December 11, 2020
Coronavirus Stimulus & Relief Alert
Recent SBA questionnaires regarding loan necessity have created more questions than answers for some PPP loan applicants—we address concerns raised by business owners and borrowers.
When most businesses, including nonprofits, applied for loans in the spring and summer as part of the Small Business Administration (SBA) Paycheck Protection Program (PPP), they were unsure what the next few months would hold for them as the coronavirus (COVID-19) pandemic was massively disrupting the American economy. Therefore, these businesses were quite confident asserting that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” on the application. In fact, while more traditional SBA loan programs have a “credit elsewhere test,” requiring applicants to be unable to find funding from any other source, the PPP specifically excluded that condition from eligibility. However, over the past few months, the U.S. Treasury and the SBA have embarked on an effort to retroactively narrow the eligibility of loan recipients based on both economic uncertainty and credit elsewhere issues.
Most recently, the SBA has issued two Loan Necessity Questionnaires, which the agency will use to “evaluate the good-faith certification” that borrowers made “that economic uncertainty made the loan request necessary.” The forms (Form 3509 for for-profit borrowers, Form 3510 for nonprofit borrowers) are to be transmitted from lenders to borrowers who have aggregate loans (including affiliates) of $2 million or more. Borrowers have ten business days to complete the questionnaire after receiving it from the lender. The questionnaires are part of the previously announced goal by the government of reviewing all loans over the $2 million threshold. There is a presumption of sorts that loans under $2 million are in a safe harbor and presumed to meet the good faith certification.
The questionnaires have created some additional concern among applicants that, based on their responses, either their eligibility to receive the loan or possibly forgiveness would be jeopardized. On December 9, 2020, the SBA posted Question #53 to its PPP FAQs, which provided additional guidance regarding the questionnaires. The SBA advises borrowers that 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.” The agency refers back to its previous Question #46, which it published in May. In that guidance, the SBA advised that borrowers whose aggregate loans were under $2 million were “deemed to have made the required certification concerning the necessity of the loan request in good faith.” And, borrowers whose loans exceeded that amount “may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance.”
What the actual “multi-factor analysis” entails and the criteria to be used to evaluate the results of that analysis have not been identified by the SBA. The government, in Question #53, indicates that “[i]n 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.”
The uncertainty around the certification review and the questionnaires themselves have resulted in litigation. On December 8, The Associated General Contractors of America sued the SBA in the U.S. District Court for the District of Columbia, asking the court to “declare that the Questionnaire was developed and published through an unlawful process and that the questions included therein are arbitrary and capricious, and further, that SBA’s use of the Questionnaire for evaluating borrower eligibility for both a PPP loan and subsequent loan forgiveness denies PPP borrowers due process.”
Also, the questionnaires are not the only part of the review process. In their most recent guidance, the SBA states that it “may request additional information, if necessary, to complete its review.” At that point, “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.” Borrowers should consult counsel before responding to the SBA to ensure that they are providing a full and complete picture in support of their eligibility for the PPP loan.
While there still exists a high degree of uncertainty around the review process, borrowers should be proactive and comprehensive in documenting their specific circumstances at the time of their PPP loan application and their organization’s economic performance in the intervening months. Advance preparation is important because, despite pending litigation, businesses should respond to any requests for information from the government in a timely manner.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.