Back in March 2020, the country learned for sure that it was in the grips of a global pandemic. By mid-March, the stock market was in total swoon, theaters had shut down, and people were being urged not to eat in restaurants or frequent other public establishments.
In April to help those struggling businesses, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which created the Paycheck Protection Program, administered by the Small Business Administration and the U.S. Department of the Treasury, to give fully forgivable loans to those struggling businesses in return for keeping their workers on staff. The program was designed as a panacea, but a lot of people saw it as free money.
Now that there’s light at the end of the COVID tunnel, the forces that were pushing out PPP funds do not seem so strong, which makes me wonder whether that money will turn out to be so free after all.
In those early days, mixed messages were everywhere. To get PPP you had to be a small businesses, but the Los Angeles Lakers got a loan. (The Lakers voluntarily returned it, like many other businesses, after unflattering news reports.) The loan required only a good-faith certification that the current economic situation made the loan necessary, which applied to practically all businesses at the time. But then Senator Marco Rubio tweeted that if you had revenue to cover operations, you weren’t eligible, and threatened to subpoena those who falsely certified. Meanwhile, the SBA enacted a safe harbor for companies to give the money back if they didn’t need it—no harm no foul.
The standard was so unclear that, frankly, it wouldn’t be shocking if some businesses took a pass because they didn’t know who to believe.
Nevertheless, it seemed then—and this is my personal opinion—that the idea was to push as much money out as possible so as to avert disaster and then sort it out on the back end. Much of the decision-making fell to the banks who got very little guidance while being asked to give out huge sums of money on the promise that the federal government would pay them back. Those bankers couldn’t have been expected to have expertise in nuanced areas of the law affecting eligibility such as SBA affiliation, especially since the rules were being written on the fly. It’s reasonable to assume that the default was approval so long as there wasn’t a clear reason not to.
But that was then. Now that it’s time for the government to start paying those banks back. And the economic forecasts that required that money to go out are no longer so dire. Something tells me those forgiveness applications are going to get a lot more attention than the initial applications did.
Part of this thinking has to do with the forgiveness process. Forgiveness of a very small loan (less than $150,000) requires a short form. But a bigger loan has to go through a lengthy two-step approval process. According to an interim final rule (“interim final” means effective immediately) published on the Federal Register, an applicant first asks for forgiveness from the lender. The lender makes an initial determination on loan forgiveness within 60 days. If the lender thinks the loan should be forgiven, it asks the SBA for repayment.
From that point, the SBA has 90 days to either remit the loan amount to the lender, or make a different determination on forgiveness. According to the rule, that 90 days gives the SBA time “to prevent fraud or misuse of PPP funds, ensure that recipients of PPP loans are within the scope of entities that the CARES Act is intended to assist, and confirm compliance with the PPP requirements set forth in the statute, rules, and guidance.”
In other words, SBA is going to look at these like the Eye of Sauron. A misplaced comma might mean that that $2 million of free money wasn’t so free after all. I’m exaggerating, but you better believe that if Uncle Sam doesn’t think you were initially eligible for that money, he’s not writing that check.
Payments are deferred on PPP loans for 10 months, but when those first payments come due, there’s every reason to suspect a rash of forgiveness applications will start coming in. If the decisions are as harsh as we think they might be, things might get real interesting. As we’ve noted before, the ultimate decision on PPP forgiveness is appealable.