IFR 15 Lender Review Process

Once again the SBA issued guidance late at night. This time it was Friday night, May 22, 2020, on the eve of a 3-day holiday weekend. The SBA issued its fifteenth Interim Final Rule (IFR 15), discussing lender responsibilities in regard to the PPP loan forgiveness application process. Additionally, and more importantly, IFR 15 describes the “clawback” of lender fees if an ineligible borrower received a PPP loan and the lender was paid a processing fee.

SBA Review

The SBA in its discretion will review individual PPP Loans to determine if a borrower was eligible to receive its loan, regardless of whether the borrower calculated the loan amount correctly or used the loan proceeds for allowable uses as specified in the CARES Act and the loan agreement. Since the borrower must retain supporting documentation for 6 years after the date the loan is forgiven or repaid in full, the SBA will have time to conduct reviews for years to come.

The SBA will notify a lender if it decides to undertake a review of one of its loans. The lender is required to notify the borrower within 5 days of the SBA announcing its intention to the lender.

If the SBA determines a borrower was ineligible to receive a loan, then the SBA will advise the lender to deny the forgiveness application and it may also seek repayment of the outstanding loan balance or pursue other available remedies. Borrowers will have the right to appeal a decision of the SBA. A separate IFR will be issued to define the appeals process.

Lender Review Process

IFR 15 defines a process for lenders to follow when reviewing a borrower’s loan forgiveness application:

1. Confirm receipt of the borrower certifications contained in the Loan Forgiveness Application Form.
2. Confirm receipt of the documentation borrowers must submit to aid in verifying payroll and nonpayroll costs, as specified in the instructions to the Loan Forgiveness Application Form.
3. Confirm the borrower’s calculations on the borrower’s Loan Forgiveness Application, including the dollar amount of the (A) Cash Compensation, Non-Cash Compensation, and Compensation to Owners claimed on Lines 1, 4, 6, 7, 8, and 9 on PPP Schedule A and (B) Business Mortgage Interest Payments, Business Rent or Lease Payments, and Business Utility Payments claimed on Lines 2, 3, and 4 on the PPP Loan Forgiveness Calculation Form, by reviewing the documentation submitted with the Loan Forgiveness Application.
4. Confirm that the borrower made the calculation on Line 10 of the Loan Forgiveness Calculation Form correctly, by dividing the borrower’s Eligible Payroll Costs claimed on Line 1 by 0.75.

Lenders are expected to perform a good-faith review of the borrower’s calculations and supporting documents concerning the amounts eligible for loan forgiveness. In the case of a payroll report prepared by a recognized third-party payroll processor, the SBA contemplates that minimal review of the calculations would be reasonable. By contrast, if payroll costs are not documented by a recognized third-party payroll processor, then a more extensive review of calculations and data would be required. In either case, the borrower should not receive forgiveness without submitting all required documentation to the lender.

Lenders may rely on a borrower’s representations, but if the lender finds errors in the calculation or lack of substantiation in the supporting documents, the lender should work with the borrower to remedy the issue.

Lenders must issue a decision to the SBA on loan forgiveness not later than 60 days after receipt of a complete loan forgiveness application. The decision can be an approval (in whole or in part), a denial, or if directed by the SBA a denial with prejudice due to a pending SBA review of the loan. If an application is denied with prejudice, a borrower may appeal the lender’s decision, unless the SBA has determined the borrower is ineligible for a PPP loan.

Lenders must submit the PPP loan forgiveness application (including Schedule A and the Demographic Information form, if submitted) to the SBA at the time it submits its decision on the application to the SBA. They must also confirm that the information provided accurately reflects the lender’s records for the loan and that they have made its decision in accordance with the requirements set forth above. The SBA then has 90 days to remit the forgiveness amount to lenders, subject to their review.

If the lender denies the entire forgiveness amount, it must submit to the SBA its reason for the denial in addition to all documentation mentioned in the previous paragraph. The lender also must notify the borrower in writing that the lender issued a decision to the SBA denying the loan forgiveness application. Borrowers can appeal the lender’s decision within 30 days by requesting that a review be performed by the SBA.

If a lender receives a written notification from the SBA that it is reviewing one of its PPP loans, then the lender must notify the borrower of this fact in writing within 5 days of its receipt of the notification from the SBA.

Lender Fees

If the SBA conducts a review and determines that the borrower was ineligible for a PPP loan, then the lender is not entitled to its processing fee. The SBA has one year from the loan disbursement date to determine if a borrower was ineligible to receive a PPP loan. If this occurs and the lender already received its processing fee, then the lender will be required to return the processing fee for that loan. However, that determination has no effect on the SBA’s guaranty of the loan if the lender complied with its obligations under section III.3.B. of the First Interim Final Rule and the document collection and retention requirements described in the lender application form (Form 2484).