Two weeks ago, we published an article on the issue that 'economic necessity' is likely to become for Borrowers of Payroll Protection Program (PPP) loans who may face an audit from the SBA. Shortly thereafter, the U.S. Small Business Administration (SBA) quietly rolled out a 'loan necessity' questionnaire, aiming the form squarely at Borrowers who took loans worth $2M or more. Considering that such a form was never mentioned as a prerequisite for loan forgiveness, and that the SBA has yet to approve even one of the 96,000 forgiveness applications it had received by September 24, this move has both Borrowers and Lenders worried that the loans might not be forgiven - creating an unexpected liability on balance sheets right as businesses are trying to recover from the immediately-onset recession.
What Does the Questionnaire Entail?
The form has two parts: (i) A "Business Activity Assessment"; and (ii) A "Liquidity Assessment".
The Business Activity Assessment requires Borrowers to certify:
Gross revenues comparisons between the first quarters of 2019 and 2020 (and supply supporting documentation); and
How COVID-19 (and responding government orders) shut down or reduced operations, or resulted in capital outlays.
The Liquidity Assessment requires Borrowers to provide details and documentation regarding:
The amount of cash (and cash equivalents) on-hand when the loan application was submitted;
Dividends and other capital distributions paid to owners during the loan's 'covered period';
Debt prepayments and capital expenditures made during the 'covered period';
Whether any Borrower employees or owners were compensated $250,000 (on an annualized basis) during the 'covered period';
The Borrower's book value on the last day of the quarter preceding the loan application (if privately held); and
Whether the Borrower received any other CARES Act benefits (not including tax benefits).
What is the Purpose of the Questionnaire?
Although the SBA has refused to comment on the forms and provided no public announcement besides the official notice marking its release, the form itself states that the information "will be used to inform SBA’s review of [the Borrower's] good-faith certification that economic uncertainty made [the] loan request necessary to support [their] ongoing operations."
The "good-faith certification" refers to the certification made in the originating loan application that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” More on that here.
SBA Chief of Staff William Manger has said that the SBA has "tried to make the process as simple as possible...weighing our fiscal responsibility and duty to the taxpayer to make sure that any time we are paying out funds for forgiveness they are legitimate, accurate funds and that the program has integrity." This questionnaire could merely be part of the integrity effort to stamp out fraud. However, trying to vitiate a Borrower's loan eligibility using the benefit of hindsight is obviously problematic.
Given that:
the forms must be returned by recipients within 10 days of receipt of the form;
the Borrower's representative is required to certify the accuracy of the response's details and supporting documentation under the threat of criminal penalty; and
failure to complete the form may cause the SBA to determine that the Borrower was ineligible for the loan, and may then seek repayment to "pursue other available remedies;"
this questionnaire seems more like a 'gotcha' tactic designed to claw-back some of the larger loans than a mere information-collection exercise to identify fraudulent loans. It seems that the SBA is taking a rather expansive interpretation of "fraudulent".
What Should I Do?
Lenders in particular are pressuring the Federal Government to stop moving the goalpost for loan forgiveness and increasing their involvement in loan administration. However, there is nothing to suggest that these efforts will prevail. Almost certainly, they will do nothing to route the SBA's inevitable audit of loans valued at $2M or greater, during which the exact information sought in the new questionnaire will be audited.
Putting aside the patent unfairness of the SBA using hindsight and actual impact of COVID-19 to determine the economic necessity for each Borrower's loan, and the agency's urgent pre-application promotion of the program, this questionnaire will be used to retroactively determine Borrower loan eligibility. Ineligibility may have consequences that extend beyond an unexpected liability on the books - particularly for government contractors. This means it's time to contact your legal counsel.
Depending on a Borrower's individual circumstances, it may be best to delay responding to the questionnaire, or even delaying an application for forgiveness altogether until additional guidance is issued by the SBA or Lenders, or legal challenges are mounted and resolved. Rushing to respond to the questionnaire may result in the disclosure of adverse and sensitive information (that may later be made public). Given the SBA's lack of guidance and growing appetite for post-factum changes, no-one should volunteer to be the proverbial guinea-pig.
The penalties and consequences of any action in response to this questionnaire are serious and long-reaching. You should contact your legal counsel urgently if you took a PPP loan of $2M or more. Your business may depend on their guidance.
If you are concerned about your PPP loan, contact Out-House Attorneys, LLC. Our corporate consulting service deploys attorneys with Executive and PPP Loan experience to audit your loan, and prepare the documents and evidence needed to prove to an SBA auditor that your loan was necessary.
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