SBA Issues New Guidance on Loan Forgiveness

COVID-19 Update

About the Interim Final Rule

On January 19, 2021, the Small Business Administration (SBA) published new Loan Forgiveness Requirements and Loan Review Procedures pursuant to an Interim Final Rule, or IFR (the PPP Forgiveness IFR). The PPP Forgiveness IFR consolidates prior IFRs related to the forgiveness and review process of the SBA for Paycheck Protection Program (PPP) loans, and incorporates changes made by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act). The PPP Forgiveness IFR helps streamline and clarify the loan forgiveness process for borrowers of PPP loans.

Process and Procedures

While the SBA is still free to review any loan from the first and second tranches of PPP loan disbursement, the PPP Forgiveness IFR states that lenders are tasked with conducting the complete review of the borrower’s loan forgiveness application and required supplementary documentation. The lender must issue an approval or denial (in whole or in part) of a borrower’s loan forgiveness application to the SBA no later than 60 days from the receipt of the loan forgiveness package from the borrower, and must notify the borrower of the forgiveness amount. If only a portion of the amount is forgiven, or if forgiveness is denied, any remaining loan amount must be repaid by the borrower on or before the maturity date of the loan.

The SBA also retains independent authority over the loan forgiveness process by reserving the right to review a lender’s loan forgiveness decision as follows:

  • The SBA will notify the lender if it requests review of a forgiveness decision or if the SBA declines a request for review.1
  • The SBA’s decision to review a borrower’s loan will focus on whether the loan amount was properly calculated and whether the borrower used the proceeds from the loan for authorized purposes.
  • If the SBA determines that the borrower was ineligible to receive a PPP loan or did not use a portion or the entirety of the amount received for authorized purposes, then the SBA can declare the loan ineligible for forgiveness.
  • In such an event, the SBA would request immediate repayment of the loan and all interest accrued thereunder, or could pursue other remedies. 

New Forgivable Nonpayroll Expenses

The PPP Forgiveness IRF also creates four new categories of forgivable, nonpayroll expenses:

(i)   Covered operations expenditures (including costs for software for business operations);
(ii)  Covered property damage costs (including for vandalism or looting not covered by insurance);
(iii) Covered supplier costs (such as suppliers of goods essential for operation of the business); and
(iv) Covered worker protection expenditures (such as costs to adapt a business facility pursuant to HHS or CDC COVID-19 guidelines).

These additional categories are acceptable for both first and second tranche PPP loans, but, with respect to any first tranche loan, only if the SBA had not yet remitted a declaration of forgiveness as of December 27, 2020. The SBA has also introduced simplified forms (Form 3508S and 3508EZ) for borrowers meeting certain specified requirements, including application for less than $150,000 of loan forgiveness. Our prior releases on the PPP loan forgiveness application process and requirements, including a description of Form 3508EZ, can be found here and here.

No Update for Larger PPP Loan Borrowers

The SBA had released prior forms and instructions for PPP borrowers of $2 million or more, as we previously discussed here. These forms and instructions were meant to provide information related to the review process of larger PPP loans and to notify borrowers such loans would be subject to automatic audit. The SBA’s auditing is focused on whether borrowers of such loans complied with applicable regulations and faced the economic necessity required for such large amounts of loan funding. If the SBA determines in the course of its review that a borrower lacked an adequate basis for a loan of this size, it will require repayment of the loan and inform the lender to inform the borrower that the loan is ineligible for forgiveness.

Unfortunately, the PPP Forgiveness IFR does not offer new guidance or information related to these larger PPP loans.

Read the full PPP Forgiveness IRF here.

1 Similarly, the SBA is free to review a borrower’s first and second PPP loan disbursements and determine the eligibility status of a borrower at any time in accordance with the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Economic Aid Act.

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