Preparing for PPP loan reviews and appeals: Avoiding potential pitfalls
The Paycheck Protection Program (PPP) provides loans to small businesses for payroll and certain non-payroll expenses. Created in March 2020 by the Coronavirus Aid, Relief and Economic Security Act (CARES Act), the PPP is administered by the Small Business Administration (SBA) with help from the Department of the Treasury. Specifically, a borrower that is an “eligible recipient” as defined in section 7(a)(36) or 7(a)(37) of the Small Business Act, as added by the CARES Act, as amended, may participate in the PPP.
An eligible borrower must make certain good-faith certifications in connection with its application for PPP assistance, including that current economic uncertainty makes the loan request necessary to support the eligible borrower’s ongoing business operations. Approved PPP loans, which are originated through participating lenders, are 100% guaranteed by the SBA. Further, up to the full principal amount of the loan may be forgiven. While the PPP was extended and modified several times following enactment of the CARES Act, authorization for new loans expired on May 31, 2021, and loan applications are no longer accepted. More than 11.8 million PPP loans totaling nearly $800 billion dollars were approved over the life of the program.
This article provides an overview of PPP loan forgiveness, including some potential issues pertaining to the appeal of SBA decisions made in connection with a borrower’s eligibility to participate in the PPP and to receive loan forgiveness.
PPP overview - eligibility and forgiveness
An eligible borrower may receive forgiveness in an amount equal to certain payroll and non-payroll costs incurred or paid during a statutorily-defined “covered period” (in many cases, the period beginning on the date the lender disburses the borrower’s PPP loan and ending on a borrower-selected date that is between 8 to 24 weeks after the disbursement date). The amount of forgiveness received may not exceed the principal amount of the loan. Notably, if an eligible borrower reduces its full-time equivalent employees or employee salary/wages during the covered period, or fails to use at least 60 percent of its loan amount for eligible payroll expenses, the forgiveness the eligible borrower can receive may be reduced, unless an exemption applies. There are several such statutory exemptions within the CARES Act, as amended, and Treasury Department and the SBA have issued regulations establishing certain additional exemptions, as authorized by the CARES Act.
A borrower wishing to apply for forgiveness must do so through its lender, which is responsible for issuing a forgiveness decision to the SBA within 60 days of the eligible borrower’s completed forgiveness application. Once a lender has issued its forgiveness decision to the SBA, the SBA will remit the forgiveness amount (if any) to the lender within 90 days, subject to any SBA review of the loan or loan application. If the full loan amount is forgiven, the lender will update its loan file to mark the loan as paid in full. If only part of the loan amount is forgiven or the forgiveness application is denied, the borrower must repay the loan balance on or before the loan’s maturity date.
Notably, the SBA has indicated that it may review any PPP loan at any time, in its sole discretion. The SBA may review the loan or loan application to determine if a borrower was eligible to participate in the PPP, whether the borrower received the correct loan amount or used the loan for unauthorized uses, and whether the borrower is entitled to the amount of loan forgiveness claimed. In connection with a review, the SBA may request additional information from the borrower, either directly or through the borrower’s lender, in which case the SBA will consider all information provided before concluding its review.
The SBA recently released data regarding forgiveness of PPP loans originated in 2020. The data indicate that, as of May 24, 2021, the SBA had approved forgiveness for 3.3 million PPP loans (out of 5.2 million total loans originated in 2020). The SBA had not received forgiveness applications for 1.7 million loans, and approximately 145,000 forgiveness applications were still “under review” as of July 5, 2021. In terms of dollar amount, the SBA had forgiven $279.4 billion in loans compared to a total PPP volume of $521.2 billion originated in 2020. SBA had not yet received forgiveness applications for $159.1 billion in loans; $81.5 billion in loans was still “under review;” and $1 billion in loans was “not forgiven.” As of this writing, the SBA has not released forgiveness data for PPP loans originated in 2021.
PPP appeals process
Subjects appropriate for appeal
According to the federal regulation, borrower may seek review of a final SBA loan review decision, the “official written decision,” and finding that the borrower:
- Is ineligible for the loan;
- Is ineligible for the loan amount received or used the loan proceeds for unauthorized uses;
- Is ineligible for loan forgiveness in the amount determined by the lender in its decision issued to the SBA; and/or
- Is ineligible for loan forgiveness in any amount, when the lender has issued a full denial decision to SBA.
The code states borrowers must appeal a final SBA loan review decision within 30 days. This appeal period begins to run upon “appellant’s receipt of the final SBA loan review decision, or notification by the lender of the final SBA loan review decision, whichever is earlier.” Upon receipt of a filed appeal, the SBA’s Office of Hearings & Appeals (OHA) will assign the matter to an administrative law judge or an administrative judge.
Standing to appeal
Only the borrower has standing to appeal the final SBA loan review decision to the OHA. Neither an individual owner of the borrower nor the lender has standing.
The appeal petition
The appeal petition must include a copy of the final SBA loan review decision being appealed (or a description of the decision if a copy is unavailable), a full and specific statement as to why the final SBA loan review decision is alleged to be erroneous, together with supporting factual information and legal arguments, a statement of the relief sought, and certain tax filings, among other requirements.
The appellant has the burden to prove by a preponderance of the evidence that the “SBA loan review decision was based on clear error of fact or law.” This review standard has been described as “significantly deferential.” The U.S. Supreme Court has further noted that a finding is “clearly erroneous” when, “although there is evidence to support it, the reviewing body on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” This standard may further reinforce the desirability of taking steps to include as much relevant information as possible in the record before any final SBA loan review decision is made.
An appeal petition that does not contain all of the required information set forth is subject to dismissal or a motion for a more definite statement. If dismissed, the OHA judge may dismiss the petition with or without prejudice.
