Last week, the Small Business Administration (SBA) began asking SBA Paycheck Protection Program (PPP) lenders to issue over 50,000 loan necessity questionnaires to borrowers that received $2 million or more in funds from the PPP. The information collection is extensive and reaches to private and public company borrowers. Also, both nonprofit and for-profit borrowers received questionnaires, for which there are two different forms: one for nonprofit borrowers and another sent to for-profit firms. SBA has made no announcement regarding the questionnaires, other than the required Federal Register notice, and has not posted the questionnaires on its website. Companies who received the questionnaires must take heed: while the lender may be the conduit, these requests are very likely for pre-investigation enforcement screening by the SBA. For more information about the likely uptick in enforcement related to PPP and other CARES Act funds, see this client alert on the recent activities of the Special Inspector General for Pandemic Recovery.
The increased regulatory burden may be both surprising and concerning.
It appears that questionnaire responses may be used to determine loan forgiveness or further investigation. The stated purpose of the form is to collect supplemental information that will help SBA evaluate whether economic uncertainty made the borrower’s loan request necessary. According to the Federal Register notice, SBA estimates there will be approximately 42,000 for-profit responses and approximately 10,000 nonprofit responses, which would make responses a good screening tool for enforcement investigations. The responses carry the same weight as the application itself: The borrower’s representative must certify her responses to the form under threat of criminal sanctions for making a false statement. In addition, the form states that SBA reserves its right to request additional information to complete its review, and will make its determination of loan necessity based on the totality of a borrower’s circumstances.
The SBA’s questionnaires raise concerns about whether SBA is going beyond Congress’ intent and if this form creates additional regulatory burdens for already struggling small businesses. Numerous proposals from Congress have sought to simplify the forgiveness process for many small businesses. However, these additional information requests seemingly expand the review of borrowers’ certifications, which were made when they applied for forgiveness. When the PPP program was enacted by Congress, applicants needed only to certify that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” The questions on the form ask borrowers to make a showing of an actual (rather than prospective) detrimental economic impact, which is beyond what the legislation required.
Banks and borrowers alike may push back on SBA for releasing these backend questionnaires given the amount of supplemental information being sought from borrowers, the short turnaround time for both borrowers and banks, and the burden put on banks. On the upside, however, the questionnaires provide a helpful rubric for the expected deluge of SBA investigations. And for companies that can quickly and clearly show that their need for SBA aid was justified, responding to the request may help avoid a costly investigation later.
Some borrowers who received the letter requests may struggle to complete the form and provide supporting documents within the deadline. Industry watchers have concerns about accuracy.
Borrowers have just 10 business days from receipt of the questionnaire to return the completed form and required supporting documents to the borrower’s financial institution. Banks then have just five days to upload the form and documents to the SBA platform, which requires the financial institution to separately input the borrower’s responses into the SBA web form. With this short time frame, borrowers should not expect their lender to offer proofreading services or verifying that all requested information has been collected.
Both the speed required and manual input by lenders is concerning. Making banks responsible for entering borrowers’ responses to the questionnaires not only burdens the banks with an unexpected workload, but also risks causing inadvertent data entry errors that could delay forgiveness of borrowers’ loans. Further, if the purpose of the information is to create a database to screen for future enforcement matters, a typo could result in expensive and unnecessary government engagement for the borrower later on.
The information requested is detailed and extensive, particularly with only 10 days’ notice.
The SBA forms seek updated and detailed financial information from borrowers, details concerning local COVID-19 shutdown orders, information about other CARES Act aid, and details about dividends and highly compensated owners or employees. The for-profit questionnaire is divided into two sections: business activity and liquidity. The form also allows borrowers to indicate whether the information being provided is customarily kept confidential and to shield such information from open records disclosure.
Regarding business activity, the questionnaire asks:
- What was borrower’s gross revenue in Q2 2020 and in Q2 2019?
- Was borrower required to shut down or significantly alter its operations by a state or local authority due to COVID-19? If so, the borrower must cite the order start and end dates.
- Did borrower voluntarily cease or reduce its operations due to COVID-19?
- Did borrower begin any new capital improvement projects not due to COVID-19?
- What is borrower’s NAICS code?
Regarding liquidity, the questionnaire asks:
- What were borrower’s cash and cash equivalents on the last day of the calendar quarter immediately before the date of borrower’s PPP loan application?
- Has borrower paid any dividends or other capital distributions to its owners?
- Has borrower prepaid any outstanding debt?
- Have any of borrower’s employees been compensated in an amount that exceeds $250,000 on an annualized basis?
- Is borrower a publicly traded company? If so, what was the borrower’s market capitalization on the date of borrower’s PPP loan application?
- On the date of borrower’s PPP loan application, did any publicly traded company own 20% or more of any class of borrower’s outstanding equity securities?
- If the borrower is not a publicly traded company, what was the borrower’s book value on the last day of the calendar quarter immediately before the date of borrower’s PPP loan application?
- Is borrower a subsidiary of another company? If so, is borrower’s parent company a foreign company? Is borrower’s parent company a publicly traded company?
- Is borrower affiliated with a private equity firm, venture capital firm, or hedge fund?
- Has borrower received funds from any other CARES Act program, excluding tax benefits?
The nonprofit questionnaire is similar, but includes questions specific to nonprofits including:
- What were borrower’s gross receipts from gifts, grants, and contributions in Q2 2020 and in Q2 2019?
- Does borrower hold assets in any endowment funds?
- On the last day of the calendar quarter immediately before the date of borrower’s PPP loan application, what was the value of borrower’s non-cash investments?
- If borrower is a school, college, or university, what was the median tuition paid per student for the 2019-2020 academic year?
Interestingly, only the nonprofit questionnaire asks for the borrower’s Q2 2020 and Q2 2019 expenses.
Although notice is short and the questions are many, avoid the temptation to complete the questionnaire with the bare minimum. Borrowers have many reasons to ensure that SBA has the full picture of the borrower’s balance sheet at the time it was applying for the PPP loan. For example, for-profit borrowers should consider providing expenses information as part of the optional additional information question in the business activity section. And if the questions—or your draft responses—are causing concern, consult with a member of our Small Business Rapid Response and Government Investigation & White Collar Defense teams.