The Paycheck Protection Program has been one of the Federal government’s most successful responses to the COVID-19 pandemic, but it’s effectiveness has been hamstrung from the outset by the SBA and Treasury Department.
Today, the S Corporation Association joined 75 other trade groups in objecting to the latest misstep by the agencies – an intrusive and legally dubious 9-page “Loan Necessity Questionnaire” (Forms 3509 and 3510) that larger PPP borrowers would need to fill out in order to have their loans forgiven. The forms demand information not previously required from borrowers and raise new challenges to extending and improving the PPP.
The PPP was enacted during the first wave of COVID-19 infections and subsequent shutdown orders by America’s governors. Businesses were told to close and workers were told to stay home. No timeline was provided to these families and businesses as to how long these orders would last, as no timeline existed. Who knew?
The CARES Act helped bridge the shutdowns by providing workers with expanded UI benefits, families with checks sent directly to their homes, and smaller businesses with PPP loans. If business used the loans to pay employees and other essential costs, they would be forgiven. The government had shutdown many of those businesses, after all, and there was a general agreement it had a duty to ensure families and businesses incurred as little economic distress as possible.
Given that background, the proposed questionnaire represents a massive hedge for the government. These businesses held up their end of the bargain by using the funds to pay employees and rents, but now the government wants to back out of the deal and force them to repay the loans, notwithstanding the fact that all the money is gone. The submission of these forms is just the necessary first step.
For those who think this is a bit hyperbolic, the letter initiated by the National Association of Government Guaranteed Lenders and signed by the US Chamber, NFIB and the National Association of Manufacturers among others makes clear it is not. Here are the key points:
Current Forgiveness Applications are Sufficient: “The existing PPP Forgiveness Applications (SBA Forms 3508, 3508EZ and 3508S) require extensive documentation that speaks directly to how PPP borrowers retained or re-hired employees in the weeks after receiving PPP funds and throughout the covered period. This information allows the agencies to examine, in great detail and prior to the approval of loan forgiveness, relevant facts to ensure that PPP loan funds were used in the way Congress intended.”
Questionnaire Rewrites “Good Faith Certification”: “When Congress created PPP loans, borrowers and lenders understood that a small business… would… be required to make a “good faith certification” of need for the loan at the time of the loan application…. Yet, the “[l]anguage included on the forms notifies lenders and borrowers that the “information collected will be used to inform SBA’s review of [the borrower’s] good faith certification” described above. The form goes on to specify that “Failure to complete the form and provide the required supporting documents may result in SBA’s determination” that the PPP loan, the loan amount, or any applicable forgiveness is “ineligible.” In other words, the form will be used to determine whether an employer’s loan is forgiven, based on information and criteria that were not part of the initial “good faith certification.”
Questionnaire Goes Beyond “Necessity”: “[Q]uestions regarding current liquidity information and revenue data during the weeks and months after the good faith attestation of need require reporting outside the scope of evaluating a borrower’s attestation. We are also surprised at inquiries that could veer into the personal finances of small business owners, even seeking exact dollar amounts of all cash on hand with supporting documentation. The CARES Act did not include a means-based test, revenue reduction test, liquidity test, or any other metric to assess financial standing in order to assign prioritization of PPP loans to certain borrowers over others.”
An Improved Approach: The letter concludes by recommending a better approach for reviewing PPP loans: “If the agencies want to inquire further into the necessity or suitability of a PPP loan for certain categories of eligible small businesses, we recommend that a better approach would be to ask the borrower to provide a narrative statement with any documentation the borrower believes appropriate to support the basis for its good faith certification that the uncertainty in economic conditions made the PPP loan necessary to support the ongoing operations of the business. This approach would satisfy commitments made by the agencies to review certain loans beyond the Forgiveness Application, but would not impose major changes to PPP criteria in an after the fact manner that could penalize small businesses that played by the rules. Most importantly, this simple, understandable narrative format would honor what was required of borrowers by the CARES Act.”
This is not the first time the SBA and Treasury have changed the PPP rules after the fact. Following critical news accounts of certain larger businesses and non-profits receiving PPP loans, the SBA created a new “liquidity” test that changed the terms of PPP loans retroactively:
Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. [Emphasis added]
FAQ 31 was released on April 23rd and immediately had the effect of undermining confidence in the program. Borrowers began giving the PPP loans back so fast that PPP funding available for new loans grew even as the pandemic and shutdowns continued. As the The Atlantic observed at the time:
The danger of this kind of naming and shaming is that it will imperil the government’s next round of stimulus. If businesses are afraid of political backlash, they might not take government funds, and instead make deeper cuts. (It doesn’t matter whether a given institution “should” find money elsewhere, but whether they will.) If Congress is afraid of backlash, it may narrow its future stimulus efforts—which already seem grievously small—wagering that potential pain in the form of a prolonged recession is easier to pass off than acute pain in the form of political controversy. The backlash against a successful government program is why the United States can’t have nice things.
Which brings us back to the proposed forms. The Paycheck Protection Program asked employers for a good-faith assessment of their needs at a time when the pandemic was new and everything was uncertain. As the letter says, “Both borrowers and lenders understood that the goal of the program as enacted by Congress was to encourage small businesses to retain their employees in order to avoid sending millions of workers to unemployment lines because of circumstances related to the pandemic which were beyond their control.”
Five million employers stepped up, took the loans, and spent the money keeping their workers employed. Now that the money is gone, the government wants to revisit the concept of “good faith”. With COVID-19 virus cases spiking once again, Congress likely will act this year or next to reauthorize the PPP. Given the government’s dismal track record of managing the program to date, Congress and the agencies need to engage in some damage control or else they will undermine all the good that PPP has done. Step one would be to withdraw these misguided forms.