PPP Loan Audit – Are You Prepared?

PPP Loan Audit – Are You Prepared?

November 11, 2020

Congress made loud proclamations in spring 2020 about transparency and easy, fast access to money in their effort to prop up the economy with the Paycheck Protection Program (PPP). Now along comes the SBA in what appears to be cloak-and-dagger mode, trying to blame the biggest borrowers for trusting Congress while dressing it up as “ensuring fairness.”

As is often the case, reading beyond the headlines is imperative to understanding what’s really happening — which is that the SBA has created new questionnaire forms that could be the first of many moves to rein in the cost of PPP loans to the U.S. government, at the expense of large borrowers. While they are still in “draft” mode, PPP Loan Necessity Questionnaire Form 3509 for For-Profit Borrowers (PDF) and Form 3510 for Nonprofit Borrowers (PDF) Forms are already being rolled out.

PPP Loan Necessity Questionnaire Background

After the (mostly media) uproar about large companies getting PPP loans erupted in late April, the SBA and Treasury announced that businesses who received loans of an aggregated $2 million or more would be subject to audit for “necessity.” Unfortunately, they left the term undefined, leaving open the notion that “we’ll know it when we see it.”

Prudent large borrowers took their cue from this pronouncement and immediately prepared files that could document necessity when the time inevitably came, reasoning that it would be easiest while things were fresh and would save time when the Feds came knocking. That time has now arrived.

On October 30, word came out that the SBA has prepared the new Forms 3509 and 3510 to help businesses and nonprofits ‘splain themselves, the former to be used by for-profit borrowers and the latter by nonprofits who hold aggregated PPP loans of at least $2 million. Curiously — or maybe not, given how the PPP program has been administered — the SBA is gently sliding this out on a need-to-know basis, keeping even the Lender Relations teams in their district offices in the dark.

Cloak and Dagger

Ostensibly, the SBA is trying to assess the “economic need” certification that every borrower made when applying for PPP funds. Given that the CARES Act’s legal test for “economic need” was “current uncertainty” about ongoing operations, and the SBA’s own FAQs provided a safe harbor (FAQ 17: “Borrowers and lenders may rely on the laws, rules and guidance available at the time of the…application”), most large borrowers could comfortably certify need back in early-mid April when uncertainty shrouded the whole planet.

The harsh reality of these revisionist new forms is this: The SBA is changing the rules of the game seven months down the road and seeking to punish borrowers who believed them and acted in good faith but somehow failed to abide by an unknown set of new rules that are only now emerging, well after the fact.

What the SBA Is Asking For

Here are the basics of what the SBA is going to want to know when large, for-profit loan holders apply for forgiveness and submit the loan necessity form:

  • 2Q20 revenue vs. 2Q19
  • Dates and proof of involuntary shut-down orders, if applicable
  • Dates and proof of involuntary need to alter operations, if applicable, along with specifics and costs of workspace reconfigurations, reductions in allowable people in a location, outdoor-only restrictions and the like
  • Same as above for voluntary reduction actions the business may have taken, and reasons why
  • Any capital improvements and their cost if undertaken after March 13, 2020, and before the end of the PPP Covered Period
  • Liquidity (cash position) at the end of the quarter preceding PPP funding
  • Total of any dividends or capital distributions since March 13, 2020
  • Amounts and reasons for any pre-payments of outstanding debts since March 13, 2020
  • Number of and amounts paid to any employee and/or owner earning over $250,000 annually
  • Market capitalization on date of PPP application, if publicly traded
  • A series of questions around ownership structures and relationships
  • Whether the business received any funding from other CARES Act programs

The nonprofit form asks many of the same questions, but also adds a few more probes:

  • Questions about endowments and details about certain restrictions on borrower use
  • If the borrower is a school, college or university:
    • Median tuition
    • Any tuition assistance offered due to COVID
    • Any revenue decrease due to COVID in 2019-2020
  • If the borrower provides health care services:
    • Program service revenue for patient care 2Q20 vs. 2Q19
    • Any discounts offered on patient care due to COVID

Of course, simply completing and certifying the form is only the start. The borrower also must supply documentation for all the above and do it within 10 days from receiving the notice from their lender. Failure to comply apparently means no forgiveness, or worse, possible prosecution for fraud if the SBA so chooses.

Questions Likely to Be Litigated

This audit program is only days old. So far, we are only aware of the forms being requested for loans where a forgiveness application has already been submitted. Clearly, though, it raises many concerns, which means there is a high likelihood of litigation in the event the SBA denies a borrower forgiveness based on their answers to these questions. For example:

  • How much cash on hand at the end of the prior quarter was “too much cash on hand”? What if you had $10 million cash on hand but your monthly cash burn was $15 million pre-COVID? Did you need the money or not?
  • What does it mean if your 2Q20 revenue was the same or even higher than 2Q19? What if it was higher than a year ago but down 25% from 1Q20, which the form didn’t ask about? What if 2Q20 revenues were a function of work already in progress when COVID hit, but your future pipeline dried up and it took its toll in Q3 and Q4? Did you need the money or not?
  • How does paying an employee over $250,000/year suggest that your business did not have uncertainty and that you must not have needed the PPP money?
  • Suppose you were 80% of the way through a construction project and faced a major penalty if you cancelled the contract when COVID hit. Does continuing with a capital commitment somehow render your business ineligible for a PPP loan after the fact, even though that was never mentioned before this form appeared?
  • If a school did not experience a decrease in tuition revenue in 2Q20 compared with 2Q19, does this mean the PPP funds were unnecessary? Since tuition for many schools is due in January (or earlier) for the spring semester, but summer programs needed to be curtailed, how does that jibe with some nebulous “necessity” definition considering what was known or unknown in early April?
  • When did “economic need” change from future uncertainty to past performance? Do you have great certainty about the future now given recent COVID statistics? How does the test get to shift to what did happen instead of what could happen?

Things Large Borrowers Can and Should Do Now

  1. If you have not already prepared your necessity justification, get started on it immediately. Knowing the documentation the SBA will want to see — plus other items that may fit your particular situation — and the limited time they will give you to comply with their request, begin pulling and organizing that file so you are ready when it comes.
  2. Work with your attorney to prepare the justification and documentation, and if you need outside accounting assistance, have your attorney hire the accountant. This will enable you to maintain attorney-client privilege on as many drafts, communiques and work papers as possible should this end up getting messy.
  3. Be absolutely sure that you check the “Confidential” box on every line of the form. Failing to do so could subject your highly sensitive information to being released under a Freedom of Information Act (FOIA) request. Further, you should clearly state in the open text fields of the form that all information is highly confidential and should be treated as proprietary using Exemption 4 under the FOIA, which protects trade secrets and financial information that is privileged or confidential.
  4. Consider when to file for forgiveness. Remember that you have 10 months from the end date of your Covered Period, which for most borrowers means a mid-2021 deadline. While we have gone on record as encouraging PPP borrowers to file for forgiveness sooner rather than later due to constantly changing rules, year-end crossover and other reasons, the significant likelihood of litigation on these large loan audits suggests that a wait-and-see course may be most prudent.


While this is yet another change in the PPP loan requirements, it is the first significant rule change to be issued that is in favor of the government and not the borrower. It may not be the last, and confidently predicting the future course of PPP loan updates after the turmoil of the last seven months is an exercise in futility.

Take this opportunity to get your necessity house in order and watch closely for more changes and information over the next few months. We will monitor developments and provide updates if and when they become available. If you have questions or need some help, don't hesitate to reach out to our experts.

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