Kiefer: Responding to SBA PPP Loan Audits: What We Learned
The Coronavirus Aid, Relief, and Economic Security Act created the Paycheck Protection Program, for which lawmakers ultimately allocated $ 806 billion. In its latest report, the Small Business Administration reports that it has approved PPP loans of just under $ 800 billion. The SBA also announced that it will verify all PPP loans of $ 2 million or more, and that it may verify other loans if it sees fit. Audits started earlier this year and are expected to continue next year.
If the SBA determines during an audit that a borrower was eligible for the full amount of their PPP loan and has spent the loan as permitted by the CARES Act, the SBA will cancel the loan and pay the bank lender the total amount of the loan. plus interest. If, however, the SBA determines that the borrower was not eligible for the PPP loan, was not eligible for the full loan amount, or did not spend all or part of the loan proceeds as permitted by law, it may require the borrower to repay all or part of the loan, with interest. Worse, if the SBA suspects fraud, it will refer the borrower to the Department of Justice for possible criminal prosecution. To date, the DOJ has filed over 300 indictments and secured over 60 PPP loan fraud convictions. These lawsuits may be just the tip of the iceberg. The deputy head of the DOJ’s fraud section in Washington, DC, recently told us that they have a “huge backlog” of PPP loan fraud cases to investigate and prosecute, and the attorneys’ offices across the states- United nationwide are reporting similar arrears. Now that the FBI and other agents are back to work after COVID-19 leave, the number of criminal investigations and prosecutions is likely to skyrocket.
SBA audits of PPP loans therefore create both significant risks and offer huge potential benefits to borrowers. But the SBA has given little guidance on how it conducts these audits, what it examines, what factors may lead it to make a criminal referral, or what borrowers can do to influence decisions. of the SBA. Since SBA audits are confidential, their knowledge is limited to those involved in the audits themselves. Our CARES Act SBA audit advocacy team at Dentons has represented borrowers across the country in audits ranging from $ 150,000 to $ 10 million and gained insight into the SBA audit process, key issues and decision making. This article is based on what we learned from SBA PPP loan audits of clients in New York, Massachusetts, California, Pennsylvania, Texas, Arizona, Kansas, Indiana, Illinois, and other states.
Main audit issues
SBA auditing practice varies from loan to loan. In some audits, the SBA simply informs the borrower’s bank that it is “reviewing” (aka “auditing”) the loan, requiring the bank to notify the borrower and upload all documents to the SBA’s electronic portal. relating to the PPP loan within 15 days. . No extension of time is granted. In these types of audits, the SBA does not notify the bank or the borrower of the specific issues being investigated. In other audits, the SBA informs the bank that the SBA requires the borrower to provide answers to specific issues. Borrowers participating in such audits should understand that even though the SBA has identified one or more issues, the SBA audit may cover unidentified issues and, therefore, borrowers should provide all relevant information and documentation to any potential problem. In the event of an unfavorable SBA audit decision, an appeal would be based on what is on the SBA file at the time of the decision. Thus, failure to produce essential information or documents could jeopardize a subsequent appeal. There is no right to complete the file on appeal, and the CARES law places the burden of proof on borrowers.
The need for a loan is one of the most common issues in PPP loan audits. The CARES Act required borrowers to certify that due to the coronavirus, “the uncertainty of current economic conditions makes it necessary to apply for the loan to support the eligible recipient’s ongoing operations.” Congress has not defined the terms that make PPP loans “necessary”, but has delegated the promulgation of regulations and the issuance of guidance on PPP lending matters to the SBA. In Frequently Asked Questions # 31, the SBA advised:
“Borrowers must make this certification in good faith, take into account their current business activity and their ability to access other sources of liquidity sufficient to support their day-to-day operations in a manner that is not significantly detrimental to the business. For example, a state-owned enterprise with substantial market value and access to capital markets is unlikely to be able to perform the required certification in good faith, and such an enterprise must be prepared to demonstrate to the SBA, on request, the basis of its certificate. ” (I underline.)
Shortly after the SBA released this guidance in April 2020, a number of companies repaid PPP loans, concluding that their access to private equity or other sources of income made them ineligible. For businesses that have kept the proceeds of their PPP loan or applied after the SBA published FAQ # 31, proving the need for the loan during an audit is essential to obtaining a loan forgiveness.
Other eligibility issues need to be addressed by many borrowers, including reviewing affiliation rules for borrowers with affiliates, subsidiaries and parents; the number of employees; and, for some borrowers, the SBA’s alternative eligibility standard of having a tangible equity of less than $ 15 million and an average net income of less than $ 5 million for the two years preceding the loan application.
A myriad of other potential issues could arise during a PPP loan audit. Borrowers should anticipate issues that the SBA may review and provide the SBA with the information and documentation necessary to achieve a favorable decision during an audit. Because borrowers have the burden of proof, they are well advised to view an audit as an opportunity to present their case, from start to finish, as if they were presenting a case in a lawsuit. This includes submitting affidavits to document the decision making, in addition to producing all the necessary documents to support the borrower’s eligibility and expenses. This gives borrowers their best chance of securing a loan forgiveness and avoiding a referral to the DOJ. •
• J. Richard Kiefer Chairs Dentons Bingham Greenebaum’s CARES SBA Audit Advocacy Team and also co-chairs the National White Collar and Government Investigations Practice Group for Dentons. The opinions expressed are those of the author.