The future of the Paycheck Protection Program under the Biden administration
The Paycheck Protection Program (the “PPP”) was passed into law by Congress as part of the CARES Act earlier this year in response to the COVID-19 pandemic. While considered a relative success at its intended goal of temporarily preserving jobs during the pendency of the pandemic, the PPP ended its initial run with tens of billions of dollars left on the table and frustrated borrowers and lenders because of opaque and frequently changing rules and regulations. President-elect Joe Biden, although supportive of a second round of PPP, criticized the Trump administration during the campaign for “allowing big banks to provide “concierge treatment” to their larger, existing customers … [in obtaining PPP loans first]... while mom-and-pop small businesses struggled to obtain relief” as well as promised increased focus on “fraud and unjust enrichment” in his administration with respect to the Small Business Administration’s (“SBA”) investigation into and audit of larger PPP borrowers.
Second Draw PPP Loans
While passage is by no means assured, it is widely expected that, as part of any bipartisan legislation that successfully makes its way through Congress, an additional round of funding for PPP loans somewhere in the neighborhood of $300 billion would be included in any bill that would allow certain eligible small businesses to apply for a PPP Loan. The current proposal in the House Democrats’ HEROES Act draft would empower PPP lenders to make a second PPP loan of up to $2 million to a small business with less than 200 employees and at least a 25% reduction in revenue year-over-year due to the pandemic. Publicly-traded companies would be prohibited from receiving a second loan, and for borrowers receiving loans more than $350,000, they would now be required to prove to a PPP lender they were unable to “find credit elsewhere,” a restoration of the original standard for SBA loans, but a significant change from the original PPP program which promoted quick processing of PPP loan applications from lenders. By contrast, Senate Republicans favor a PPP bill that permits a second draw to business with less than 300 employees, and has fewer restrictions, but their frameworks are quite similar. The inclusion of a substantial drop in revenue requirement to both of the bills seems likely to result in a second draw being largely inaccessible to many potential PPP borrowers.
Importantly to lenders, both sets of bills have modifications to the PPP loan forgiveness process that essentially allow borrowers with smaller loans (the specific amounts differ from bill to bill, but $100,000 to $150,000 seems to be a common threshold), which are the vast majority of PPP borrowers, to “self-certify” as to the accuracy of their application and compliance with the program, rather than requiring each borrower to submit a fulsome application and wait for the lender to fully evaluate and render a decision on whether and to what extent the borrower has complied with the program. Lenders have long expressed concern about this process since they often are not familiar at all with the business of a particular borrower and are instead relying almost entirely on the borrower’s submission, which could cause errors to be made in their judgment. The pre-existing submission and lender review process would remain in place for larger loans. The possibility of this easier forgiveness process has encouraged many borrowers to adopt a “wait-and-see” approach on submitting their forgiveness applications, since, due to the passage of the PPP Flexibility Act in July 2020, they have until sometime next year to apply before repayment of principal and interest begins.
Enforcement Concerns
Under the Biden administration, it is possible that the SBA will place greater emphasis on prosecution and enforcement of PPP fraud cases - in particular with respect to eligibility questions, given the high-profile news stories about large corporations, celebrities, sports teams, and so on receiving PPP Loans. Notably, the PPP loan application required a certification be made that, at the time of the application, “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” without much elaboration by the SBA. This caused much uncertainty in the small business and lending communities, resulting in many borrowers returning their funds unused and many other potential applicants electing to not apply at all out of fear and uncertainty. In response, the SBA noted that with respect to all PPP loan recipients with loans under $2 million (the vast majority), they would be deemed to have made the certification in good faith, and for those with loans of more than $2 million, they would be subject to an audit by the SBA before their loan forgiveness application would be approved.
Recently the SBA has required PPP lenders to have all applicants with loans above $2 million fill out an SBA form questionnaire alongside its forgiveness application. Lenders are not required to verify the information provided by the Borrower in its questionnaire. Although ostensibly intended to assist the SBA in evaluating the “economic need” of these particular applicants at the time of application as part of its audit process, the substance of the questionnaire suggests that the SBA will also consider the post-application actions of the business in evaluating this need, rather than relying on a subjective good-faith determination by the management of the borrower at the time of the application. For example, the questionnaire asks Borrowers to compare second quarter 2020 revenue against the same quarter in 2019, despite that most PPP applicants made their certifications prior to the end of the second quarter.
Furthermore, the questionnaire asks applicants to disclose whether they paid dividends (other than those made to fund pass-through tax payments), prepaid other debt, made capital improvements, and paid any of their employees more than $250,000 a year on an annualized basis, in each case after the loan application was made. The $250,000 number, in particular, seems to suggest a new after-the-fact requirement, since the PPP and implementing regulations do not in any way restrict compensation paid to employees. In fact, the only relevant compensation threshold is $100,000 in that cash compensation above $100,000 for an employee could not be included in the loan amount, and that compensation of employees who make more than $100,000 could be cut by more than 25% without incurring a reduction in loan forgiveness. Requiring disclosure of the making of capital improvements, payment of dividends, payment of salaries to highly-compensated employees, and prepayment of debt after the application seem like new criteria that ignores the profound uncertainty among U.S. businesses in March and April of 2020 and may instead function as a clumsy attempt to identify businesses that happened to have greater-than-expected economic results during the pendency of the pandemic, and does so mostly as a result of public outrage about a few bad actors. Wasn’t economic stability the point of the Paycheck Protection Program?
Conclusion
Recent reports suggest that the FBI has opened several hundred PPP-related investigations involving hundreds of millions of dollars of loans. The SBA’s office of inspector general said that “tens of thousands of organizations also appear to have received more money than they should have based on their headcounts and compensation rates.” With the incoming Biden administration expected to be in power as these investigations continue and come to a head, Borrowers and Lenders should be sure to consult with their attorneys, accountants, and other advisors to stay up to date on all new statutes, rules and regulations concerning the Paycheck Protection Program, which is ever-changing.