Client Alert: PPP Loan Necessity Questionnaire – The Continuing Saga of the Necessity Certification
Date: November 19, 2020
The purpose of these forms is to facilitate the collection of supplemental information that SBA loan reviewers will use to evaluate the good-faith necessity certification that borrowers made on their PPP application; i.e., whether “uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient” (the “Necessity Certification”).
The consequences of an adverse determination by SBA may be serious, including that the SBA could declare a borrower ineligible resulting in a lender immediately calling a loan or the SBA denying forgiveness. SBA auditors could even refer borrowers to the Department of Justice to investigate potential criminal and/or False Claims Act liability.
The new questionnaires are part of SBA’s audit process to check that borrowers made the Necessity Certification in good faith and properly received PPP loans and ask for a variety of financial information that establishes whether the borrower was successful and had sufficient liquidity during the pandemic, including:
- The business’s gross revenue before and during the pandemic (the second quarter 2019 compared to same period in 2020).
- How the business was impacted by mandatory and voluntary shutdowns.
- Whether the pandemic ceased or altered business operations and any related costs.
- Whether the business made capital improvements during the covered period.
- The business’s liquidity during the pandemic, including disclosure of amounts of cash on hand the day before the PPP application, dividends and distributions, debt repayments, compensation above $250,000, market capitalization, for public borrowers, and book value including shareholders’ equity value, for private borrowers.
Each of these questions provides some room for a narrative explanation, but no question on the forms addresses the thrust of the Necessity Certification – whether, at the time of the application the applicant reasonably believed that uncertainty of economic conditions made the PPP loan necessary.
Instead, as put in a November 17, 2020, letter to Congress from 82 national organizations, including the American Bankers Association, American Institute of CPAs and the US Chamber of Commerce:
The questionnaire presents two fundamental policy concerns: a focus on the wrong timeframe during which need for the PPP loan must be assessed and an apparent reliance on assessing the good faith certification based on information unrelated to what the borrower was asked to consider. The questionnaire requests metrics, narratives, and documentation that all paint a picture of whether the borrower has been successful or has been struggling throughout the pandemic. . . . These questions focus on the wrong timeframe. The borrower was asked to certify in good faith that economic uncertainty made the loan necessary at the time of the borrower’s application for the loan. The law required that the borrower self-assess to the best of its ability with the information it had at the time. Any circumstances that happened after the certification was made and throughout the pandemic should have no bearing on evaluating the borrower’s good faith statement at the time it made the certification.
The questionnaire does not allow borrowers to provide a narrative to support its good faith determination, instead apparently penalizing PPP borrowers who weathered the storm, likely because of their PPP loan. Applying a standard retroactively is sometimes constitutional, but it also can violate due process and be grossly unfair. Inevitably, this questionnaire inserts more uncertainty for PPP borrowers.
OMB's approval of Form 3509 and 3510 is still pending and the comment period is open until November 25, 2020, after which OMB has 30 days to complete the review process. There is some confusion now about whether lenders can require borrowers to complete the questionnaire and then send the responses to the SBA. Forms 3509 and 3510 are already available on the SBA platform available to PPP lenders and some have started sending the forms to borrowers thereby purporting to trigger the 10-day clock for returning the verified information sought by the questionnaires. However, these forms have not yet been approved as final under the Paperwork Reduction Act, so businesses that need additional time to respond may be able to seek additional time for completing the form.
While this questionnaire may well be subject to legal challenge, failure to respond likely will make a PPP borrower the target of an SBA audit. Therefore, borrowers who received PPP loans over $2 million should start collecting responsive information and gather any documentation that they kept at the time of the PPP loan application to support the Necessity Certification. Should the SBA use information to deny forgiveness in a manner that is unfair, or even unconstitutional, then this firm stands ready to advocate for clients to prevent government over-reach.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.