SBA to Require Forms Documenting Necessity of PPP Loans of $2 Million or More

The SBA has announced its intent to release two new standard form questionnaires (Form 3509 and Form 3510) relating to loan necessity for certain loan recipients under the Payment Protection Program (PPP). The new questionnaires, which are not yet available on SBA’s website, will be required for any borrower that “together with its affiliates, received PPP loans with an original principal amount of $2 million or greater.”

The questions are not limited to a borrower’s circumstances at the time it applied for its PPP loan. Rather, several concern the time after March 13, 2020, the date of the COVID-19 National Emergency Declaration issued by President Trump, and during the borrower’s loan forgiveness covered period, including but not limited to:

1. the “Borrower’s approximate additional cash outlays” resulting from government-ordered or voluntary changes to operations due to COVID-19;
2. whether, between March 13, 2020, and the end of the PPP loan forgiveness period, the “Borrower paid any dividends or other capital distributions (other than for pass-through estimated tax payments) to its owners;”
3. whether, during the same period, the borrower “prepaid any outstanding debt;” and
4. whether, during the same period, any of the borrower’s employees were “compensated in an amount that exceeds $250,000 on an annualized basis.”

Form 3509 also asks borrowers to represent whether they or their parent companies are publicly-traded, and whether any publicly traded company or private equity firm, venture capital firm or hedge fund owns 20 percent or more of any class of their securities.

Failure to complete and submit the form within ten business days of receipt from the lender, along with associated documentation, could result in “SBA’s determination that you were ineligible for either the PPP loan, the PPP loan amount, or any forgiveness amount claimed, and SBA may seek repayment of the loan or pursue other available remedies.”

Background

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), passed on March 27, 2020, provided forgivable loans of up to $10 million to qualifying small businesses under the Payment Protection Program (PPP). 

PPP applicants were required to make a number of certifications in connection with their application. One such certification is that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA clarified in FAQ 31 that borrowers “must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”

On May 13, 2020, the SBA clarified that “all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.”

Uncertainty about SBA review and evaluation

SBA has not disclosed how it will review and evaluate the information on the questionnaire in determining whether the borrowers properly certified regarding the necessity of their PPP loans, especially in light of the fact that the relevant certification attested only to the necessity of the PPP loan based on “current economic uncertainty” at the time of the loan application.

For information about the PPP and requirements for the program, contact us. We are here to help.

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