Lender vs. SBA Denial: Understanding PPP Forgiveness Process.

A lender’s denial of a PPP loan forgiveness application is an administrative act, not a legal finding of fraud. It marks an initial decision based on the lender’s initial review of the documentation provided. However, it is important to distinguish this first step from the SBA’s potential review. As documented in the PPP Loan Forgiveness Program (LFP) and related guidelines, these represent separate stages of forgiveness administration. First and foremost, a lender’s forgiveness denial does not, by itself, establish that the borrower has committed a criminal act. The lender’s decision reflects its assessment of eligibility based on the information available at the time; it does not constitute a final finding of fraud, misrepresentation, or any other statutory violation. A lender’s denial may be the result of calculation disputes rather than suspicions of fraud. PPP forgiveness calculations can be complex and subject to numerous interpretation challenges. A borrower might make an honest mistake or rely on a plausible interpretation of the rules, yet still have its application denied by the lender. At the initial review stage, lenders have several options:

• Approving the forgiveness application.
• Denying the forgiveness application.
• Denying the application without prejudice. The “denial without prejudice” outcome means that the lender determines the information currently on hand is insufficient to support forgiveness, but the borrower is allowed to supplement their application with additional documentation.

The Small Business Administration (SBA), in turn, retains the authority to determine whether the amount requested is indeed eligible for forgiveness. In its role overseeing the program, the SBA may decide to approve, reduce, or deny the amount otherwise eligible for forgiveness. This indicates that even if a lender initially approves, the SBA can still intervene, and even if a lender denies, there may be grounds to challenge the decision at the federal level.

How can a borrower turn a lender denial into SBA review?

Borrowers seeking PPP loan forgiveness begin the process by submitting a PPP loan forgiveness application to the lender servicing their PPP loans. As established in the PPP Loan Forgiveness Program (LFP) and related guidelines, the loan servicer plays a critical role in both the initial review and the forwarding of approved or denied requests to the SBA. With the sole exception of approved direct PPP loans, the PPP loan forgiveness application must be submitted to the lender that disbursed the loan. The lender must transmit its forgiveness decision to the SBA within 60 days after receipt of a complete application from the borrower. If the lender approves the application in full, the lender, as the PPP loan servicer, will send an email notification to the borrower stating “Approved.” Similarly, in cases where the lender approves some (but not all) of the forgiveness amount requested, the lender will notify the borrower that its application is “Approved with modification.” If a lender denies the application in whole, this triggers the process for requesting a review by the SBA. The lender, which is tasked with initially processing the application for approval or denial, will send an email notification stating, “Denied.” Upon receipt of this denial, the borrower has 30 calendar days to send a request for SBA review to the lender. The lender must promptly transmit its decision to the SBA and, if a borrower requests a review, must notify the SBA of the request within five calendar days. The SBA retains authority at all stages to intervene. Subject to any SBA review of the loan or loan application, the SBA must remit the appropriate forgiveness amount to the lender no later than 90 days after the lender issues its decision to SBA. This administrative process is separate from criminal proceedings, though at any stage, a borrower must be prepared to defend against any allegation of fraud, even if it was initially levied by the lender.

Which evidence can rebut the forgiveness calculation or eligibility problem?

A lender’s denial of a PPP loan forgiveness application can often be rebutted by properly supporting the borrower’s eligibility, the amount requested, and the borrower’s use of the loan proceeds. The SBA’s review of any submitted lender-denial appeal will include an examination of the following factors: (i) eligible loan amount, (ii) PPP loan proceeds usage, (iii) borrower eligibility, and, (iv) the calculations used to determine the amount of forgiveness requested. These requirements include an examination of the borrower’s documentation. In regard to the documentation requirements, the SBA and U.S. Department of the Treasury have clarified the records a borrower must retain. Under the PPP Loan Forgiveness Program (LFP), the SBA expressly demands that “all PPP borrowers must retain records related to their PPP loans for six years after the loan is forgiven or repaid in full:

• Their PPP loan application(s) and necessity certification(s);
• Payroll records;
• Documentation supporting the amount of PPP loan proceeds requested for forgiveness; and,
• For Second Draw loan applicants, records supporting their applicable gross-receipts reduction certification(s).

