Obligations for Borrowers and Lenders Under PPP

Great, you got the money. Now you can relax, right? Not so fast.

This article provides background into the Paycheck Protection Program and addresses the borrower’s and lender’s responsibility to the Small Business Administration (SBA) as detailed in the Interim Final Rule¹ (IFR) and subsequent Frequently Asked Questions (FAQs) promulgated by the SBA. The Treasury and the SBA did not follow normal loan documentation protocols and procedures in order to provide loans as expeditiously as possible. Further, since the loans can be forgiven, the borrowers must keep accurate records, because they bear the burden of proving that both the loan amount and the usage of those funds are in accordance with the terms of the CARES Act.

The Paycheck Protection Program (PPP) requires that lenders ensure compliance with the Act’s terms for eligibility and forgiveness; however, the Act allows the lender to rely upon the representations of the borrower.

The funds are intended to be used for payroll costs, mortgage interest, rent and utilities. As such, the borrower certified in their application that the funds all would be used for this purpose and further certified that they understood that if the funds were “knowingly used for unauthorized purposes” they could be held legally liable for fraud.

Responsibilities of the Lenders at Application

Lending institutions participating in the PPP were tasked with providing loans in an expeditious fashion, so much so, that SBA processed in a thirteen-day period the same number of loans as it had in the last fourteen years. The SBA could not have issued the loans this fast without the participation of the lending institutions tasked with underwriting the loans. Because of the compressed time frame to issue loans, the SBA in its Interim Final Rule and subsequent FAQ’s made it clear that the SBA sought to limit the underwriter’s obligations.

Consequently, as part of the underwriting process, the IFR states that lenders are only required to confirm the receipt of certain documentation and resolve any discrepancies between the underlying documentation and the loan request. Specifically, the lender is required to:

1. Confirm receipt of borrower certifications in the PPP application.
2. Confirm receipt of information demonstrating that the borrower had employees for whom the borrower paid salaries and payroll taxes on or about February 15. 2020.
3. Confirm the dollar amount of average monthly payroll costs for the preceding year by reviewing the payroll documentation submitted with the borrower’s application.
4. Follow applicable Bank Secrecy Act requirements.

At this time it is not clear, what penalties, if any, lenders might be subject to, if they have not performed these functions.

Process for Forgiveness

An important component of the PPP is the potential for the loan to be forgiven if the money is used in accordance with the terms of the Act. This is made clear in the application where the borrower certifies that “loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities, and not more than 25% of the forgiven amount may be for non-payroll costs.”

To obtain forgiveness, the borrower files an application with their lender, requesting loan forgiveness².

The Act states that a borrower seeking loan forgiveness, is required to:

1. File an application.
2. Submit documentation verifying the number of full-time equivalent employees on payroll and pay rates, and provide certain federal and state payroll tax and unemployment insurance filings.
3. Submit documentation evidencing payment, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payment of payroll and other allowed costs, such as mortgage obligations, lease obligations, and utility payments.
4. Submit a certification from an authorized representative of the borrower that.
   • The documentation presented is true and correct.
   • The amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments.
5. Any other documentation the Administrator deems necessary.

The lender decides whether to grant forgiveness and has sixty days from receipt of the loan forgiveness application to issue a decision. Loan forgiveness shall not be granted unless the above information is submitted to the lender servicing the loan. It is incumbent on loan recipients to keep detailed records indicating the use of the funds, and it is beneficial to maintain schedules detailing the figures provided to the lender.

The IFR addresses whether lenders can rely on borrower documentation for the loan forgiveness, to which the answer is a resounding “yes”. The IFR specifically states that “The lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs.” Further, the Administrator will hold harmless, “any lender that relies on such borrower documents and attestation from a borrower.” Therefore, it is imperative that the borrower maintain the records necessary to prove the proper usages of funds.

In summary, the responsibility of the lender is limited by the terms of the Act that require confirmation of data provided by the borrower. The ultimate responsibility for the usage of funds and proofs of the proper usage rests with the borrower. Therefore, the borrower must maintain accurate records. As these obligations are clarified in future SBA communications, we will keep you informed.

¹Further guidance is to be forthcoming from the SBA regarding loan forgiveness.
²Pursuant to the IFR, after seven weeks, the lender can request that the SBA purchase the “expected forgiveness amount of a PPP loan or pool of PPP loans”. This aspect of loan forgiveness is not being addressed in this writing.