The Fog of SBA/PPP Loan Scrutiny

Three very recent developments have made it clear that the SBA plans to scrutinize certain successful applicants of the Paycheck Protection Program loans (“PPP”) that were rolled out in late March by the CARES Act and replenished last week, and the SBA also is asking applicants to scrutinize themselves.

What happened?

First, Treasury Secretary Mnuchin and SBA Administrator Jovita Carranza explained on Tuesday in a joint statement that before being approved for the forgiveness component of the PPP loan, every applicant with a loan exceeding $2 million will undergo a full review by the government, and smaller loans may be reviewed as well. This statement was later encapsulated in SBA Q&A #39. The purpose of such audits is not to second-guess the lending banks’ approval processes, but to verify the borrower’s assertion of “need,” which is the focus of the other developments.

On April 23, the SBA added new Q&A #31 to its website, asking whether “businesses owned by large companies with adequate sources of liquidity” are eligible for a PPP loan. It dodges a clear, definitive answer, and instead directs applicants to carefully review the requirement that their loan requests truly are necessary. (A “good faith certification” of that need is required as part of the application process.) Those who no longer are sure they meet that standard are invited to return their funds by May 7, 2020, and by doing so they automatically will be deemed by the SBA to have made the certification in good faith.

Then, on April 28, Q&A #37 appeared, asking the same question directed at “private companies” of means (instead of “large companies”). Instead of a new answer, it directs readers to the vague, subjective wording of Answer #31.

This occurs as more stories appear in the media of successful, high-profile applicants deciding (under pressure from their PR advisors as much as their attorneys) to return funding already obtained, even though their applications may well have met the criteria established in the CARES Act.


Q&A #31 and #37 clarify very little, and instead raise a number of questions. One of the few things that is clear is that a number of well-versed borrowers or advisors easily will be able to interpret the same set of facts but come to completely different conclusions regarding whether need was established under these incredibly subjective standards. Following are some considerations that can be used by borrowers in assessing their own interpretation of this guidance.

  1. The guidance this article discusses all turns on Congress’s short statement in the CARES Act that a loan is allowed if “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations” of the recipient. (The use of “uncertainty” is an interesting choice of words. How can a borrower be certain of a need unless also able to identify the economic conditions – with certainty – as harmful or harmless?)
  2. In the CARES Act, Congress directed the SBA to issue guidance that “prioritizes small business concerns” and other certain borrowers. Perhaps even if its guidance is far narrower than Congress seemingly intended (and is perceived by some as making up their own laws), the SBA believes that rules that have the effect of helping small businesses, even at the expense of large ones, are consistent with Congressional intent.
  3. We have long known that there are two stages in the gauntlet for a PPP borrower who also anticipates loan forgiveness: (1) Initially applying for the loan, and (2) later providing evidence that the loan qualifies for forgiveness, as part of a second application. We now see that the second application involves some backward-looking scrutiny that not only evidences proper use of the funds (that make it eligible for forgiveness), but may also ask borrowers to provide more detail regarding how their circumstances, as known at the time of the initial application, support the need for the loan.
  4. The CARES Act directs lenders to determine whether loans will be forgiven within 60 days of receiving borrowers’ forgiveness applications. As long as the documentation required for forgiveness is provided (primarily evidence of qualifying payroll, mortgage, lease, and utility payments), banks will be held harmless for their determinations. However, even though the forgiveness application also launches a mandatory SBA review of $2,000,000 loans (and optional reviews of smaller loans), there is no 60-day or other timeline prescribed yet for the SBA’s determination of whether the loan’s need was sufficiently established – or a protocol explaining exactly what happens if the SBA believes the burden was not met. We are told that further regulatory guidance will be forthcoming.
  5. Based on a survey by the National Federation of Independent Business, only 20% of PPP applicants were able to obtain approvals before the initial funding went dry. Q&A #31 was issued after the initial funding was exhausted, but well before the 8-week period for qualifying for forgiveness of the loan could be established. Its new policy by which borrowers can return funds on a “no questions asked” basis by May 7 represents a distinctly different method of reversing the flow of funds. The CARES Act has always allowed the possibility that some loans would need to be repaid instead of forgiven (if the uses didn’t qualify), but Q&A #31 instead represents more of an “undoing” of an application that, unlike a “regular” loan repayment, would free up those funds for other applicants.
  6. Q&A #31 and #37 read in part, respectively, “businesses owned by large companies” and “businesses owned by private companies.” This seems to suggest that both questions address relationships involving tiered ownership (one entity owning another), and the liquidity and means of the parent entity could prevent the subsidiary entity from establishing a “need.” But does “business” refer to an entity, or does it instead refer to activity conducted by an entity (the entity’s operations)? If it refers to an activity, then what about businesses owned by individuals, if those individuals potentially represent sources of liquidity? Do their individual means need to be considered in establishing the business needs? This is not specifically addressed in the legislation or guidance. It is curious, though, that in the CARES Act, Congress deliberately suspended, at least indirectly, language that at times has existed in the Small Business Act that required a 20% individual owner to contribute personal assets to reduce the company’s need, and also suspended a similar provision that requires other sources of credit to be exhausted before a borrower turns to the SBA.


