Paycheck Protection Program (PPP) loans were designed to help small businesses cover explicit allowable expenses during the COVID-19 pandemic. There are various eligibility requirements that businesses must satisfy before applying for PPP loans and subsequently upon seeking forgiveness. Because the loans were sought and made at rapid speed, many business owners unknowingly made errors in the application process or while spending the loan monies. Many lenders did not flag or even recognize such errors. After loans were distributed, the SBA issued guidance on eligibility requirements. Now, as businesses turn to the forgiveness process, seek an additional PPP loan or simply realize that they received loan proceeds in error, companies are left trying to navigate the complicated process of fixing errors. How businesses correct these mistakes is extremely important and can mean the difference between having to write a good faith error letter to a lender and fending off a criminal investigation.
Possible issues we’re seeing:
- Including independent contractors in loan calculation
- Incorrectly calculating full time employees
- Making mistakes while computing payroll costs
- Spending the loan money on impermissible uses
- Improperly determining the covered period
Excess Loan Amount Errors
PPP borrowers have long feared the SBA will be inflexible when granting loan forgiveness to borrowers who made good faith errors in the application or forgiveness process. Loan forgiveness often hinges on whether a borrower was eligible to participate at the time of applying and whether the borrower is eligible for complete loan forgiveness based on the proceeds received. A loan is not eligible for forgiveness if the SBA determines that a “borrower was ineligible for the PPP loan based on the provisions of the CARES Act” See 85 Fed. Reg. 38306. Similarly, lenders will be instructed to deny the loan forgiveness application if the “SBA determines that the borrower [was] ineligible for the loan amount or loan forgiveness amount claimed by the borrower.” See 85 Fed. Reg. 33012.
SBA Procedural Notice 5000-20078 provides guidance to parties that have identified an “excess loan amount error” made by a borrower or lender when approving the PPP Borrower Application. Procedural Notice 5000-20078 addresses situations in which a borrower or lender made a good faith error that caused them to receive a PPP Loan in excess of the correct amount. Examples that may result in an “excess loan amount error” include:
- Failing to subtract amounts paid to employees in excess of $100,000 (annualized and prorated) from reported payroll costs.
- Including payments to independent contractors when calculating payroll costs in the PPP Borrower Application Form. As a result, the amount approved exceeded the correct maximum loan amount.
Borrowers who experience and identify a good-faith excess loan amount error are not precluded from seeking full loan forgiveness. Rather, borrowers are expected to repay the excess loan proceeds and then seek loan forgiveness on the properly obtained balance. Forgiveness will only be denied for the ineligible portion and the borrower must make payments on the remaining loan amount. Of note, Procedural Notice 5000-200078 does not require that borrowers immediately repay the entire amount of the excess loan proceeds Instead, borrowers will be required to make payments towards the excess amount in accordance with the terms of the note. Borrowers and lenders that identify an excess loan amount error are advised to notify the SBA even if a final determination of loan forgiveness has been made.
Borrowers should be aware that Procedural Notice 5000-20078 and its discussion of “excess loan amount error” does not apply to errors caused by people who make known misstatements or fraud.
PPP1 vs. PPP2
Generally, a borrower is eligible for a PPP2 loan if it previously received a First Draw PPP (PPP1) loan, will or has used the full amount of the loan only for authorized uses, has no more than 300 employees and can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. However, there are some additional disqualifiers in PPP2 that were not contained in PPP1, including one that forces an examination of the borrower’s relationship with China.
Congress specifically targeted China in PPP2, making any businesses with substantial ties to the country ineligible. Companies should proceed with extreme caution when deciding whether to seek a PPP2 loan if it has any relationship with China.
PPP2 disqualifies companies:
- That are created in or organized under the laws of China
- That have significant operations in China
- In which a Chinese company owns or holds, directly or indirectly, 20% or more of the economic interest of the business
- That have a resident of China on its board of directors.
If your business has received a loan and has ties to China, the business should expect heightened governmental scrutiny and seek counsel to proactively evaluate potential civil and criminal liability.
If a Borrower Suspects a Mistake Was Made
The owner of any business that has already received a PPP loan and thinks an error may have been made in applying for the loan or spending the loan should consult with counsel before communicating with any government agency or lender. An attorney can help assess the full potential for civil and criminal exposure, interface with the lender and government and help mitigate potential damages.