The Small Business Administration (SBA) is verifying applications for Paycheck Protection Program (PPP) loan forgiveness for first- and second-draw PPP loans, including for nonprofits that have received loans. As part of these audits, the SBA requests supporting documentation for the loan calculation, affiliation, eligible expenses incurred, and analysis of the need for the loan. So far, SBA audits have focused primarily on loans of $2 million or more, but the SBA may extend its review to smaller loans.
In most cases, the borrower’s bank acts as the intermediary in an SBA audit, with all correspondence going through the bank. The SBA often gives tight deadlines to respond. Failure to respond to a request for documentation or information in a timely manner could result in an adverse decision against the nonprofit or other entity that received the loan. Thus, in practice, borrowers who have submitted requests for loan forgiveness should be attentive to communications from their bank. In some audits, the SBA may simply notify the borrower’s bank that it is reviewing the loan file, requiring the bank to notify the borrower of the SBA’s review and upload all documents related to the PPP loan into 15 days. This type of audit does not identify any specific issues that the SBA is considering. Other times, the SBA notifies the borrower’s bank that the SBA is asking the borrower to answer specific questions.
Respond to SBA Audit
Nonprofit organizations should be prepared to provide a full response to the SBA audit. Even when the SBA notifies the bank that the borrower must address specific issues, the borrower must provide documentation and information regarding any potential issues, not just the issues identified by the SBA. If the SBA makes an adverse decision denying loan forgiveness, an appeal of the SBA’s decision would be based on the SBA’s record as it stands at the time of the decision. On appeal, the borrower may have limited opportunities to complete the file. Thus, nonprofit organizations must provide a full response demonstrating their entitlement to the PPP loan and loan forgiveness.
SBA document requests may duplicate documentation submitted with the loan forgiveness application or documentation provided earlier during the review process. It is important to focus the SBA examiner’s attention and provide supporting documentation in an organized manner. A cover letter or other narrative response that establishes the nonprofit’s eligibility for pardon and explains the documentation provided is helpful.
It is important to note that an SBA audit or investigation may occur after a PPP loan is forgiven, as the statute of limitations for an audit or investigation is generally six years. Nonprofit organizations must retain all files and records related to a PPP loan and forgiveness application for at least this long.
There are four potential reasons the SBA may deny full forgiveness of a PPP loan: (1) the borrower was not eligible for the loan; (2) the borrower did not qualify for the amount received or the borrower used the loan proceeds for an unauthorized purpose; (3) the borrower is declared ineligible for partial loan forgiveness by the lender who has rendered its decision to the SBA; and/or (4) the borrower is deemed totally ineligible for loan forgiveness by the lender and the lender has rendered a full denial decision to the SBA.
If a borrower receives a full or partial denial of loan forgiveness from the SBA and wishes to appeal, the borrower must file a written appeal with the SBA’s Office of Hearings and Appeals (OHA) within 30 calendar days of the receipt of final loan review decision from SBA. Appeals should be submitted through the OHA’s Case Portal, and if the borrower calling has not yet begun repaying their lender for their loan, the borrower should send a copy of the appeal to their lender to that the lender can continue to defer repayment to the borrower. for the duration of the appeal process.
After receiving an appeal, the OHA assigns the case to an administrative law judge. The judge’s decision must be based solely on the administrative record, appeal request, responses, and additional pleadings and filings. The standard of review is “palpable error of fact or law”, and the onus is on the appellant. Once a judge’s decision becomes final, that final decision can be appealed to the appropriate federal district court (the rules provide no additional context for this process).
Finally, in addition to the federal district court appeals process, the SBA Administrator has the authority to review and reverse OHA decisions. Within 30 days of service of an OHA decision or service of a revised OHA decision, the SBA administrator may elect to review or rescind the OHA judge’s decision. . If the Administrator elects to review or rescind an OHA decision, the Administrator’s decision becomes final upon issuance. The SBA Administrator’s authority to review or reverse an OHA decision does not create any right to further appeal, and there are no statutory criteria that trigger the Administrator’s review – the power of review is at the sole discretion of the administrator.
Borrowers of PPP loans bear the burden of proof to establish their eligibility for loan forgiveness. Nonprofits with first- or second-draw loans over $2 million should be prepared to produce an organized and comprehensive response to an SBA audit.