The astute reader will realize that nothing in this article provides definitive answers regarding how to establish the “need” necessary to support the loan and its forgiveness. That is deliberate and necessary, thanks to the vague wording throughout the guidance. Instead, this explains part of the rapidly-changing landscape and provides some tools you can use to unpack your own interpretation of the requirements. Clearly Congress and the SBA intended for this to involve a subjective, fact-specific analysis, and perhaps they denied us any objective criteria out of necessity. With the relative speed with which the legislation came together, it would have been nearly impossible to prescribe a numerical measuring stick that let everyone in that it should and left out everyone that it shouldn’t. It also would seem inappropriate to provide objective criteria after the fact, when the borrowing took place based on subjective terms. So instead, the government reminds us that with finite funding, this is a zero-sum game, and we should simply reflect, and think harder about whether the need existed when the request for help was made. (This reminder, of course, would have been more useful a few weeks ago.) In a completely different setting, Justice Potter Stewart years ago famously wrote “I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description… and perhaps I could never succeed in intelligibly doing so. But I know it when I see it…” Perhaps the same analysis will be applied to identify true need for PPP purposes.

It was readily apparent when the PPP was rolled out that demand would exceed supply, and while first-in, first-out played a huge role, some logistical issues impacted who benefited and who was left behind. The government is trying to allow for some who otherwise would be left behind to have another chance, at the expense of some who (rightly or wrongly) will “undo” their previous actions. But that should not frighten those who legitimately obtained the funds or make them feel guilty. The harsh reality is that successful applicants may look around and see equally deserving applicants who received nothing.

What we recommend

  1. Regardless of loan size, operate under the assumption that your loan will be audited.
  2. Gather and retain contemporaneous documentation regarding what factors influenced your determination of the need for the PPP loan.
  3. Consult with your BNN advisor and your other business and legal advisors.
  4. Create detailed records documenting your qualification for debt forgiveness.
  5. Continue to operate your business in a way that makes good business sense and complies with the spirit of the program. Avoid making drastic changes that serve no purpose other than to obtain and utilize PPP loan funds.


In spite of all of this ambiguity, before May 7, borrowers should review their “needs” for funding as of the initial date of application, and consider how they can bolster their evidence of it. Unfortunately, vague wording in Q&A #31 and #37, combined with recent public shaming (Harvard, Shake Shack, the L.A. Lakers), undoubtedly will cause some borrowers who meet the criteria for legitimate borrowing to be frightened into volunteering instead to return it.

For more information or a discussion on how this may impact you, please contact your BNN advisor at 800.244.7444.


Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

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