination of bad press and unclear guidance led many large companies to return their loan proceeds and take advantage of a safe harbor provision included in a subsequent guidance stating that if funds were returned by May 14, 2020 the need certification would be deemed to have been made in good faith.
Any PPP Loan Can Be Audited
In conjunction with establishing the safe harbor, SBA stated in the guidance that it would review all loans in excess of $2 million. This has led many borrowers and their advisors to conclude incorrectly that loans of less than $2 million will not be reviewed. However, the language in the guidance clearly states that the SBA “will review all loans in excess of $2 million, in addition to other loans as appropriate, following lender’s submission of the borrower’s forgiveness application.” Consistent with this language, the SBA's interim final rule clearly states that the SBA may review “any PPP loan, as the Administrator deeds appropriate” for the purposes of verifying borrower eligibility, loan amounts and use of proceeds and loan forgiveness amounts. The interim final rule further states that such review may be undertaken “at any time.” Thus, while PPP loans in excess of $2 million are clearly subject to review, no borrower should expect that its loan cannot be audited.
The SBA has not released guidelines or protocols for PPP loan audits. Borrowers should be careful, not only in making certifications and providing documentation in conjunction with forgiveness applications, but in responding to follow-up requests for additional information or documentation. While some of these contacts may seem innocuous, they could be a prelude to further scrutiny of the loan. An adverse PPP loan audit outcome could result in denial of forgiveness or, in a worst-case scenario, civil or criminal penalties or prosecution of responsible individuals. For this reason, borrowers should involve counsel upon the first contact from the SBA following submission of a PPP loan forgiveness application.
If contacted by the SBA, borrowers should gather the following basic documentation before contacting an attorney:
- PPP loan application and supporting documentation.
- 2019 tax returns and financial statements.
- Corporate organization and ownership structure
- Number of affiliated employees
- PPP loan documentation executed
- PPP Loan Forgiveness Application and supporting documentation
- Copies of all emails or other correspondence with lender or SBA
Federal and state governments have numerous criminal, civil and regulatory tools at their disposal to pursue COVID-19-related investigations targeting small and midsize businesses. While the issues these inquiries raise are novel, the strategies that must be deployed to blunt their impact do not differ markedly from other white-collar criminal defense and regulatory compliance engagements.
Additional Information
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