On December 9, 2020, the SBA updated its Frequently Asked Questions document for PPP lenders and borrowers with FAQ #53, which addresses the Loan Necessity Questionnaire we first told you about several weeks ago.
As a refresher, on October 26, 2020, the SBA issued a notice seeking approval from the Office of Management and Budget (OMB) for the collection of information from recipients of PPP loans of $2 million or greater.
The notice provided for the issuance of two Loan Necessity Questionnaires, which appeared to be part of the SBA's review process to assess borrowers' good-faith certification of their economic need:
Since then, information on these questionnaires has been scant. The SBA's comment period on the questionnaires was scheduled to run through November 25, and even though there have been no updates since that date, we have heard anecdotally from a few of our clients that they have already begun to receive the questionnaires from their lenders.
However, the newly-issued FAQ #53 provides some additional information. It states:
As previously announced, SBA is reviewing all loans of $2 million or more, and other loans as appropriate, for eligibility, fraud or abuse, and compliance with loan forgiveness requirements. As part of this process, SBA is providing a Loan Necessity Questionnaire to lenders for them to provide to PPP borrowers that, together with their affiliates, received loans of $2 million or more. Upon request from their lender, borrowers should return the completed questionnaire to their lender within 10 business days of receipt.
The information that borrowers provide on the questionnaire will help SBA assess those borrowers’ certification in their loan application that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” as required by the CARES Act.
A request to complete the Loan Necessity Questionnaire does not mean that SBA is challenging a borrower’s certification that is required by the CARES Act. SBA’s assessment of a borrower’s certification will be based on the totality of the borrower’s circumstances through a multi-factor analysis. As described in FAQ #46, SBA will assess whether the borrower had adequate basis for making the required good-faith certification, based on its individual circumstances in light of the language of the certification and SBA guidance. This certification is required to have been made in good faith at the time of the loan application, even if subsequent developments resulted in the loan no longer being necessary. In its review, SBA may take into account the borrower’s circumstances and actions both before and after the borrower’s certification to the extent that doing so will assist SBA in determining whether the borrower made the statutorily required certification in good faith at the time of its loan application.
After a borrower submits its completed questionnaire, SBA may request additional information, if necessary, to complete its review. When additional information is requested, borrowers will have an opportunity to provide a narrative response to SBA explaining the circumstances that provided the basis for their good-faith loan necessity certification. SBA will make a final determination that a borrower lacked an adequate basis for its loan necessity certification after reviewing any additional information that a borrower chooses to submit. This targeted, multi-step approach will ensure the integrity of the evaluation process and expeditious processing, as well as properly allocate SBA’s finite resources to those loans that require additional review.
The wording the SBA used in this sentence, in particular, is interesting: "This certification is required to have been made in good faith at the time of the loan application, even if subsequent developments resulted in the loan no longer being necessary."
Many PPP loan recipients have been concerned about the possibility that the SBA will determine they did not act in good faith in applying for the loan, simply because their worst fears did not materialize and business conditions ultimately did not deteriorate to the point that the loan became a critical lifeline for keeping the company afloat.
Hindsight is always 20/20, and it would seem unfair to punish a company for taking a PPP loan at a time when circumstances seemed very dire, only to realize months later that things did not turn out as badly as they feared. That was not the intention of Congress in authorizing the Paycheck Protection Program under the CARES Act, and there were many who felt that the SBA was acting in opposition to Congress' wishes by subjecting the loan forgiveness process to undue levels of scrutiny.
There is still a great deal of uncertainty surrounding the PPP loan forgiveness process, and while this most recent FAQ does provide some additional clarity, we do not expect this to be the final word on the matter. We will continue to monitor this issue and the related questionnaire, and we will provide further information as it becomes available on the topic as well as other related CARES Act accounting issues.
As always, if you have any questions about these or any other matters, please contact your Kreischer Miller relationship professional or any member of our team. For additional PPP loans-related news and resources, visit our COVID-19 Business Resources center.
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