Clowns Congress to the Left, Jokers the SBA to the Right, Here Business Owners and Banks Are, Stuck in the Middle of Impending Conflicts Created by the Paycheck Protection Program
By Brian J. Crepeau and Brandon N. Mourges
In March 2020, Congressional leaders “got the feeling that something ain’t right.” Mass hysteria was building and government-imposed quarantines were all but guaranteed. Health officials expected millions to potentially perish from the ravages of COVID-19. Financial experts predicted that businesses would be shuttered for a year or longer and the United States would be set with a depression. Congress knew that some action had to be taken to avert further crisis. And, as the saying goes, in creating the Paycheck Protection Program (“PPP”) as part of the CARES Act, they did not let a good crisis go to waste.
While the PPP was a way to positively spin the federal response to COVID-19 – to the general public and small businesses – the devil was, and is, in the details (or lack thereof). As business owners seek forgiveness for loans administered pursuant to the PPP, the issues caused in the haste to pass this legislation will be magnified. Thousands of businesses and banks will be stuck in the middle of conflicts created by a lack of Congressional foresight and the desire of the administration to limit actual and perceived abuses in a highly politicized environment. For business owners and lenders wondering what it is they should do, the answer is to find competent legal counsel; otherwise, their loans may not be forgiven, and they may end up sleeping on the floor.
…Started Out with Nothing: Rush to Originate PPP Loans.
Although it was necessary to disperse funds immediately to sustain the economy, administering what would become about $650 billion in forgivable loans in a matter of weeks did not, and perhaps could not, come without issue. Given their limited resources, the federal agencies tasked with overseeing the PPP – the Small Business Administration (SBA) and Treasury – placed a significant amount of the oversight and administration of the funds within the control of community banks. All of this was done with a basic application and short guide, a minimal statutory framework, and with a promise that guidance would be forthcoming. Coupled with a perception that funds would be exhausted, regardless of the potential downside of “to be determined” guidelines and limitations, banks and business owners acted quickly to originate these loans (or, as some have called them, “grants with conditions”). Without much guidance, banks processed millions of loans and exhausted the entirety of the first round of funding ($349 billion) within a matter of days.
In the coming weeks, after a significant amount of the funds had already been disbursed, details started to be filled in by the SBA and Treasury. Even with more guidance, interpretations seemingly changed by the day and interested parties continued to consult with advisors on new questions created by the guidance. Even after dealing with an initial exhaustion of funds, many banks had to deal with continued issues caused by the PPP (e.g., irritated customers, discrimination lawsuits, media coverage, etc.). To make matters worse, the administration and Congressional leadership seemed to change their position with respect to certain businesses that technically qualified for the PPP.
Trying to Make Some Sense of It All: Loan Forgiveness Applications.
While some of those issues are (still) yet to be resolved, funding of the loans was only the first step of the process for the PPP. The more contentious and complex step in the process – loan forgiveness – is fast-approaching and, much like the rest of the PPP, has been hatched in a piecemeal manner with relatively little guidance. And though all parties were generally incentivized to originate loans as quickly as possible, the incentives to approve loan forgiveness applications are not the same for all interested parties. As such, interested parties should prepare for the worst and should proceed with caution as this can be a make-or-break moment for many businesses and can expose banks to significant liability.
Gearing up for incoming loan forgiveness applications, on May 22, 2020, the SBA and Treasury released two separate interim rules detailing the process: one on requirements governing the forgiveness of PPP loans and one on the SBA’s process for reviewing PPP loan applications and forgiveness applications. In addition, on May 16, 2020, the SBA published the loan forgiveness application and the accompanying schedules.
While this guidance addresses some of the questions from borrowers and lenders, it clearly does not resolve many questions and it requires many new details. For example, the forgiveness application (SBA Form 3508) is quite lengthy and contains many definitions that are highly technical. With the new details on the covered period, the introduction of the “alternative payroll covered period,” explanations on eligible payroll and nonpayroll costs that are incurred or paid, differentiations between employees and employee-owners as it relates to the $15,385 cap, technical explanations of other limitations based on FTEs and re-hires, and references between different pages of the loan forgiveness application, it is clear that many borrowers will not be able to maximize their forgiveness without professional assistance. Even then, it is highly likely that mistakes will be made and interpretations will differ. With only a matter of weeks to digest this new information and with only 60 days for lenders to process forgiveness applications, there will be tremendous operational burdens placed on lenders that were likely not anticipated when the loans were originated.
