In Focus

The Small Business Administration (SBA) appears to be making good on guidance announced in April and May 2020, that it would be reviewing on a more detailed basis all Paycheck Protection Program (PPP) loans in excess of $2 million. On October 26, 2020, the SBA quietly revealed in the Federal Register its proposal to use a new Form 3509 (Loan Necessity Questionnaire for For-Profit Borrowers) and a new Form 3510 (Loan Necessity Questionnaire for Non-Profit Borrowers) to scrutinize these larger PPP loans, and sought a thirty (30) day comment period. The SBA has not officially published the forms, but they are widely available on the internet and, for the sake of reference, linked above.

Although the final format may change, information detailed in the proposed forms indicates that their purpose is to help the SBA Loan reviewers evaluate the good faith certifications made by larger borrowers on the PPP Borrower Application (SBA Form 2483 or Lender’s equivalent form). Each borrower that solely, or together with its affiliates, received PPP loan funds in the original amount of $2M or greater would be required to complete the questionnaire and return it back to their lender within ten (10) business days of its receipt from the lender. It appears that the trigger for requiring the questionnaire will be the lender’s review of the borrower’s forgiveness application. 

Based on the foregoing, for-profit and non-profit borrowers who received PPP loan funds in excess of $2M as a single loan or in the aggregate of total affiliated borrowings, should prepare now for the SBA’s probable increased scrutiny of their forgiveness application and various aspects of their business operations.

Each questionnaire is clear that the information collected from each borrower (and affiliates, if applicable), will be used to determine whether the SBA will challenge the borrower’s good faith certification that economic uncertainty made the loan request necessary to support its ongoing operations. The questions are divided into Business Activity Assessment and Liquidity Assessment categories and are plainly intended to delineate a borrower’s economic status and financial circumstances both before and after applying for a PPP loan. A sample of the information sought by the For-Profit Form 3509, and through supporting documentation, includes the following:

• Whether borrower was ordered to shut down its business by a state or local authority due to COVID-19;
• Whether borrower had to significantly alter its operations due to the state or local orders;
• The approximate cash outlays required to respond to the applicable orders;
• Borrower’s total cash and cash equivalents as of the last day of the calendar quarter preceding the date of its PPP loan application;
•  Whether between March 13, 2020 and the end of the loan forgiveness period, did the borrower pay dividends or distributions to its owners;
• Whether between March 13, 2020 and the end of the loan forgiveness period, did the borrower prepay any of its outstanding debt;
• Whether borrower compensated any of its employees in an amount exceeding $250,000 on an annual basis;
• Whether borrower compensated any of its owners in an amount exceeding $250,000 on an annual basis;
• Whether 20% of more of borrower’s equity securities were owned by a private equity firm, a venture capital firm or a hedge fund; and
• Whether any of the borrower’s equity securities are publicly traded, and if not, what was the value of total shareholder or owner equity.

The Non-Profit Form 3510 contains similar questions applicable to larger charitable organizations such as schools, hospitals and churches. For example, related to the Liquidity Assessment, separate questions seek information on assets in endowment funds and the value of borrower’s non-cash investments, such as equity, bond and real estate holdings.

Earlier news stories and even more recent allegations of borrower improprieties in the loan application process seem to be driving the SBA’s efforts to maximize program integrity and protect taxpayer resources. Borrowers who are required to use these new forms, but cannot with certainty show that their operations were impacted enough by COVID-19, may have their loan forgiveness application denied. Based on the foregoing, it would be prudent for all affected PPP loan borrowers to begin compiling responses and gathering supporting documentation now.

The Bowles Rice CARES Act / COVID-19 Response Team will continue to monitor the status of these proposed forms. And as always, our firm's attorneys continue to stand ready to help clients who have concerns about the interpretation and response to Form 3509 and Form 3510, and other PPP loan issues.

About the Author

John F. Nobbs is an attorney in the Southpointe, Pennsylvania office of Bowles Rice. He concentrates his practice on business, corporate and real estate law. His business and corporate experience includes entity formation, corporate governance, mergers and acquisitions, and leasing and financing. John also assists clients in the formation of non-profit entities.

In Focus is a digital supplement to our firm's award-winning Views & Visions magazine.  Like its print relative, the blog offers unique perspectives on a variety of topics from leaders of business and industry, government, education and community organizations throughout our region.