This evidence is critical for rebutting an SBA review and supporting a request for forgiveness. Furthermore, the SBA and LFP guidelines set out how a borrower may support the eligibility of its expenses. For example, in addition to eligible payroll costs, the LFP allows for forgiveness of costs incurred for business mortgage interest, real estate rent or lease payments, non-residential utility costs, and eligible PPP loan fees. A lender may generally approve a borrower’s forgiveness application based on documentation for these expenses. Along with this, a borrower’s request for PPP loan forgiveness must generally meet the 60% payroll costs requirement. This requirement applies in two scenarios:

• “To receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs, and may use up to 40 percent of such amount for any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), any payment on any covered rent obligation, any payment on any covered operations expenditure, any payment on any covered property damage cost, any payment on any covered supplier cost, any payment on any covered worker protection expenditure, or any covered utility payment.” and,
• “In general, a reduction in FTE employees during the covered period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees.”

The calculation for either scenario must be based on the data in the borrower’s PPP loan application or supporting documentation. If documentation to support the request for PPP loan forgiveness is absent or in doubt, the SBA will have additional grounds to deny the appeal.

Which PPP rule versions control an earlier forgiveness application?

The Paycheck Protection Program (PPP) is subject to complex rule versions and amendments. For the purposes of PPP Loan Forgiveness, the original covered period was eight weeks after the date of loan disbursement. With the enactment of the Paycheck Protection Program Flexibility Act, the SBA allows PPP borrowers to extend this covered period to 24 weeks after the date the lender disburses the PPP loan.

Eligible PPP payroll costs include:

• Wages and salaries paid to employees, as well as
• Tips, commissions, bonuses, and “hazard pay,”

as well as (i) other forms of compensation that would otherwise count as compensation for purposes of the Internal Revenue Code “without regard to the statutory cap,” (ii) eligible employer-paid health insurance costs, and (iii) costs paid in connection with any employee’s qualifying퇴직금 or pension plan.

While employer-paid group health-care costs could count as eligible payroll costs, qualifying payment required for the provisions of group health care or group life, disability, vision, or dental insurance benefits, including insurance premiums; generally count as eligible payroll costs. Earlier borrowers can adopt the expanded maturity and covered-period options through amending their loan documentation, if they have not done so already. With that in mind, a potential denial by your lender does not preclude seeking reconsideration with the SBA, as the SBA has broader-reaching authority to approve, reduce, or deny the amount of forgiveness requested.

When may the SBA revisit an approved or denied PPP loan?

The SBA maintains the authority to review all PPP loans at any time. According to the PPP Loan Forgiveness Program (LFP) guidelines, the SBA may conduct reviews in order to monitor compliance with all relevant PPP rules and regulations. Notably, this authority extends to the SBA reviewing the loan regardless of whether it was initially approved or denied by a lender, and whether the loan has already been forgiven or has been repaid in full. As LFP documents explain, SBA representatives “The Administration shall permit any person to file with it a statement in writing, under oath or otherwise as the Administration shall determine, as to all the facts and circumstances concerning the matter to be investigated. For the purpose of any investigation, the Administration is empowered to administer oaths and affirmations, subpena witnesses, compel their attendance, take evidence, and require the production of any books, papers, and documents which are relevant to the inquiry. Such attendance of witnesses and the production of any such records may be required from any place in the United States.”

Along with the SBA’s authority to conduct reviews, the SBA Office of Inspector General (OIG) may also request PPP records during its review. The Special Inspector General for Pandemic Recovery (SIGPR) received authority to conduct audits and investigations concerning the CARES Act financial assistance programs. The scope of these reviews varies widely, and PPP loan fraud enforcement is focused on a variety of issues. If an SBA review is in progress and/or your lender has denied your PPP loan forgiveness application, now is the time to engage experienced federal criminal defense counsel to help you avoid (or fight against) any allegations of fraud or misconduct. For a free and confidential initial consultation with an attorney at Spodek Law Group, call our office today at 866-441-9117.

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