Starting around October 26, 2020, the Small Business Administrations (the "SBA") asked some Paycheck Protection Program ("PPP") lenders to provide certain questionnaires to PPP borrowers with loans over $2 million. There are two questionnaire forms on the Treasury: Form 3509 for for-profit borrowers and Form 3510 for non-profit borrowers. On December 9, 2020, the SBA released FAQ 53, which provides some clarifications on the questionnaire (the "FAQ #53").

Takeaway: Borrowers with loans over $2 million should gather the requested information now in anticipation of the lender's request. The FAQ #53 clarifies that the SBA's prior guidance that the "necessity" certification must have been made in good faith at the time of the loan application still applies. However, FAQ #53 also states that the "SBA may take into account the borrower's circumstances and actions both before and after the borrower's certification to the extent that doing so will assist SBA in determining whether the borrower made the statutorily required certification in good faith at the time of its loan application." Given the uncertainty as to how this process will be administered and how the information will be used, and the fact that further clarifications are needed and there are tight timelines, borrowers should seek legal advice prior to submitting a forgiveness application or responding to a request for additional information. Borrowers should also consider delaying submission of their forgiveness application until some of the open issues are clarified and they are in a position to respond to the questionnaire. As a reminder, a determination that the borrower did not have a good-faith basis to make the certification will render the borrower ineligible for the loan (and ineligible for forgiveness). 

Challenges to the Questionnaire:  On December 8, 2020, the Associated General Contractors of America filed a lawsuit in the United States District Court for the District of Columbia seeking, in addition to other remedies, to declare that the questionnaire is arbitrary and capricious, to enjoin the SBA from basing a decision to deny an application for PPP loan forgiveness, or challenging a borrower's certification, solely or exclusively on the information provided in response to the questionnaire, and to order the SBA to adopt a revised questionnaire that permits borrowers to explain the totality of the circumstances as much as reasonably necessary. At this time, it is difficult to determine whether FAQ #53 would resolve this lawsuit.

Purpose of the Forms: In the initial PPP loan application, borrowers were required to make several representations and certifications. One of the certifications dealt with the economic conditions of the borrower. Each borrower had to certify in good faith that current economic uncertainty made the borrower's loan request necessary to support its ongoing operations.

According to the SBA, the purpose of these new questionnaires "is to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that [a borrower] made on [its] PPP Borrower Application (SBA Form 2483 or Lender's equivalent form) that economic uncertainty made the loan request necessary." The SBA is reviewing all loans over $2 million for eligibility (including necessity), fraud or abuse, and compliance with loan forgiveness requirements.

The FAQ 53 states: "A request to complete the Loan Necessity Questionnaire does not mean that SBA is challenging a borrower's certification that is required by the CARES Act. SBA's assessment of a borrower's certification will be based on the totality of the borrower's circumstances through a multi-factor analysis." The FAQ further states: "This certification is required to have been made in good faith at the time of the loan application, even if subsequent developments resulted in the loan no longer being necessary. In its review, SBA may take into account the borrower's circumstances and actions both before and after the borrower's certification to the extent that doing so will assist SBA in determining whether the borrower made the statutorily required certification in good faith at the time of its loan application."

The questionnaires are seen as screening tools. As discussed below, the borrower will be given an opportunity to provide a narrative response, if the SBA seeks further information. The SBA will review all additional information that the borrower chooses to submit. With that said, a properly completed questionnaire will potentially avoid delays and the need for the SBA to ask for more information.

Borrowers Affected: Each borrower that, together with its affiliates, received PPP loans with an original principal amount of $2 million or greater is required to complete the applicable form and submit it, along with the required supporting documents, to the lender servicing the borrower's PPP loan.

Scope of the Information: The SBA previously announced that it would review the necessity of the PPP loans, especially for those borrowers with loans over $2 million, with "necessity" understood as:

"... all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application  ... [A]ll 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.

In addition, in FAQ #46, the SBA stated that loans greater than $2 million would not be subject to the good-faith safe harbor and such loans will be reviewed for compliance with the program requirements. As described in FAQ #46, the SBA will assess whether the borrower had adequate basis for making the required good-faith certification, based on its individual circumstances in light of the language of the certification and SBA guidance.

Although both the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and FAQ #31 instructed borrowers to assess their need for the loan at the time of application, the SBA's new forms gather information to assess the borrower's need both at the time of application and during the use of the funds. This is a surprise for most borrowers who were prepared to provide information about "necessity" at the "time of the application" but were not anticipating scrutiny about necessity over the period of use of the funds. In FAQ #53, the SBA clarified that the certification is required to have been made "at the time of the loan application, even if subsequent developments resulted in the loan no longer being necessary."  However, the SBA went on to say that the SBA may take into account "the borrower's circumstances and actions both before and after the borrower's certification." At this time, we don't know how the information "both before and after the borrower's certification" will be used by the SBA to determine "necessity."

Information Requested: The information requested in the questionnaires is extensive and somewhat unclear.

Please note that for each question, the borrower may select that the information be designated as "Confidential." That means whether the answer or information provided in response to the question is "customarily kept confidential." This designation will be important to most borrowers because the PPP loans are part of a government program and much of the information associated with the program will likely be subject to Freedom of Information Act requests. Borrowers who designate the questionnaire responses as confidential should make sure that the supporting documentation is also marked as "CONFIDENTIAL."

