SBA to Drop Its Review of PPP Loans of $2 Million and Above

Applying for Paycheck Protection Program loan forgiveness is about to get easier for bigger borrowers.

After months of requiring financial documentation proving need from borrowers with PPP loans of $2 million or more, the Small Business Administration took steps this week to roll back some of those requirements. The effort marks an about-face for the agency that landed in hot water after allowing publicly traded companies to access the program intended for small businesses. It also signifies a swifter forgiveness process for some borrowers.

On Tuesday, the SBA began informing lenders that it plans to eliminate the loan necessity review for PPP loans of $2 million or more, adding that it plans to publish a FAQ on the subject “shortly.” And effective immediately, the SBA says it will no longer request the loan necessity questionnaire (SBA Form 3509) for any PPP loan reviews. (It will also pull the non-profit loan necessity questionnaire,  SBA Form 3510.) The agency did not respond to a request to confirm its plans to roll back its financial reviews of larger borrowers; Inc. reviewed a copy of the letter it sent lenders.

In October, the agency began asking lenders to provide loan necessity questionnaires to both for-profit and non-profit borrowers with PPP loans of $2 million or more. Smaller borrowers, rather, simply had to self-certify the potential for need. 

“It’s a time and money savings,” says Carmen Calzacorta, a corporate transactional attorney with Schwabe, Williamson & Wyatt, a law firm with offices across the Pacific Northwest. She notes that the additional financial checks and supplemental reviews had pushed some forgiveness requests out eight months, beyond the typical five-month decision timeframe. The lender, filing the forgiveness application on behalf of the borrower, has 60 days before it needs to submit anything to the SBA; the SBA then has 90 days to remit funds to the lender. “If the SBA asks for supplemental information, it suspends all the dates,” she says.

Filling out the questionnaire itself also takes more time and energy. The form asks for a litany of supplemental financial information like gross revenue, capital on hand, and a list of highly paid executives, as well as questions regarding business operations and business activity. And some businesses may worry about this information falling into the public sphere, should a future freedom of information act request requisition this data.

To be sure, these changes don’t unravel all of the SBA and U.S. Treasury checks on larger loans. In April of 2020, the U.S. Treasury encouraged businesses with alternative ways to raise funding–say, from investors via the public markets–to return the money. It also encouraged companies to look deeply at whether they really need federal funds to guard against economic uncertainty going forward. It added that “a public company with substantial market value and access to capital markets” would likely not meet the standards required for attaining a government-backed loan.

The SBA, also in April, issued a final interim rule noting that hedge funds are not eligible for federal assistance through the PPP. It indicated that private equity-backed companies would face a similar level of scrutiny as public companies when applying for a PPP loan.

The closer inspection of bigger loans was thought to be useful for preventing companies that may not need emergency funding from tapping the forgivable loan program. It was also a mechanism for weeding out publicly traded companies or other firms that may alternate funding s. In the early days of the PPP, Small Business Administration was pilloried for allowing publicly traded companies like Legal Sea Foods and P.F. Chang’s to access the PPP.

Yet after more than a year of PPP, during which time the agency helped dole out more than $780 billion in emergency funding to more than eight million small businesses, interest in keeping the forgiveness process streamlined and drama free may be heightened, says Bill Briggs, the former director of the SBA’s office of capital access. “SBA is seeking to further expedite the forgiveness process for borrowers and ease some of the pressing administrative tasks facing the agency this year.”

The SBA may also be looking to subdue legal challenges. In December 2020, the Associated General Contractors (AGC) of America, an Arlington, Virginia-based trade association, filed a lawsuit against the SBA seeking to amend the loan necessity questionnaire to allow borrowers to provide added context explaining the totality of their circumstances. For instance, the AGC notes in its complaint that the questionnaire does not ask borrowers to describe the status of their operations and the attendant business anxieties back in the spring, when economic uncertainty was at its peak. Instead, the questionnaire focuses on what came after, over the ensuing months of 2020–effectively pushing the SBA’s request for information outside its purview. 

“What we hoped to achieve was a more rational review of what borrowers in general actually knew and did not know at the time they applied for their loans. We were trying to persuade the SBA that economic uncertainty was a major factor,” says Mike Kennedy, AGC’s general counsel. “There seemed in our minds a fundamental disconnect between the certification that borrowers made and the questions that the SBA was asking.”

Regardless of SBA’s reasons for the change, the next step for businesses now is to figure out an action plan. While you won’t need to file this supplemental form anymore, you may still need to provide financial documentation of need, says Calzacorta. “After forgiveness, they’re not off the hook. [Businesses] could get subsequently audited. Many of these programs get audited years later.” For this reason, she suggests holding on to financial documents relating to a PPP loan for six years.

Calzacorta also suggests doing the work in collecting potentially useful financial information anyway. “What we’ve been recommending is to provide their narrative on necessity at the time of application,” while it’s all still fresh, she says. “To the extent they make it easy for the SBA, then the more quickly it will go through. If they don’t give them enough information they may be subject to a supplemental request, which will just delay the process.”