SBA Begins the PPP Loan Audit Process

Alert

February 17, 2021

As promised, the SBA is reviewing a borrower’s necessity for PPP loans by sending out a Loan Necessity Questionnaire to borrowers with loans in excess of $2 million. The information collected will be used for SBA’s review of the borrower’s certification that economic uncertainty made the loan request necessary to support ongoing operations. This determination is made as of the application date, although the questionnaire does require information about transactions after the loan application was made.

Receipt of the questionnaire does not mean that SBA is challenging a borrower’s certification. It is merely part of a verification process that the SBA is undergoing for any loan, or combination of loans for affiliated borrowers, totaling more than $2 million.

Borrowers have 10 business days from receipt of the questionnaire to complete it and return it with required documentation to the lender. There is no indication that this 10-day period can be extended, so borrowers should be ready to provide the information completely and in an organized format for the lender’s and SBA’s review.

Within five business days after the borrower provides the completed questionnaire with all required responses, supporting documents, and signatures and certifications, the lender is required to forward the information to the SBA for their review. Borrowers may be required to provide additional information for SBA to complete their review. There is no defined timeline for SBA’s review of questionnaires. The SBA has stated that their determination will be based on the totality of a borrower’s circumstances.

There are two questionnaires, one for for-profit entities and one for not-for-profit entities. Both are divided into two sections, an Activity Assessment and a Liquidity Assessment. Each questionnaire asks for certification that the information provided is true and correct in all material respects, with an understanding of the criminal penalties associated with false statements.

Business Activity Assessment

The Business Activity Assessment portion requests gross revenue information for the second quarter of 2020, with special rules applied for seasonal businesses. In addition, if the borrower existed in 2019, gross revenue for the second quarter of 2019 needs to be provided. If the borrower did not exist in 2019, information for the first quarter of 2020 needs to be provided. Supporting documentation, presumably tax returns, needs to be included with this information.

Additional information for the Business Activity Assessment includes questions regarding whether the business was closed or ordered to significantly alter its operations due to a government order, the government issuing that order and the start and end dates of the order. If the government order merely required alterations to operations, the questionnaire requests information on what alterations were required and the approximate additional cost for complying with the mandatory alterations.

In addition to information regarding mandated shut downs or partial shut downs, the questionnaire requests information regarding whether the business voluntarily ceased, reduced or altered operations due to COVID-19, the start and end dates for doing so, the reason for the ceasing or reducing operations and, in the case of altered operations, how operations were altered and the cash outlays of making the voluntary alterations.

The final question in the Business Activity Assessment is whether the borrower began any new capital improvement projects between March 13, 2020, and the end of the PPP loan covered period (i.e., the 8 week or 24 week period for incurring expenses used for loan forgiveness) that were not related to COVID-19 and the cash outlays for those projects.

Borrowers are provided space for additional comments, totaling no more than 1000 characters, on any questions in this Business Activity Assessment portion of the questionnaire.

Liquidity Assessment

The Liquidity Assessment requests the following:

The amount of cash and cash equivalents owned by the borrower as of the last day of the calendar quarter immediately before the date of the loan application, with supporting documentation.
The total dividends or other capital distributions (other than amounts for estimated tax payments for owners which cannot be in excess of the profits earned in the first three quarters of 2020, 110 percent of the pro-rata share of last year’s tax liability and/or 100 percent of the pro-rata share of tax liabilities on 2020 expected taxable income) paid between March 13, 2020 and the end of the PPP loan covered period (i.e., the 8 week or 24 week period for incurring expenses used for loan forgiveness), with supporting documentation.
The amount of any prepaid debt payments between March 13, 2020 and the end of the PPP loan covered period, with supporting documentation.
The number of employees paid more than $250,000 on an annualized basis (including salary, wages, bonuses, commissions, and severance pay) and the total amount paid to all of these employees during the PPP loan covered period, with supporting documentation.
The number of owner employees paid more than $250,000 on an annualized basis (including salary, wages, bonuses, commissions, and severance pay) and the total amount paid to all of these employees during the PPP loan covered period, with supporting documentation.
If the borrower had equity securities traded on a national securities exchange, the market capitalization of the borrower on the date of the PPP loan application.
If 20 percent or more of the borrower’s equity was owned by a publicly traded company, the owner(s) name and market capitalization on the date of the borrower’s PPP loan application.
If the borrower did not have equity securities traded on a national securities exchange, the book value of shareholder’s equity as of the last day of the calendar quarter immediately before the PPP loan application date.
If 50 percent or more of the borrower’s equity was owned by another entity, the name of the entity and if that entity was organized or incorporated outside the U.S. and a national securities exchange or a securities exchange in a non-U.S. jurisdiction, the market capitalization of that entity of the date of the PPP loan application.
Whether 20 percent or more of the borrower’s outstanding equity was owned by a private equity firm, venture capital firm, hedge fund or any fund managed by such firms on the date of the PPP loan application.
If the borrower was an affiliate or subsidiary of a foreign state-owned enterprise or a department, agency or instrumentality of a foreign state, the name of such owner.
If the borrower received other funds provided by the CARES Act, the amount received from the other program(s) and the funding source.

Not-for-Profit Questionnaire

The not-for-profit questionnaire is very similar to the for-profit questionnaire, with a few differences.

That not-for-profit questionnaire asks for the amount of grants, gifts, contributions and similar amounts in the second quarter of 2020 and the same quarter in 2019 or the first two quarters of 2020 and the amount of expenses for those time periods, all with supporting documentation. In addition, as part of the Liquidity Assessment, a not-for-profit needs to describe any restrictions on the borrower using income or cash, savings and temporary cash investments for payroll or other costs, such as mortgage interest, rent and utilities payments and the amount and types of endowment funds held by the borrower of any related organization as of the last day of the quarter immediately preceding the PPP loan application, all with supporting documentation. A not-for-profit also needs to disclose the value of non-cash investments, including securities and real estate. If the borrower is a school, college or university, the median tuition paid per student for the 2019-2020 academic year needs to be reported, as well as whether the institution offered additional financial assistance to students for the 2019-2020 year due to COVID-19 and the decline in revenues from tuition compared to the 2018-2019 academic year due to COVID-19. For not-for-profit entities providing health care services, the amount of program service revenue for the second quarter of 2020 and the same quarter in 2019 or the first two quarters of 2020 needs to be disclosed and whether the borrower provided discounts for patient care services due to COVID-19. Not-for-profit entities other than educational institutions and health care providers are also required to disclose if the borrower offered a discount for its services due to COVID-19.

The not-for-profit questionnaire asks for information on capital improvement projects, debt prepayments and employees’ salaries, but does not ask for any owner or distribution information.