SBA Releases Loan Necessity Questionnaire for PPP Borrowers

PilieroMazza PLLC
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PilieroMazza PLLC

On October 26, 2020, the Small Business Administration (SBA) issued a notice in the Federal Register that, among other updates, announced two new forms, 3509 and 3510 (the Forms),  related to the Paycheck Protection Program (PPP).  Form 3509 is for for-profit businesses, while 3510 applies only to non-profit entities.  These Forms will be sent by PPP lenders only to PPP borrowers who received a principal loan amount of $2 million or more, and borrowers will have ten days to complete it.  According to the SBA, the purposes of these Forms is to evaluate a borrower’s good-faith certification on their economic need, but in actuality, these Forms attempt to retroactively modify  PPP regulations and punish borrowers for not previously abiding by these new requirements.

It is our assessment that SBA’s intention is to deny loan forgiveness to businesses that were not negatively impacted by the coronavirus pandemic (COVID-19). Among other inquiries, both of these Forms compare quarterly revenue in 2020 compared to 2019 and ask borrowers if they were ordered to shut down or make significant changes to their operations due to COVID-19.  These types of questions seem to be aimed at denying loan forgiveness by demonstrating that borrowers have not been negatively impacted by COVID-19, even though no borrower could have known the impact that COVID-19 would have on them when they first submitted their loan application.

It is also of note that the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that created the PPP, made no mention of a requirement that companies be actually impacted by COVID-19, only that the “economic uncertainty” made the loan necessary.  Further, the CARES Act did not clearly define “economic uncertainty” or “need,” leaving it up to applicants to make good-faith certifications that they qualified for PPP loans based upon their own, subjective determination of what those terms meant.  While there was some, still vague, guidance released later, at the time of many initial loans, the definitions were entirely non-existent and the level of uncertainty as to how COVID-19 would affect their business was extreme.  Indeed, the economic outlook for many firms is still uncertain to this day as no one knows what will happen given the current spike in COVID-19 infections as well as how the government will react–this includes possible austerity in the federal procurement space due to the COVID-19 deficit spending. As a result, the Forms appear to be trying to facilitate post hoc rationalizations from regulators to deny loan forgiveness to eligible businesses, even though they could not have predicted their business’ financial situation for this year in the early period of COVID-19. Just today, in fact, COVID-19 infections skyrocketed to over 90,000 new infections in one day and no one is able to accurately predict what the future holds.

Given that these Forms appear to add additional requirements, we would not be surprised to see legal challenges to forgiveness denial determinations made based upon the information required by the Forms.  But, it is also possible that the SBA Office of the Inspector General or the Department of Justice could use the information from these Forms to conduct fraud investigations on certain PPP borrowers if the answers provided in the Forms create an impression, again a post hoc impression, that the businesses did not “need” the PPP loans.  While such cases would be difficult to prosecute given the legal standards involved, the risk of such an investigation or threat is often enough for the government to get the results it seeks.  And, that may be exactly the intention here.

It should also be noted that the Forms require borrowers to state if and where any information being provided is confidential or proprietary.  Thus, this document is not exempt from FOIA on its face and, as such, we strongly recommend any borrower filing out the Forms make an express representation that all information contained is highly confidential and should be treated as proprietary under FOIA Exemption 4.  It is unclear how it will ultimately be treated, but without the inclusion of such a statement or broader legend, the information may be simply released if media outlets or others make a request.

Consequently, borrowers whose loans are over $2 million should carefully review the “need” determination made, taking into account these Forms and SBA’s earlier guidance (which we wrote about here) and make sure that determination was well supported and documented.  It may also be reasonable to wait to seek loan forgiveness until the impact of these Forms, and how the government plans to use them, is better known and, perhaps, even after the first round of litigation commences on denials based upon the information contained in these Forms.  As always, we will have to see how things evolve in this ever-changing COVID-19 landscape.

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