The PPP Loan Process: How To Fix Mistakes Before It’s Too Late Fox Rothschild LLP
Paycheck Protection Program (PPP) loans were designed to help small businesses cover explicit authorized expenses during the COVID-19 pandemic. There are various eligibility requirements that businesses must meet before applying for PPP loans and subsequently after requesting a discount. Because loans have been applied for and granted at a rapid rate, many business owners have unknowingly made mistakes in the application process or in spending the loan money. Many lenders have not reported or even acknowledged such errors. After the loans were distributed, the SBA issued guidelines on eligibility requirements. Now, as businesses turn to the forgiveness process, look for an additional PPP loan, or simply realize that they received the loan proceeds in error, businesses must try to navigate the complicated process of correcting errors. How businesses correct these mistakes is extremely important and can make the difference between having to write a good faith error letter to a lender and pushing back a criminal investigation.
Possible problems that we see:
- Include independent contractors in the loan calculation
- Incorrect calculation of full-time employees
- Make mistakes when calculating salary costs
- Spending loan money on unauthorized uses
- Incorrect determination of the period covered
Loan excess amount errors
PPP borrowers have long feared that the SBA will be inflexible in granting a loan forgiveness to borrowers who have made good faith mistakes in the application or forgiveness process. Loan waiver often depends on a borrower’s eligibility to participate at the time of application and the borrower’s eligibility for full loan waiver based on the proceeds received. A loan is not eligible for a discount if the SBA determines that a “borrower was not eligible for the PPP loan based on the provisions of the CARES Act” See 85 Fed. Reg. 38306. Similarly, lenders will be instructed to deny the loan forgiveness request if the SBA determines that the borrower [was] ineligible for the loan amount or loan forgiveness amount claimed by the borrower. See 85 Fed. Reg. 33012.
SBA Procedure Notice 5000-20078 provides guidance to parties who have identified an âexcess loan amount errorâ made by a borrower or lender in approving the PPP borrower application. Procedural Notice 5000-20078 deals with situations in which a borrower or lender made a good faith error that resulted in them receiving a PPP loan in excess of the correct amount. The following are examples that could result in a âLoan Excess Amount Errorâ:
- Do not subtract amounts paid to employees in excess of $ 100,000 (annualized and prorated) from reported salary costs.
- Include payments to independent contractors when calculating salary costs in the PPP borrower application form. As a result, the approved amount exceeded the correct maximum loan amount.
Borrowers who see and identify a good faith error on the excess loan amount are not precluded from requesting a full forgiveness of the loan. Rather, borrowers are expected to repay the excess loan proceeds and then demand forgiveness of the loan against the properly obtained balance. The pardon will only be refused for the ineligible part and the borrower will have to make payments on the remaining amount of the loan. It should be noted that Notice of Procedure 5000-200078 does not require borrowers to immediately repay the full amount of excess loan proceeds. Instead, borrowers will be required to make payments for the excess amount in accordance with the terms of the note. Borrowers and lenders who identify an excess loan amount error are advised to notify the SBA even if a final loan cancellation decision has been made.
Borrowers should be aware that Procedural Notice 5000-20078 and its discussion of âLoan Excess Errorâ does not apply to errors caused by people making known inaccuracies or fraud.
PPP1 vs. PPP2
Generally, a borrower is eligible for a PPP2 loan if they have already received a PPP First Draw Loan (PPP1), will use or have used the full loan amount only for authorized uses, have no more than 300 employees and can demonstrate at least a 25% reduction in gross revenue between comparable quarters in 2019 and 2020. However, there are a few additional disqualifications in PPP2 that were not contained in PPP1, including one that requires a relationship review of the borrower with China.
Congress specifically targeted China in PPP2, rendering ineligible all companies with substantial ties to the country. Companies should proceed with extreme caution when deciding to apply for a PPP2 loan if they have a relationship with China.
PPP2 disqualifies companies:
- Who are created or organized under the laws of China
- Who have major operations in China
- In which a Chinese company owns or owns, directly or indirectly, 20% or more of the economic interest of the company
- Who have a resident of China on their board.
If your business has received a loan and has ties to China, the business should expect increased government scrutiny and seek advice to proactively assess potential civil and criminal liability.
If a borrower suspects that a mistake has been made
A business owner who has already received a PPP loan and believes that a mistake may have been made while applying for the loan or using the loan should consult a lawyer before contacting a government agency or lender. . A lawyer can help assess the full potential of civil and criminal exposure, interface with the lender and the government, and help mitigate potential damage.