The SBA recently released Procedure notice when the lender can require the SBA to fulfill its PPP loan guarantees. The PPP Loan Program has been in existence for over a year and has provided billions of dollars in assistance to small businesses across the United States. Unsurprisingly, some PPP borrowers continually face financial hardship, in some cases leading to bankruptcy, dissolution, door closures or fraud issues. What should a lender do?
Under program 7 (a) (PPP loans are a special part of the 7 (a) loan program), the lender is required to service the PPP loan in the same way as it would service its other loans. When an SBA 7 (a) loan defaults, the lender usually needs to liquidate collateral, secure guarantors, obtain court orders, or seek foreclosure through bankruptcy before requiring the SBA to fulfill its loan guarantees. These steps are less appropriate for an unsecured loan, especially one that may be eligible for 100% forgiveness. Fortunately, the SBA has recognized this in its latest guide to PPP loans.
The lender must continue to service the PPP loan.
The lender must continue to service the PPP loan until the loan is repaid in full, forgiven in full, or until the SBA acquires the guarantee and writes off any balance. The Notice of Procedure sets out a number of actions that a lender must take to service a PPP loan.
When can a lender require the SBA to fulfill its guarantees?
The lender may ask the SBA to make a guarantee purchase and write off the loan under the following circumstances:
The loan is 60 days overdue and not repaid, but only after a payment request has been submitted;
The borrower has closed permanently and is not petitioning for forgiveness;
The borrower filed for Chapter 7 bankruptcy, but only after the lender provided proof of claim (except that proof of claim is not required for Chapter 7 bankruptcy);
The borrower is a sole proprietor, sole proprietor, sole shareholder or independent contractor and the owner has died;
The borrower or owner of 20% or more has been charged or convicted of a felony related to a PPP loan; and
It has been 60 days since the borrower filed an appeal against the SBA’s final decision to review the loan with the Office of Hearings and Appeals.
In such situations, the lender does not need to exhaust remedies or incur costs in pursuit of the borrower. Instead, the lender can ask the SBA to fulfill its PPP loan guarantees.
What if a PPP borrower files for Chapter 11, 12, or 13 bankruptcy?
When a borrower files a Chapter 11, 12, or 13 reorganization procedure, the lender must notify the SBA, file proof of claim, and continue bankruptcy supervision; but it is not required to take other steps in bankruptcy other than the presentation of proof of the claim. The creditor can then require the SBA to fulfill the guarantee only if the bankruptcy petition was filed more than 60 days after the grace period ended. or at any time after the entry of the order confirming the plan, if the plan does not provide for the full repayment of the PPP loan. There is a caveat in the order confirming the plan: if the approved plan calls for the full repayment of the PPP loan, the lender must continue to service the PPP loan until it is fully repaid, fully forgiven, or, in the case of a subsequent event that allows for a tender with the SBA, the SBA buys the loan and approves the write-off.
The notice of the procedure confirms that the borrower who has filed for bankruptcy can apply for forgiveness. However, the procedural notice does not specify whether the lender should file an objection against the sale of the property of a bankrupt borrower or against the sale of more than 50% of the assets in liquidation. Run by SBA change of control procedure notification, the borrower, under certain circumstances, must deposit sufficient cash to fully repay the PPP loan, or for the buyer to commit to the PPP loan.
What does a lender need to file with the SBA?
The registered lender must use the existing PPP platform to request both a guarantee purchase and a write-off. The SBA encourages lenders to process both first and second draw PPP loans at the same time. The procedural notice details the information and documents that the lender must submit through ETRAN, the required certificates of the lender, the retention requirements for the lender’s documents, and how the guarantee payments will be made upon purchase to the lender.
There is currently no new guidance on how long the SBA will fulfill its guarantees. The procedural notice states that the SBA will pay interest during the grace period plus up to 120 days of additional interest due to non-payment. This could mean that the SBA intends to process these requests within 120 days.
According to the procedural notice, the SBA guarantee expires 180 days after the maturity of the loan. This can cause problems in some bankruptcy procedures, since it is possible that the bankruptcy reorganization plan can be confirmed no earlier than 180 days after the date of the loan repayment.
What if the borrower asks for forgiveness?
It is possible that the borrower may apply for forgiveness after the lender has requested a guarantee purchase. In this case, the lender is obliged to process the forgiveness application. If the SBA has not yet completed the warranty purchase and write-off, the lender must immediately withdraw the request and not resubmit it until the SBA completes the forgiveness review. If the SBA has already completed the purchase and write-off, the lender must still process the forgiveness application, but the SBA will not transfer the forgiveness payment to the lender, but will instead apply the forgiveness amount to reduce the borrower’s outstanding loan amount.
What if the lender receives payment from the borrower after the purchase?
The lender may receive payments from or on behalf of the borrower after the SBA completes the warranty purchase and write-off. This can happen, for example, not only in bankruptcy proceedings, but also in inheritance proceedings, other proceedings or voluntarily. In this lucky case, the lender must transfer such payments to the SBA using Pay.Gov.
What if the lender suspects fraud?
The procedural notice directs the lender to report fraud, waste or abuse to the Credit Risk Management Office and the Office of the Comptroller General. However, it does not provide any guidance on how to process a fraudulent forgiveness statement, let alone that a lender can request a purchase guarantee and write-off from the SBA.
© Miller, Canfield, Paddock & Stone, 2021 Review of National Legislation, Volume XI, Number 202