PPP loans under the CARES Act are being audited by the SBA. All PPP loans over $2 million will be audited, and many more under $2 million will be audited as well. Applying for forgiveness of a PPP loan increases the likelihood of an audit.
An audit or "review" by SBA of a borrower and its PPP loan can result in an SBA determination that the borrower (1) was ineligible for a PPP loan; (2) was ineligible for the PPP loan amount received or used the PPP loan proceeds for unauthorized uses; (3) is ineligible for PPP loan forgiveness in the amount determined by the lender in its full or partial approval decision issued to SBA (except for the deduction of any Economic Injury Disaster Loan advance in accordance with section 1110(e)(6) of the CARES Act); and/or (4) is ineligible for PPP loan forgiveness in any amount when the lender has issued a full denial decision to SBA (each and collectively a "SBA Loan Review Decision").
A borrower can administratively protest and appeal an SBA Loan Review Decision under new rules announced by SBA. However, the following actions are not considered to be an "SBA Loan Review Decision" and cannot be appealed under these new rules: (1) any decision or determination by a lender concerning a PPP loan; (2) any determination by the SBA's Office of Inspector General; and (3) any SBA decision on any Section 7(a) loan other than a PPP loan.
Only the borrower, and not the lender or other parties may appeal an SBA Loan Review Decision. An appeal must be in writing and filed with the SBA Office of Hearings and Appeals ("OHA") within 30 days after the borrower's receipt of the SBA Loan Review Decision, or notification by the lender of the SBA Loan Review Decision (whichever is earlier). The appeal must be also be served on the SBA Associate General Counsel for Litigation.
An appeal of a SBA Loan Review Decision must include the following: (1) the basis for OHA's jurisdiction, including, but not limited to, evidence that the appeal is timely; (2) a copy of the SBA Loan Review Decision that is being appealed, or a description of that decision if a copy is unavailable; (3) a full and specific statement as to why the SBA Loan Review Decision is alleged to be erroneous, together with all factual information and legal arguments supporting the allegations; (4) the relief being sought; (5) signed copies of federal payroll tax filings actually filed with the IRS (e.g. Forms 941 and 940) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings actually filed with the relevant state, for the relevant periods of time (e.g. SUTA returns), if not provided with the PPP Loan Forgiveness Application (SBA Form 3508, SBA Form 3508EZ, or lender's equivalent), or an explanation as to why they are not relevant or not available; (6) signed copies of applicable federal tax income returns actually filed with the IRS with appropriate schedules (e.g., IRS Form 1040 with Schedule C/F) documenting income for self-employed individuals or partners in a partnership, if not provided with the PPP Borrower Application Form (SBA Form 2483 or lender's equivalent), or an explanation as to why they are not relevant or not available; and (7) The name, address, telephone number, email address and signature of the appellant or its attorney.
Appeals of an SBA Loan Review Decision filed with OHA will be assigned to a federal Administrative Law Judge ("ALJ") for decision. The decision will generally be issued within 45 days after the record in the appeal is closed, and will be based on the administrative documents and information in the PPP loan file, or "administrative record". The assigned ALJ can order that the borrower provide additional information, and can allow documents and information from outside the administrative record to be considered. The ALJ can order a trial or hearing if necessary due to disputed testimony and/or other evidence.
In considering the administrative record and other evidence, as applicable, the ALJ is required to consider whether any adverse decision by SBA concerning the borrower's PPP loan was based on a clear error of fact or law, and where the borrower has the burden of proving clear errors of fact and law, and by a preponderance of the evidence.
Once the ALJ issues his/her decision in an appeal, the decision will become final within 30 days; however, both the borrower and SBA can request reconsideration of the ALJ decision within 10 days of the ALJ's decision and, if so, the ALJ decision is suspended until the ALJ rules on the request for reconsideration. After the ALJ decision, initial and reconsidered if applicable, the borrower and SBA can also request a further review from the SBA Administrator (and which further suspends the ALJ's decision). Both the borrower and the SBA can also appeal adverse PPP loan decisions through the federal courts; however, the borrower (and not the SBA) is required to seek further review by the SBA Administrator before the borrower can file such a lawsuit.
These new SBA PPP audit appeal rules do not allow the borrower to recover his attorneys' fees, even if successful in an appeal. Also, borrowers (and the SBA) will be presenting confidential information through the PPP audit appeal process, including tax information, and the new SBA rules contemplate that a borrower may seek and receive a protective order for this confidential information.
Thousands of PPP borrowers and their PPP loans will be audited by the SBA, and the SBA will be issuing audit decisions denying the benefits of the CARES Act to many borrowers. Many of these SBA audit decisions will be wrong and must be appealed. Borrowers need to consult with competent legal counsel to discuss their PPP loans and to be prepared before the audit begins.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.