Record for appeal
Generally, appeals are to be decided based on the administrative record (i.e., relevant documents that SBA considered in making its final decision or that were before the SBA at the time of the final decision), the appeal petition and any response to the appeal petition. No reply to the response will be permitted unless directed by the OHA judge. The borrower may object to a document’s absence from the administrative record if the borrower believes that the document should have been included. The SBA may seek discovery upon a showing of good cause; otherwise, discovery is not permitted. Appeals will be decided without an oral hearing unless there is a genuine dispute concerning a material fact that cannot be resolved, except through the taking of testimony.
Borrowers should be mindful that in adjudicating appeals, the OHA has previously declined to consider potentially relevant evidence that was not before the SBA at the time of the SBA’s decision. See examples of this in unsuccessful appeals filed by Osprey Technology Solutions Inc. and Darton Innovative Technologies Inc. While these OHA decisions related to matters outside of the PPP, the OHA may adopt a similar approach for PPP appeals. As a result, to put themselves in the best possible position to avoid the need for an appeal, borrowers may wish to consider the advisability of taking steps, to the extent practicable, to ensure that their lender and/or the SBA is in possession of all relevant information at the time the borrower applies for forgiveness or responds to a lender or SBA inquiry.
For example, a borrower should ensure that it has provided appropriate supporting information relevant to the calculation of its forgiveness amount (e.g., documentation of payroll costs) when responding to a request from its lender for additional information. Similarly, a borrower that receives a loan necessity questionnaire from the SBA (generally, borrowers with loans greater than $2 million) should use the questionnaire to provide narrative responses to flag potential arguments or issues, or to explain key information relevant to the borrower’s certification – made in connection with its loan application – that economic uncertainty made its loan necessary to maintain ongoing operations.
Borrowers should be aware that the SBA may assert a claim of privilege with respect to material within the administrative record. A borrower may object to a privilege assertion, in which case the OHA judge will rule on the objection. Either party may obtain interlocutory review of the OHA judge’s ruling before the administrator or the administrator’s designee.
Alternate dispute resolution during the appeals process
Under the regulation, at any time during the pendency of the appeal of a final SBA loan review decision, the parties may submit a joint motion requesting alternative dispute resolution. If this motion is granted, the proceedings before the OHA are stayed in whole or in part.
Reconsideration or further review of the OHA decision
The OHA Judge will issue an initial decision on the appeal within 45 calendar days after the record is closed, to the extent “practicable.” This decision will become the final decision of the SBA 30 calendar days after its service, unless the SBA or borrower timely seeks reconsideration of the decision or requests that the administrator review the decision.
The SBA or the borrower may seek reconsideration by submitting a petition for reconsideration within 10 calendar days of service of the initial decision. Such a request must “clearly show an error of fact or law material to the decision.” An initial decision can also be reconsidered by the OHA judge on his or her own initiative within 20 days after service of the decision.
Within 30 calendar days after service of the OHA judge’s initial decision or reconsidered initial decision, either party or the SBA’s Office of General Counsel may seek review by the administrator. The administrator will sustain the decision “unless it is based on an erroneous finding of fact or interpretation or application of case law, statute, regulation, or SBA policy.”
Federal district court
A borrower may also seek review of a final SBA loan review decision in federal district court, provided the borrower has exhausted their administrative remedies. Thus, a borrower who wishes to obtain judicial review of a final SBA loan review decision must first seek the administrator’s review of the OHA judge’s initial decision with respect to the final SBA loan review decision.
Potential issues for further consideration
Certain matters not appealable
It is worth noting that certain matters may not be appealable to the OHA. To the extent this is the case, it may be especially important for borrowers to take steps to ensure a full and complete record in support of their forgiveness application, to put themselves in a more favorable position to exercise any potential rights they may have to obtain review of an adverse SBA action in other forums. For example:
- If the SBA remits the amount of forgiveness as determined by the lender in the lender’s decision to the SBA, the borrower may not appeal to the OHA and must begin repaying any remaining loan balance. Thus, if the amount of forgiveness the borrower is seeking differs from the amount of forgiveness the lender determines the borrower can receive (and the SBA remits this lender-determined amount), the borrower cannot appeal the SBA’s action to the OHA.
- If the lender determines that a loan is not eligible for forgiveness in any amount, the SBA, in its sole discretion, may decline to entertain the borrower’s request that the SBA review the lender’s determination. To the extent the SBA’s declination is not considered to be a final SBA loan review decision, as defined in SBA’s regulations, such declination may not be appealable to the OHA.
Other matters that are not appealable to the OHA include determinations by the SBA’s Office of Inspector General concerning a PPP loan.
Borrowers should recognize their obligations under their PPP loan and begin repayment of any outstanding loan balance at the end of the loan deferral period or when the SBA remits the loan forgiveness amount to the lender (or notifies the lender that no foreignness is allowed). Notably, the appeal of a final SBA loan review decision to the OHA does not extend the deferral period.
OHA decisions will be published to the OHA website, where they will be publicly available. A party may seek a protective order to protect sensitive business or personal information contained within any documents that are part of the appeal, in which case the OHA judge will “usually” issue a redacted version of the decision for public viewing. If a protective order is not in place, a party may contact the OHA to request a redacted public decision.
Many SBA loan determinations pursuant to the PPP are forthcoming and knowledge of the appeals process and a plan to navigate it may prove critical to many small businesses. Borrowers should focus on developing a complete factual record to support their PPP loan forgiveness application and, in light of the abbreviated timelines described above, take proactive steps to prepare their strategy for any potential appeal of a final SBA loan review decision.