Finalizing Forgiveness: Fighting SBA Decisions and Pursuing Borrower Claims

Recent increases in Paycheck Protection Program (PPP) loan forgiveness denials by the Small Business Administration (SBA) are causing anxiety across the market for both borrowers and lenders. Grounds for adverse decisions have included disputable application of agency rules, administrative challenges to loan calculations, or even retroactive challenges to loan eligibility. Not only have these decisions created financial uncertainty for denied applicants now facing the prospect of repaying loans they expected forgiven, they raise the specter of further scrutiny through SBA audits or potential referrals for enforcement proceedings.

The SBA Interim Final Rule (IFR) lays out procedures for appealing adverse PPP forgiveness decisions.

While borrowers and lenders expected forgiveness to mark the conclusion of the PPP process, adverse decisions by SBA are triggering potentially lengthy processes through which borrowers defend their claims. These processes include pursuing appeals through administrative proceedings and, later, the court system or even affirmatively challenging SBA rules through court actions. Where SBA has referred claims for audit or enforcement proceedings, borrowers find themselves forced to defend their eligibility for their loans and the legitimacy of their claims. Additionally, lenders are facing increased scrutiny and must ensure that their loan programs are fully compliant in order to defend challenges to both PPP lending and forgiveness decisions.

Among the thorny situations borrowers and lenders face:

• The evolving nature of SBA rulemaking through the PPP process has resulted in uneven and inconsistent application of program rules to forgiveness decisions. For instance, changing eligibility criteria has meant some borrowers who were eligible for their loans are now being determined ineligible for forgiveness.
• There is uncertainty around qualification of private equity portfolio companies for initial funding. The rules evolved, as did the issuance of subsequent FAQ’s and the interpretation of the “credit elsewhere test” of the 7(a) loan requirement. Scores of companies with private equity ownership are now being challenged.
• SBA is scrutinizing borrower affiliations and rejecting forgiveness applications where it considers loans proceeds improperly applied to an affiliate’s covered expenses.
• SBA disputing loan eligibility or forgiveness amounts may give rise to claims of applicant fraud, which, in turn, may create additional civil or even criminal exposure for denied applicants.
• Borrowers should take care to protect privileged or proprietary information. Facts required during the appeals process might include trade secrets or financial information a company wouldn’t want a competitor to see.
• The number of employees at a company may have fluctuated during the term of the PPP loan, affecting eligibility and leaving business owners confused about how to move forward with a forgiveness appeal.
• Time is of the essence. Appeals must be filed to the Office of Administrative Hearing within 30 calendar days after receipt of the SBA decision, and they must be filed using the online portal.
• Any argument made in an appeal must be well-conceived and complete. In addition to including a copy of the SBA decision, appeals must contain a “full and specific” statement as to why the SBA decision is in error, as well as all supporting information. Exhibits and attachments must be clearly labeled. Incomplete petitions may be dismissed, and borrowers may not be able to refile.

We have been on top of the administration of the PPP since its inception, helping clients—ranging from small and mid-sized business owners to stakeholders—navigate the lending process. As issues with the loan forgiveness process began to emerge, our transactional lawyers and litigators have worked together to provide support to clients pursuing challenges to SBA forgiveness decisions and defending against enforcement actions.

We also help lenders ensure their loan programs are compliant with all applicable laws and regulations, assist in responding to government inquiries, and defend challenges to PPP lending and forgiveness decisions. For more information, click here or reach out to one of the authors of this alert.

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