The United States Small Business Administration (“SBA”) recently released important new guidance (Procedural Notice SBA 5000-812316, SBA Guarantee Purchases and Lender Obligations Effective July 15, 2021 (“SBA Service Guidelines”)) on servicing loans issued under the Payroll Protection Programwhich was originally created under the Coronavirus Relief, Relief and Economic Security Act. (“PPP Loans”). The purpose of the SBA Service Guidelines is to reinforce certain service obligations that lenders have in relation to PPP loans in accordance with existing SBA rules and regulations (collectively “Program Requirements”)as well as inform lenders of the guarantee purchase process required for the SBA to fulfill its 100% guarantee on each PPP loan.
The SBA’s Servicing Guide provides detailed and additional guidance on a number of scenarios that typically arise in the context of servicing and repaying PPP loans.
In this regard, the SBA Maintenance Guidelines stipulate that the lender’s primary responsibility for servicing is to work with the borrower on each PPP loan to achieve full loan forgiveness in accordance with the applicable program requirements within ten months after the end of the applicable period stipulated for PPP loan forgiveness; or, in the event of default or other qualifying event, require SBA to fulfill its guarantee of 100% repayment of the PPP loan and write off the balance of the PPP loan in accordance with the procedures set out in the SBA’s Service Manual. The SBA’s Service Handbook lists the service responsibilities that the SBA expects from each PPP lender. It is important to note that the SBA’s Servicing Guidelines (i) clearly state that the lender must service each PPP loan until it is fully forgiven, paid in full, or written off, and (ii) provides that if the borrower becomes more than 60 days in arrears on a PPP loan that has not been fully forgiven, the lender must apply to the SBA to make a guaranteed purchase of the guaranteed balance of the PPP loan and write off the outstanding balance using the SBA PPP platform.
The SBA’s Service Guidelines also provide that if a borrower for a PPP loan has filed for bankruptcy protection after the PPP loan has been repaid, unless the loan has been fully forgiven and the bankruptcy procedure is not an assetless procedure, the lender must provide SBA with bankruptcy notice. ; submit proof of claim; and continue to monitor what is happening. However, the SBA has now indicated that it does not normally expect creditors to take bankruptcy action in excess of the above minimum steps and approve bankruptcy-related litigation costs only if the SBA decides after reviewing the litigation plan presented by to the lender that the legal costs to be incurred are cost-effective in the context of any expected reimbursement. These clarifications, included in the SBA’s Service Guidelines, offer a different approach to dealing with borrowers in the event of bankruptcy than the approach required in bankruptcy filings by borrowers more generally in Loan Program 7 (a) (of which PPP loans are part). However, the SBA’s Service Guidelines suggest that circumstances may arise in which lenders must be prepared to proceed with the coordination and approval of the SBA. Lenders will need to assess different situations in order to decide whether to seek authorization for additional action and what is reasonably required to continue monitoring the bankruptcy proceedings, but it is helpful that the SBA has clarified that in many circumstances no action other than the steps outlined will be necessary or appropriate.
The SBA’s Service Guidelines list the circumstances in which a lender can ask the SBA to fulfill its guarantees and receive a write-off of a PPP loan. Notably, these circumstances include most bankruptcy proceedings, where the court issues an order confirming the reorganization plan that does not provide for the repayment of 100 percent of the debt on a PPP loan. The SBA’s Service Manual also identifies circumstances under which a creditor may require SBA to fulfill its guarantees without writing off the balance. This most commonly occurs when a borrower has filed an appeal against a forgiveness decision and the appeal is pending with the SBA’s Hearings and Appeals Office.
The SBA’s Service Guidelines also describe what a lender must do if a borrower for a PPP loan submits a request for forgiveness after the lender has filed a request with the SBA to honor its guarantee, and describes how lenders must submit requests to the SBA to honor their guarantee. and writing off a PPP loan using the SBA platform. It is noteworthy that full instructions for using the SBA platform in this context are not included in the Notice and will be posted at a later date.
Finally, the SBA Service Manual clearly states that SBA will honor its guarantee and will buy back 100 percent of the outstanding balance of a PPP loan only if the lender has complied with the program requirements, including applicable underwriting requirements and document collection and record retention requirements. Although the burden placed on lenders at the start of the PPP lending program was minimal, the SBA’s Servicing Guidelines clearly state that lenders must carefully comply with the requirements to continue servicing PPP loans.
The SBA’s Servicing Guidelines provide useful new information to help lenders determine how to proceed with servicing PPP loans, including how to proceed in the context of a borrower’s filing for bankruptcy.