As part of Bradley’s continued reporting on issues arising from the CARES Act and the Paycheck Protection Program (PPP) that uniquely impact government contractors, we summarize here a new Small Business Administration (SBA) loan decision appeal rule.
Background on the New Rule
On March 27, 2020, the CARES Act became law. Section 1102 of that act established the PPP, which created a program administered by the SBA to extend emergency loans to small businesses to cover a variety of payroll and other business expenses that the businesses may have trouble paying because of COVID-19-related business disruptions. Subject to several exceptions, the act generally defined “small businesses” as businesses that would already be considered small under existing SBA rules or had 500 or fewer employees. Section 1106 of the act allowed for forgiveness of PPP loans for amounts expended on payroll, mortgage interest, rent, and utilities.
Over several months after the act became law, the SBA issued numerous rules and instructions on how the PPP would operate before it stopped accepting loan applications on August 8, 2020. On August 27, 2020, the SBA formally issued its interim final rule entitled Appeals of SBA Loan Review Decisions Under the Paycheck Protection Program.
Summary of the New Rule
The SBA’s new regulation gives disappointed borrowers a means to appeal official PPP loan decisions to the SBA’s Office of Hearings and Appeals (OHA) by adding a new subpart to the SBA’s OHA rules (13 C.F.R. Part 134). OHA is the forum to which companies now appeal various size-related protests.
There are certain limits on the scope of the PPP loan appeal rule. To start with, the OHA rules of practice for appeals of size determinations and NAICS code designations do not apply to PPP appeals. In addition, the borrower cannot appeal any decision made by a lender concerning a PPP loan nor any PPP loan determination by SBA’s Inspector General. Lastly, the new rule creates no appeal right on what the SBA calls its non-PPP “7(a) loans,” which provide financing for general business purposes for small businesses.
With those limits in mind, to appeal a PPP loan decision, there must first be an official, written decision by the SBA after the SBA completes a review of a PPP loan. For an appeal to be possible, the official SBA decision has to have found that a borrower (1) was ineligible for a PPP loan; (2) was ineligible for the PPP loan amount received or used the loan for an unauthorized purpose; (3) “is ineligible for PPP loan forgiveness in the amount determined by the lender in its full approval or partial approval decision issued to SBA;” and/or (4) “is ineligible for PPP loan forgiveness in any amount when the lender has issued a full denial decision to SBA.”
Only the borrower on a loan for which SBA has issued a final loan review decision has standing to appeal that loan review decision to OHA. Neither individual owners of a borrower nor lenders have standing to appeal. The borrower must file the appeal within 30 days of receiving the final SBA loan review decision or notice from the lender of the final SBA loan review decision, whichever is earlier.
In general, an appeal petition must include (1) a statement on jurisdiction; (2) a copy of the SBA loan decision being appealed (or a description of the decision if it is not available); (3) a full, specific statement explaining why the decision was factually or legally incorrect; (4) the relief sought; (5) signed copies of a variety of supporting federal and state payroll tax documents and similar filings; (6) copies of federal tax returns; and (7) contact information for the borrower or the borrower’s attorney. The appeal cannot exceed 20 pages in length, unless the OHA judge grants permission. The borrower must serve a copy of the appeal on the SBA’s litigation counsel at the time of filing. Either the borrower or the SBA may seek a protective order for confidential business or financial information or other sensitive information.
The appeal process is designed to be swift, with an ideal case taking approximately 90 days to resolve, although the OHA can extend that time period. Typically, the SBA will file the administrative record within 20 days after the judge issues a scheduling order. “The administrative record shall include relevant documents that SBA considered in making its final decision or that were before SBA at the time of the final decision,” but the record “need not… contain all documents pertaining to the appellant.” For that reason, the judge may allow the SBA to make discovery demands on the borrower upon showing good cause. For its part, the borrower may object to the absence of documents from the record or claims of privilege involving documents in the record.
The SBA may file a response to the appeal petition, but the borrower may not file a reply without permission. The judge typically will close the record 45 days after receipt of the appeal petition but may extend that period. If necessary, the judge may allow an oral hearing to resolve genuine issues of material fact. Once the record is closed, the judge will issue a decision within 45 days, as practicable.
The judge decides the appeal based solely on a review of the written record, the appeal petition, any response to the petition, any admitted evidence, and any oral hearing. “The standard of review is whether the SBA loan review decision was based on clear error of fact or law. The appellant has the burden of proof, by a preponderance of the evidence.”
The appeal rule allows the judge to stay a case in whole or in part for the parties to engage in alternative dispute resolution. In addition, any party may file an interlocutory appeal of a judge’s ruling to the SBA administrator or designee within 20 days of that ruling. The judge may stay the appeal in whole or in part pending the resolution of the interlocutory appeal.
The possible outcomes of the appeal are that “OHA may affirm, reverse, or remand an SBA loan review decision.” When OHA issues a decision, it is the SBA’s “initial decision.” Unless a party files a request for reconsideration by the judge or a request for review by the SBA Administrator, the initial decision becomes the SBA’s “final decision” after 30 days. Before a borrower can take a PPP loan appeal decision by OHA to federal court, the borrower must exhaust its administrative remedies by requesting that the SBA Administrator review either the disputed initial OHA decision or the reconsidered OHA decision.
Lastly, if successful, the new rule specifies that a prevailing PPP borrower may not recover attorneys’ fees under the Equal Access to Justice Act.
The promulgation of formal PPP forgiveness appeal rules shows that basic due process protections are now in place to take some of the rough edges off the implementation of what was an understandably hurried program rollout. In that way, the rules reflect a maturing administrative process.
The SBA figures available from early August reflect that the PPP approved more than 5.2 million loans totaling over $525 billion. To the extent that even a small percentage of those loans are adjudicated as ineligible for loan forgiveness, there is a potential for a wave of PPP appeal litigation from disappointed and/or financially destitute borrowers, which may severely stress the OHA.
Bradley will continue to monitor developments involving PPP appeals.