First Draw Loans at or Over $2 million—SBA Discontinues Use of Necessity Questionnaires and What Is Next

Schwabe, Williamson & Wyatt PC

As per our earlier articles, in late 2020, the SBA began requiring borrowers with First Draw PPP loans $2 million or greater to complete a PPP Loan Necessity Questionnaire (Form 3509 (For Profit Borrowers) or Form 3510 (Non-Profit Borrowers)) as part of the forgiveness process. These forms were the subject of a lawsuit in December 2020 advanced by the Associated General Contractors of America (“AGC”).

On June 23, 2021 and June 24, 2021, the AGC announced as part of its settlement negotiations that the SBA was expected to withdraw the forms. It now appears that on June 21, 2021, the SBA requested the Office of Management and Budget’s (“OMB”) approval to discontinue Forms 3509 and 3510. The SBA letter states:

"… The Loan Necessity Questionnaires had a deterrent effect and prevented program abuse by applicants that could not make the loan necessity certification in good faith. Now that SBA’s program authority has expired, such deterrence is no longer necessary. Furthermore, SBA has been conducting loan necessity reviews, using the Loan Necessity Questionnaires, on loans of $2 million or greater where borrowers have submitted forgiveness applications. A significant number of these reviews have shown that borrowers met the good faith certification requirement.

…Discontinuance of these two forms will reduce the burden on PPP borrowers with loans of $2 million or greater, as they will no longer be required to complete the Loan Necessity Questionnaires to obtain forgiveness of their loans. SBA will also be able to conserve its finite audit and review resources and be better positioned to process forgiveness decisions within the statutory deadlines."

In the first two weeks of July, the SBA began notifying PPP lenders that the lenders will not be required to obtain the Necessity Questionnaires as part of the forgiveness process. However, the SBA is still in the process of formally implementing this change and has indicated that it will do so shortly through a FAQ.

Necessity Review Continues: First Draw PPP Loan borrowers with loans $2 million or greater that have not applied for forgiveness are the primary beneficiaries of the discontinuance of the forms. However, the withdrawal of the forms does not change the SBA review process for PPP loans. The SBA may take into account “the borrower’s circumstances and actions both before and after the borrower’s certification to the extent that doing so will assist SBA determining whether the borrower made the statutorily required certification in good faith at the time of the First Draw PPP loan application.” (Emphasis added.) (See FAQ 53.)

Support and Documentation Are Still Needed: As the SBA review procedures have not changed, all PPP borrowers are encouraged to continue to assemble, document, and retain their information that supports “necessity,” and in particular, use the information requested in the Forms as a possible checklist. See “First Draw Loans $2 Million and Up and the PPP Necessity Questionnaires.” Borrowers should be prepared to present their narrative or rationale on “necessity” if it is requested or during a review. Borrowers should also assemble and maintain information for eligibility, the calculation of the loan amount, and the use of funds. See “Updated Key Considerations for PPP Documentations under the Economic Aid Act.”

Schwabe is committed to providing our clients with up-to-date resources to understand the CARES Act and navigate the COVID-19 pandemic. For legal advice for your situation, you should contact an attorney.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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