There are two categories of requested information and a certification:

  • Business Activity Assessment ("BAA") –  questions and documentation:
    • Documentation of Gross Revenue – the gross revenue of the borrower in the first quarters of both 2019 and 2020 and supporting documentation to justify the revenues reported. (BAA Questions 1 and 2).
    • COVID-19 Impacts – since March 13, 2020:
      • whether the borrower was ordered (mandatory) to shut down or to significantly alter its operations, and if yes, to provide information regarding reduced or capped number of people at any location, service restricted to outdoors, employee workplace reconfigured, cash outlays, and other information. (BAA Question 3)
      • whether the borrower voluntarily ceased or reduced its operations, and if yes, to provide information regarding whether the borrower had employees who contracted COVID-19, or whether COVID-19 significantly disrupted the borrower's supply chain, and other information. (BAA Question 4)
      • whether the borrower voluntarily altered its operations, and if yes, to provide information regarding reduced or capped number of people at any location, service restricted to outdoors, employee workplace reconfigured, cash outlays, and other information. (BAA Question 5)
    • Capital Improvement Projects – between March 13, 2020 and the end of the covered period, any new capital improvement projects and cash outlays, (BAA Question 6)
    • NAICS code – borrowers must provide their primary six-digit NAICS code. (BAA Question 7)
    • Optional  – additional comments on any question in the Business Activity Assessment section (1,000-charater max). (BAA Question 8)

Practice Note: In response to BAA Questions 3, 4, 5, and 8, the forms provide "Other" boxes with a 1,000 character max to explain these situations. Borrowers should use these boxes to strategically explain their circumstances at the time of the loan application and to counterbalance any post application change in circumstances. 

  • Liquidity Assessment ("LA")  – questions and documentation of:
    • Cash on hand – the amount of cash and cash equivalents as of the last day of the calendar quarter immediately before the date of the borrower's PPP loan application. (LA Question 1)
    • Dividends and distributions – the amount of dividends or other capital distributions (other than for pass-through estimated tax payments) paid to owners between March 13, 2020, and the end of the covered period. (LA Question 2)
    • Prepaid debt –all debt prepayments made between March 13, 2020, and the end of the covered period. (LA Question 3)
    • Highly paid owners and employees – the amounts paid to owners and/or employees in excess of $250,000 on an annualized basis during the covered period. (LA Questions 4 and 5)
    • Value of the borrower – if publicly traded, value based on market capitalization on the date of the PPP loan application; if privately held, the book value as of the last day of the calendar quarter immediately before the date of the PPP loan application. (LA Questions 6 and 8)
    • Ownership – whether their equity was owned by a publicly traded company, private equity or venture capital firm or hedge fund, whether it is an affiliate of another entity, and whether they are owned by a foreign or state-owned enterprise. (LA Questions 7, 9, 10, and 11)
    • Other CARES Act benefits – whether or not they received any other benefits through the CARES Act, excluding tax benefits. (LA Question 12)
    • Optional  – additional comments on any question in the Liquidity Assessment section (1,000-charater max) (LA Question 13)

Practice Note: In response to LA Questions 12 and 13, the forms provide "Other" boxes with a 1,000 character max to explain these situations. Borrowers should use these boxes to strategically explain their circumstances at the time of the loan application and to counterbalance any post application change in circumstances.

Information Not Specifically Requested: Although FAQ #31 addressed the borrower's "ability to access other sources of liquidity," at this time, the forms do not ask about this item. We recommend that borrowers be prepared to answer questions related to sources of liquidity and provide documentation if it is requested. In addition, although the for-profit form does not discuss "expenses," a borrower should consider highlighting or explaining expenses as part of the optional disclosure.

Certifications: The certifications are made by an "Authorized Representative" and address authority, confirmation, of the accuracy of the information in all material respects (after reasonable inquiry of people, systems, and other information available), and acknowledgement of the consequences of a false statement.

Process: The completed form and related information are due to the PPP lender servicing the PPP loan within 10 business days of receipt from the lender. The lender must then submit the borrower's completed information to the SBA within five business days. At this point, we don't know if borrowers will receive the request at the time of submission of a forgiveness application or at another time. It appears that submission of the forgiveness application triggers the questionnaire request. After the form is submitted, the SBA may request additional information, if necessary, to complete the review. In FAQ #53, the SBA stated: "When additional information is requested, borrowers will have an opportunity to provide a narrative response to SBA explaining the circumstances that provide the basis for their good-faith loan necessity certification." The SBA will make a final determination "after reviewing any additional information that the borrower chooses to submit." The SBA's determination will be based on the totality of the borrower's circumstances through a multi-factor analysis and a targeted, multi-step approach. Failure to complete the form and provide the required supporting documents may result in the SBA's determination that the borrower was ineligible for either the PPP loan, the PPP loan amount, or any forgiveness amount claimed, and the SBA may seek repayment of the loan or pursue other available remedies.

PPP Questions: Because of the many variables that affect each borrower differently, a borrower should consider discussing the loan forgiveness process with legal counsel before submitting the application and other documentation. Schwabe is committed to providing our clients with up-to-date resources to understand the CARES Act and navigate the COVID-19 pandemic. For more information about the PPP Loan Forgiveness Application, visit our  PPP Portal or reach out to one of our attorneys today.

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.