SBA Requires Borrowers Who Received PPP Loans of $2 Million or More to Submit “Pre-Audit Review” Information

Burr & Forman

Burr & Forman

On October 31, 2020, the SBA released new forms and related instructions requiring borrowers with PPP loans of $2 million or more to provide additional information related to their PPP loans.  Titled “Loan Necessity Questionnaire”, the SBA released separate forms and instructions applicable to both for-profit and non-profit borrowers.  The SBA explains that “the purpose of this form is to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that you made on your PPP Borrower Application.”

Applicable to for-profit PPP borrowers, the new Form 3509 asks for additional information to be used by the SBA to determine whether the borrower has made the required good-faith certification in its PPP loan application that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

The form will be sent to the borrower by its lender (and not by SBA).  The borrower will have 10 days to complete and return the form to the lender, together with required supporting documentation.  The lender will then have 5 days to submit this information to the SBA.

Through the submission of this form to lenders, and by the lender to the SBA, the SBA will essentially begin a “pre-audit” review of borrowers with PPP loans of $2 million or more, seeking information from each borrower about whether there was “economic necessity” for the loan.  The SBA can ask for more/follow-up information.  If a borrower does not return the form as required, the borrower can be determined to be ineligible for the PPP loan.

Each borrower that receives this form must carefully review the form and instructions before responding.

Applicable to for-profit borrowers, and particularly those that are not publically-traded, the new SBA form requires an extensive amount of information, including:

  • Gross revenues/receipts for quarters in both 2019 and 2020.
  • Information about whether the Borrower was required by state or local authorities to shut down due to COVID-19.
  • Information about whether the Borrower was required by state or local authorities to significantly change operations due to COVID-19.
  • Whether any voluntary reduction/alteration in operations took place due to COVID-19.
  • The amount of cash outlays for voluntary or mandatory alterations of operations or facilities due to COVID-19.
  • Cash and cash equivalents of the Borrower as of the last calendar quarter immediately before the PPP loan application.
  • Dividends/capital distributions to owners of the borrower between March 13, 2020, and the end of the Borrower’s covered period.
  • Prepayments made on debt before its contractual due date made between March 13, 2020, and the end of the Borrower’s covered period.
  • The number of employees and, separately, the number of owners of the borrower, who received compensation in an amount that exceeds $250,000 on an annualized basis during the Borrower’s covered period.
  • The total book value of the borrower’s equity on the last date of the calendar quarter preceding the date of the loan application.
  • Whether the Borrower received other funding from the Coronavirus Aid, Relief, and Economic Security (CARES) Act in addition to PPP funds.

PPP borrowers that received PPP loans of $2 million or more should begin to prepare this required form in anticipation of receiving it from their lenders – and in anticipation that the SBA will now be carefully scrutinizing the borrower and its loan to see if the borrower may not qualify for the PPP loan.

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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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