Dear Clients and Friends,
The SBA continues to issue guidance regarding the Paycheck Protection Program (“PPP”). This Client Alert provides an update regarding recently issued guidance on the PPP program, including loan disbursement requirements and certain considerations for (and additional scrutiny of) PPP loan recipients. This information is not legal advice and may not be suitable for all client situations. As always, if you would like specific legal assistance with respect to the PPP program or any other matters, please do not hesitate to contact your HH&K attorney.
Loan Disbursement Requirements
The SBA published another Interim Final Rule on April 28, 2020 regarding the PPP loan program, which addresses disbursement of PPP loan funds. In short, this new Interim Final Rule asks and answers the question of whether a borrower can take multiple draws from a PPP loan and thereby delay the start of the 8-week covered period during which PPP loan funds spent may be eligible for forgiveness. The answer to this question is “no”.
Disbursement of PPP Loan Funds
The SBA has confirmed that the lender must, within ten calendar days of approval, make a one-time, full disbursement of the PPP loan. This Interim Final Rule clarifies that “approval” occurs when a PPP loan is assigned a loan number by the SBA and notes that if the tenth calendar day is a weekend or legal holiday, then the ten-day period will be extended until the end of the next business day.
For loans that received an SBA loan number prior to the posting of this Interim Final Rule on April 28, 2020 but have not yet been fully disbursed, the SBA has indicated that the following transition rules apply:
- The ten calendar day period begins on April 28, 2020; and
- The 8-week covered period starts (or started, as applicable) on the date of the first disbursement.
The SBA further provides that lenders are not responsible for delays in disbursements where a borrower fails to timely provide required loan documentation, including an executed promissory note. That said, borrowers cannot use this as a way to indefinitely delay the start of the 8-week covered period. This Interim Final Rule provides that if a borrower does not submit the required documentation within 20 days of approval, the lender shall cancel the loan.
Additional Requirements for Lenders
This new Interim Final Rule also provides guidance to lenders regarding when lenders must electronically submit an SBA Form 1502 indicating that PPP loan funds have been disbursed.
Lenders must upload SBA Form 1502 within 20 calendar days after a PPP loan is approved. For loans approved before the updated reporting process, this form must be uploaded by May 18, 2020. As part of this form, the lender must indicate whether the funds have been fully disbursed. The SBA determined that requiring lenders to report regarding loan disbursement within 20 calendar days of approval will help ensure that disbursement of funds to eligible borrowers will occur more rapidly and will also enhance the SBA’s ability to track program data.
The SBA made it clear that lenders will not receive a processing fee:
- prior to full disbursement of the PPP loan;
- if the PPP loan is cancelled before disbursement; or
- if the PPP loan is cancelled or voluntarily terminated and repaid after disbursement (which includes any borrowers that elect to repay PPP loan proceeds within the “grace period” referenced below to conform to the SBA’s guidance regarding necessity of the loan).
Considerations for PPP Loan Recipients
Other Sources of Liquidity
The SBA has also issued additional guidance, in the form of additional Q&As from the Treasury Department, regarding the requirement that applicants certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” As we noted in our prior Client Alert issued on April 24, 2020, the SBA has indicated 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.
The most recent Q&A from the Treasury Department confirms that these requirements are applicable to all borrowers and not just public companies (which were the example used in the prior Treasury Department Q&As) and further emphasizes that all borrowers need to take this guidance into consideration when determining their eligibility for a PPP loan.
As provided in our prior Client Alerts, the SBA has set up a “grace period” for borrowers to reconsider their eligibility for a PPP loan based on recent guidance, even if they have already received their PPP loan funds. Any borrower that applied for a PPP loan prior to the issuance of the guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
Audit of PPP Loan Recipients
Treasury Secretary Steven Mnuchin stated in an interview with CNBC on April 28, 2020 that businesses that receive PPP loans in excess of $2 million will be subject to audit by the SBA prior to loan forgiveness to confirm borrower eligibility and need for the PPP loan. As we noted in a prior Client Alert, additional scrutiny by lenders as to eligibility and need was expected in light of the recent SBA guidance discussed above. This statement by Secretary Mnuchin, which was made amid public outcry that larger companies with existing sources of liquidity and capital (such as the Los Angeles Lakers) obtained PPP loans, confirms this assumption.
It is also important to note that, in his interview, Secretary Mnuchin specifically referenced the potential that borrowers would have criminal liability if the SBA determines that the borrower certified that the loan was necessary and it is determined that this certification was not true.
Given recent SBA guidance and the statements made by Secretary Mnuchin, all borrowers, and especially any borrowers that have applied for and/or received PPP loan funds in excess of $2 million, should reconsider their eligibility taking this guidance into consideration. If you are concerned that the certifications made in your PPP loan application may not be accurate in light of recent guidance, you can take advantage of the “grace period” mentioned above, which runs through May 7, 2020.
In addition, all PPP loan recipients (especially those that are borrowing more than $2 million) should be prepared to provide evidence of eligibility and need for the PPP loan and to demonstrate that they thoroughly considered their current business activity and their ability to access other sources of liquidity when determining eligibility. We are still awaiting SBA guidance on loan forgiveness, but it is possible that all PPP loan recipients may be required to provide documentation regarding eligibility and need and proof that they made a good faith assessment of the same when they are seeking loan forgiveness.
Contact Your HH&K Attorney For Legal Guidance
This Client Alert provides general information regarding the PPP program and does not outline all of the important considerations related thereto. We anticipate that the terms of the PPP program will continue to evolve as the SBA releases additional guidance. This Client Alert is not a substitute for legal guidance regarding program details and how those may be applicable to your business. As always, if we can be of assistance during this difficult time, please do not hesitate to contact your HH&K attorney.
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| Erica L. Lawson Partner 80 Exchange Street Binghamton, NY 13901 Phone: (607) 231-6907 Email: elawson@hhk.com |
Copyright © 2020 by Hinman, Howard & Kattell LLP. This Client Alert is provided as a general information service to clients and friends of Hinman, Howard & Kattell, LLP. It should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. These materials may be considered Attorney Advertising in some states.