…It Makes No Sense at All: Looming Issues.
As if the technical guidance did not pose enough of a problem, the sheer number of small business owners likely to seek forgiveness and the different standards of recordkeeping is enough to cause many lenders to fall off their chairs. To start, in the loan forgiveness process, lenders must confirm receipt of borrower certifications from the initial application, any required documents to verify payroll and nonpayroll costs, and a host of calculations. As stated in the guidance, the lender is “expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness.”
But what does this standard really require? What is a “recognized third-party payroll processor” that can result in a minimum review of calculations? Should it matter if the lender has already obtained, or can obtain, additional information that might bear on the forgiveness application? And should lenders hold borrowers receiving larger loans to a higher standard? And what about borrowers that were not prior customers of the lender? What about businesses that arguably were affected by different guidance on the “good faith” certification? This vague standard will create many inconsistencies across lenders and even for different loans of the same lender.
This vague standard also may result in inequitable or, worse yet, discriminatory treatment of certain types of borrowers. That is, borrowers with smaller loans are likely to have less technical expertise, may not have as sophisticated of a payroll process, are less likely to have a pre-existing relationship with the lender, are less likely to have outside professional help, and may be slow to develop procedures to handle the PPP loan forgiveness process. Given that lenders have already been sued for discriminatory treatment of borrowers in this process, lenders not using objective and well-identified protocols may be ripe for such claims.
On the other hand, it is not possible to prepare for every type of borrower – most with different recordkeeping procedures – in the short time span presented. Even if these issues are addressed appropriately, a difference of opinion by the SBA in its review process – which could be dictated by political pressure or yet published guidance – could cause more issues for borrower and lenders and could put them at odds with one another. Worse yet, there are bound to be a significant number of loans that should never have been generated at all as the borrowers were ineligible. If a lender makes this determination in the loan forgiveness process, what should they do if their initial review was part of the problem? Issues like these, and a host of other unknown issues, are certain to crop up in the next few months.
Wondering What It Is I Should Do: Seek Professional Assistance.
With so much riding on the line and with constantly changing guidance and political pressures, it is near impossible for business owners and lenders to prepare for every situation. Plenty of business owners will seek maximum loan forgiveness – perhaps more than they are entitled to under existing guidance but necessary for the business’ survival – and banks will be placed in the unenviable position of playing the middle. Should they advocate for the business – particularly ones that have existing relationships with the bank – or should they take conservative steps and submit infallible requests, potentially claiming less than maximum forgiveness, to avoid potential liability? And what about loans that were fraudulently induced by borrowers? What type of internal review will be performed by lenders to minimize their exposure to civil and criminal liability? These are decisions that will have long-lasting effects for all involved and are based on legal, business, and other considerations.
Even after a determination on loan forgiveness has been made, lenders will be making representations to the SBA during a separate 90-day review process. Those representations by lenders, many of which come directly from the loan forgiveness review, are fraught with potential exposure to liability from both ends. Lenders will also be put in the unenviable position of communicating these decisions from the SBA to the borrowers. Again, lenders and borrowers will be stuck in the middle with tremendous pressure and opportunities for legal risks. For those that did not have their entire loan forgiven, the lender will be required to make certain representations to the SBA to have the loan guaranteed. Since some of the borrowers are likely to fold as a result of the shutdown, lenders will be forced to fight these issues with the SBA – often in circumstances where little front-end review was done and there is some exposure for the lenders. Lenders could again be put in a position at odds with their clients.
Bottom line: Both banks and business owners must act now to obtain professional help that is knowledgeable and will advocate for them in the PPP loan forgiveness process. Banks will be looking to limit potential liability on both ends and will likely not blindly accept a borrower’s application and calculations. Businesses will need to submit spotless substantiation to achieve maximum forgiveness with potential pushback from lenders and the SBA. The stakes are high, the issues continue to develop and change, and the government is likely to engage in a significant number of audits. Policies for identifying these issues proactively, dealing with them in the appropriate internal channels, and proactively communicating between lenders and borrowers are a must in order to mitigate liability.
Our skilled team at Rosenberg Martin Greenberg is happy to be stuck in the middle with you as you navigate through the Paycheck Protection Program and its loan forgiveness process. For a consultation, please contact Brian J. Crepeau (firstname.lastname@example.org) at 410.649.4981 or Brandon N. Mourges (email@example.com) at 410.951.1149. These descriptions are intended for informational purposes only and should not be taken as legal advice on any particular set of facts or circumstances.