Last year, we published an article titled “What to Do if Your PPP Forgiveness Application Is Denied.” Today, we share some insights into the Paycheck Protection Program (PPP) and appeals process based on our representation of dozens of small businesses in appeals of adverse Small Business Administration (SBA) loan forgiveness decisions at the SBA’s Office of Hearings & Appeals (OHA).
1. Do not assume that the SBA has carefully reviewed documentation you provided or that SBA correctly applied its rules and guidance.
Given that there were more than 11 million PPP loans issued in 2020 and 2021, it was inevitable that a substantial number of forgiveness applications would be denied based on borrower errors. It was also inevitable that the SBA would make errors when reviewing such an influx of loans and forgiveness applications. This plays out every day, as many of the SBA’s denial decisions are contrary to law, the SBA’s own rules and guidance, and even facts and documentation submitted to the SBA.
For example, many borrowers have received denial decisions based on the SBA’s misapplication of the “single corporate group” rule that imposed an aggregate group limit of $20 million for first draw loans issued after April 30, 2020, and a limit of $4 million for second draw loans.
In many other instances, the SBA has taken an aggressive position—in apparent contradiction of its own regulations—with its application of the ineligible businesses list in 13 CFR 120.110, including certain types of financial businesses.
Additionally, the SBA will at times hang its hat on facts or documents from decades prior to the PPP to deem that businesses were affiliated, without considering the businesses’ changed circumstances and actual realities.
Finally, the SBA has issued many denial decisions that seem to come out of nowhere for borrowers because of communication issues between the SBA and lenders. Borrowers in these situations are forced to go through the appeals process and effectively resubmit documents that the SBA should have already received or respond to old requests that borrowers never received from their lenders.
In light of the above, borrowers should not simply accept the SBA’s denial decision if there is a chance it was made in error.
2. After appeals are filed with OHA, SBA counsel is usually open to remedying SBA errors prior to a final decision from an OHA administrative law judge.
SBA’s lawyers want to cooperate with borrowers during the appeals process. This usually means that the SBA’s counsel is receptive to requests from borrowers to have the SBA program office re-review the challenged denial in light of the arguments and information provided in the appeal. This re-review frequently (but not always) results in the SBA reversing the challenged denial decision prior to any finding from the OHA administrative law judge.
3. If the SBA forgave your loan in 2020 or 2021, do not get too comfortable.
Many PPP borrowers likely think that their PPP saga ended when the SBA forgave the loan. However, the SBA is showing no indication that it intends to move on from its reviews of PPP loans, including previously forgiven loans. With a six-year audit window from the time of forgiveness for loans over $150,000, the SBA has an extended period to review the loans. If the SBA issues your business a request for information, make sure to respond in a timely and thorough manner. Given the above, do not be surprised to see requests for completely irrelevant information or even information you already provided to the SBA.
4. Government contractors should keep in mind the Defense Contract Audit Agency’s (DCAA’s) guidance on PPP loans.
Along those same lines, borrowers that hold government contracts may see their PPP headaches continue for some time. Businesses that hold government contracts were eligible to receive PPP loans. However, in September 2021, the DCAA released a series of frequently asked questions (FAQs) that included a discussion of how the government will treat PPP loans awarded to government contractors. The FAQs provide that to “the extent that PPP credits are allocable to costs allowed under a contract, the Government should receive a credit or a reduction in billing for any PPP loans or loan payments that are forgiven.” Government contractors that believed they had finally finished navigating the PPP process when the SBA forgave their loans might face a later DCAA audit to determine whether they must credit the government with any of the forgiven amount.
5. Forgiven PPP loans still carry potential M&A risks and considerations.
SBA loan reviews of previously forgiven loans—even if the re-review does not ultimately result in a denial of loan forgiveness—will cause headaches and confusion for businesses (and the new owners of those businesses) that had their loans forgiven and subsequently underwent a change of ownership. The personnel who handled a company’s loan application, forgiveness application and correspondence with the lender may be long gone from the company. But the company must retain PPP records and comply with any future SBA reviews of the loan. If the SBA does end up determining that a previously forgiven loan should have been denied, there will be a scramble to figure out who must pay it back—and who should pay it back.
6. The 30-day clock to file an appeal begins on the date the borrower actually receives the final loan review decision document, not the date listed on the final loan review decision.
If the SBA elects to deny—in full or in part—a borrower’s forgiveness application, the SBA will send the borrower’s lender a final loan review decision. Lenders must then pass this decision along to the borrower within five business days. The SBA’s Final Rule on Borrower Appeals of Final SBA Loan Review Decisions Under the Paycheck Protection Program stipulates that a borrower has 30 calendar days after “receipt of the final SBA loan review decision” to appeal the SBA’s decision to the OHA. (See 13 CFR § 134.1202(a).) Accordingly, the 30-day clock begins to run from the date a borrower receives the decision from its lender, rather than from the date listed on the final loan review decision.
The authors of this article have successfully represented dozens of small businesses in PPP appeals before the OHA. We have extensive experience advising clients on issues relating to affiliation rules, PPP loan eligibility, PPP loan forgiveness, mergers and acquisitions involving PPP loans and government investigations and audits. If you have any questions or need assistance regarding the denial of a PPP forgiveness application or any PPP-related issue, please contact the authors of this article or your regular McDermott lawyer.