T he historic Paycheck Protection Program has been a lifeline for small businesses across America throughout the COVID-19 pandemic. In late March, the Small Business Administration reported more than 8 million loans have been issued to small businesses, totaling more than $700 billion. However, like all loans, PPP loans are beginning to come due, and lenders now must navigate the ever-evolving labyrinth of loan forgiveness rules in order to stay in compliance.
The Consumer Financial Protection Bureau and the SBA jointly issued an interim final rule amended to reflect the rules established by the passage of the Economic Aid Act on December 27. Along with outlining the forgiveness application process for borrowers, the rule also lays the foundation for lenders to comply with PPP loan forgiveness. Requirements include:
- What the lender should review.
- How the lender should determine forgiveness amounts.
- How the lender should communicate forgiveness decisions to the SBA and the borrower.
Regulators will be expecting lenders to follow these requirements for first and second draw PPP loans, although the requirements are not very explicit and may be difficult to interpret (stop me if you’ve heard this before).
What to review?
When a borrower submits a loan application for forgiveness, the borrower must certify that the information submitted is complete and accurate. Thus, as a lender, your first responsibility when reviewing a submitted application is to confirm that the borrower has completed this certification. If the borrower has failed to certify, you should follow up with the borrower and explain that the SBA will not accept their forgiveness application without this certification.
If key fields on the application are not filled out (such as forgiveness amount requested, eligible payroll and non-payroll amounts, covered period, etc.), notify the borrower to complete the missing items and send the application back. I recommend developing an online forgiveness application experience with built-in automated flags. This can prevent the borrower from submitting the application if they have not completed all fields (more on this below). Additionally, the borrower’s supporting documentation should provide a clear picture of how the borrower determined their eligible payroll and nonpayroll costs.
Taking it one step further, the requirements also expect the lender to confirm the borrower’s calculations of applicable payroll and nonpayroll costs and verify that eligible payroll costs are not less than 60 percent of the total forgiveness amount. This is one of the main requirements for PPP loan forgiveness.
To throw a wrench into all this, SBA makes it clear that the accuracy of these calculations is the responsibility of the borrower and that the lender is expected only to perform a “good-faith review.” Completing this good-faith review is how the lender can determine whether the borrower is eligible for forgiveness. Check whether your bank requires a formal review of the loan submission package by a third-party accounting firm if loans are over a certain dollar threshold.
Determining forgiveness eligibility
As I https://www.paydayloanpennsylvania.org/ mentioned above, lenders can rely on borrowers’ representations. They are not required to verify the borrowers’ reported information independently. However, it is key to define your “good-faith review” of forgiveness applications in order to evidence your compliance in the event of a regulatory review.
- Develop an online forgiveness platform with automated flags built-in to prevent applications from being submitted incompletely or with inaccurate calculations.
- Use a risk-based approach to review the borrower’s supporting documentation. If a borrower’s supporting documentation is from recognizable and credible sources, minimal review may be needed. However, if supporting files are not from recognized sources or are incomplete, you should perform a more extensive review of the calculations and data entered to ensure that the data reported ties back to supporting evidence.