These forms will be used by the SBA to assess a borrower’s good faith representation on its loan application that current economic uncertainty made the loan necessary support its ongoing operations. See FAQs #31 and #46. The problem with these forms from a borrower’s perspective is that they solicit information on business activities that occurred after the loan application date, which arguably have no bearing on a borrower’s good faith as of its loan application date. The AICPA and others have written to Congressional leaders to express these concerns, and others.
FAQ #53 acknowledges that the certification was required to be made in “good faith at the time of the loan application, even if subsequent developments resulted in the loan no longer being necessary.” This acknowledgement is helpful for many businesses that recovered or even grew their revenue during the pandemic. For example, consider a surgical practice that obtained a PPP loan. The initial shut down orders brought their business to a screeching halt because operating rooms were shut down for non-essential surgeries. Then, months later, when the shut-down orders were lifted, there was a tremendous backlog of surgeries that still needed to be performed. As a result, many surgical practices had a few months of relative quiet and then a few months of frenetic activity, with patient volumes eventually returning to normal. Even though many of these practices ended their year flat or slightly up from 2019, they had grave concerns about their businesses when they filed their loan applications in early April. It would be grossly unfair to second guess their bona fides back in early April now that we have the benefit of hindsight, and the SBA seems to acknowledge that.
The FAQ also acknowledges that it is not so much moving the goal posts on borrowers as it is seeking a fulsome picture of their operations. It states 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.” While no one likes the government digging into its affairs, particularly on such sensitive issues as compensation and distributions, it is gratifying to see that the SBA at least understands its mission is only to assess good faith as of one moment in time – the loan application date.
The FAQ states that the SBA may, after reviewing completed Forms 3509 or 3510, seek additional information from borrowers. This was to be expected, but the SBA also stated that it would allow borrowers “an opportunity to provide a narrative response to SBA explaining the circumstances that provided the basis for their good-faith loan necessity certification.” This is helpful because many borrowers are concerned that the 1,000-character responses boxes are insufficient to provide a complete explanation of why they needed the PPP loan.
Last, the FAQ states that “[t]his targeted, multi-step approach will ensure the integrity of the evaluation process and expeditious processing, as well as properly allocate SBA’s finite resources to those loans that require additional review.” This somewhat neutral statement is actually very helpful, and it confirms what we have thought all along – that these forms were not intended to create new rules; rather, they were intended to serve as a screening tool. So prepare these forms carefully and be sure to put your best foot forward as you only get one chance to make a good first impression.
These forms, which are linked below, are a must read for all PPP borrowers with aggregated loans of $2 million or more (note these forms have not been released publicly by the SBA and we cannot confirm they are final versions of the forms that eventually will be released). The government estimated these forms will apply to approximately 52,000 borrowers: 42,000 for-profit borrowers and 10,000 not-for-profit borrowers.
The new forms are Form 3509 – Loan Necessity Questionnaire (For-Profit Borrowers) and Form 3510 – Loan Necessity Form (Non-Profit Borrowers). Together, they provide detailed insight into how the SBA will approach this issue of loan eligibility. Even though these forms are not yet available on the Treasury or SBA websites, we understand they have already been distributed to certain borrowers.
The instructions to the forms indicate that they will be required for borrowers who, combined with their affiliates, received PPP loans of $2 million or more, and borrowers are required to provide responses within ten days of receiving the relevant form from their lender. Given this relatively short deadline to respond, we recommend borrowers with aggregated loans of $2 million or more start gathering the information required by these forms so they are prepared to respond timely when they receive the official request.
The forms appear designed to maximize program integrity and protect taxpayer resources, and receipt of one of these forms does not necessarily mean the SBA is challenging a borrower’s loan eligibility or entitlement to loan forgiveness. It appears to be designed solely to gather information.
The forms generally request information so the SBA can made two key assessments – one relating to the borrower’s business activity, and another relating to the borrower’s liquidity. Below is a more specific summary of forms.
Form 3509 – Loan Necessity Questionnaire (For-Profit Borrowers)
Form 3510 – Loan Necessity Questionnaire (Non-Profit Borrowers)
The questions in these forms suggest the SBA is evaluating how borrowers were affected by COVID-19 at the loan application date, and for some period of time period after the loan application date. This is odd because the certification addressed in FAQ #31 addresses the borrower’s good faith only as of the loan application date, and not at any point in time after that date.
As we have seen time and time again, the PPP loan eligibility and loan forgiveness process evolves over time. Keep in touch with your Withum advisor for the most up to date information.