Payment Protection Program July Updates: Loan Forgiveness, Audit Risks, and Recipient Disclosure

July 27, 2020
Nichole M. Baer

This blog post will cover a couple of updates to the Paycheck Protection Program (the “PPP”) since it launched in April. In the past month, more details have emerged about applying for loan forgiveness as well as the audit risk, disclosure of some PPP recipients, and application deadline.

Extension of Application Deadline

On July 4, 2020, the President signed a new law which extended the application deadline for the PPP from June 30, 2020 to August 8, 2020.  There is approximately $132 Billion left in PPP funds for Borrowers to apply for.

Forgiveness of PPP

How Do I Apply for Loan Forgiveness?

In order to receive loan forgiveness, you must complete and submit the “Loan Forgiveness Application” to the lender servicing the loan.  You must use SBA Form 3508 or 3508EZ or a lender equivalent form.

You may use the EZ form if one of the following is true:

  1. Borrower is self-employed and has no employees; or
  2. Borrower has employees but did not reduce their salaries or wages during the covered period by more than 25% and did not reduce the number of hours worked by the employees; or
  3. Borrower had employees, but did not reduce their salaries or wages during the covered period by more than 25%. AND, due to complying with laws requiring the business to reduce hours or stay closed during the covered period, the Borrower was unable to operate during the covered period at the same level the Borrower was operating its business prior to February 15, 2020.

The lender will review your application for forgiveness and issue its decision within 60 days to the U.S. Small Business Administration (the “SBA”).  After an internal review of the loan and the forgiveness application, the SBA will then remit the forgiveness amount to the lender no more than 90 days after the lender issues its decision to the SBA.

This means from the date of submission of the Loan Forgiveness Application, the Borrower may have to wait up to 150 days for confirmation that their loan is forgiven.  Note: The notification of forgiveness will come from the lender and not from SBA.

When Can I Apply for Loan Forgiveness?

The SBA released an interim final rule on June 22, 2020 which details when a Borrower can apply for forgiveness.  If you have used all the loan proceeds you want forgiven, the rule states: “a borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period [8 weeks or 24 weeks depending on the date you obtained your loan].”

As stated, the rule does permit you to apply for forgiveness early – before the lapse of their respective covered period.  The problem with seeking forgiveness early is the employer forfeits a safe harbor provision that permits them to restore salaries/wages of employees by December 31st to avoid the reduction in loan forgiveness provided.   If you have not reduced the wages of your employees, you do not have to worry about this provision.

Audit Risks

The SBA has not issued any more information regarding a safe harbor for audits, a serious concern for Borrowers as the application required minimal documentation and multiple certifications.

One audit risk is a Borrower must have had economic uncertainty due to COVD-19.   In prior guidance, the SBA did provide a small safe harbor provision for Borrowers.  If a Borrower received a loan under $2 million, the SBA will consider the loan made in good faith based on economic uncertainty and will not inquire further.

This does not prohibit the SBA from auditing a loan under $2 million for other reasons, such as the credit elsewhere certification.  PPP did not require documentation of a lack of credit elsewhere (which SBA disaster loans typically require). Instead, the Borrowers had to certify that they did not have sufficient access to credit.  However, it is unlikely this will be a huge audit risk for Borrowers as traditional lines of credit were difficult to obtain for many businesses during the pandemic.

Disclosure of PPP Loans

On July 6, 2020, the SBA released some data they maintained regarding the PPP loans issued as of July 6, 2020. However, that release was limited to Borrowers who had received loans of $150,000 or more.  For Borrowers who received more than $150,000, the SBA disclosed the name, address, how many jobs retained, and the lending bank to the public.

Here are some interesting tidbits:

  • Approximately 4.9 million loans were issued by the SBA totaling $521 billion dollars.
  • Pennsylvania businesses received PPP funding totaling $20.7 billion. 26,095 loans in Pennsylvania were for more than $150,000.
  • Approximately 85% of Pennsylvania’s PPP loans were worth less than $150,000.
  • Pennsylvania loan recipients reported 1.8 million jobs retained due to the PPP money, data which is self-reported.
  • The average loan size for a PPP nationwide was $107,000.
  • S. Treasury Secretary Steve Mnuchin is encouraging private schools with significant endowments to return PPP funds. Three private schools in Lancaster received PPP loans.
  • A lawsuit was filed on May 12, 2020 in the U.S. District Court in Washington, D.C. to obtain more transparency as less than 15% of all loans issued have been disclosed to the public.
  • The U.S. Catholic Church received approximately $1.4 billion in PPP loans. Of that, the Archdiocese of New York received a loan between $5 and $10 million.
  • The Any Rand Institute received a loan between $350,000 and $1 million.
  • The U.S. Transportation Secretary’s family business (Foremost Maritime) received a loan of between $350,000.00 and $1 million. The U.S. Transportation Secretary is the wife of Senate Majority Leader, Mitch McConnell.
  • Restaurant chains P.F. Chang’s and Chopt received aid of between $5 million and $10 million. TGI Fridays received at least $5 million in PPP loans.
  • Many news organizations received PPP loans including Forbes Media (about $5 million), the Washington Times (at least $1 million), and the Daily Caller (at least $350,000).
  • As of July 6, 2020, over $30 billion in loans were returned partially due to public outcry. However, some loans were returned as businesses weren’t able to meet the original requirements of spending the funds. Those who returned funds include Ruth’s Chris Steak House chain ($20 million), Shake Shack ($10 million), and AutoNation ($77 million).

Laws and regulations remain a moving target for COVID-19-related relief.  As such, the laws and regulations discussed today may change soon.  Please consult with a legal professional regarding the updates to the Paycheck Protection Program if you have any legal concerns.

Nichole Baer is an attorney at Russell, Krafft & Gruber, LLP, in Lancaster, Pennsylvania. She received her law degree from Stetson University, College of Law and practices in several areas, including BusinessCommercial Real EstateEstate Planning, and Estate Administration.