On October 26, 2020, the Small Business Administration (SBA) issued a notice in the Federal Register that it would be utilizing Loan Necessity Questionnaires in connection with its Paycheck Protection Program (PPP) loan review process. Borrowers who – together with their affiliates, as that term has been defined through the Interim Final Rules and other guidance – received loans with an original principal amount of $2 million or greater must complete the questionnaires.
The SBA crafted two separate questionnaire forms, which it has begun releasing to lenders.1 SBA Form 3509 will be used by for-profit borrowers, and SBA Form 3510 will be used by nonprofit borrowers. Lenders are expected to distribute the forms to applicable borrowers, and borrowers must complete the forms and provide supporting documentation to lenders within ten business days. Lenders then have five days to upload borrower responses and documents to the SBA’s loan forgiveness platform.
The forms are designed to help SBA loan reviewers "evaluate the good-faith certification" borrowers made at the time they applied for PPP loans. The SBA noted in the instructions that a borrower should not assume that, because it received a questionnaire, the SBA is challenging the borrower’s certification. SBA stated that its determination "will be based on the totality of [the borrower’s] circumstances."
However, the SBA cautioned that a borrower’s failure to complete the form and provide supporting documentation may result in the SBA’s determination that the borrower was "ineligible for either the PPP loan, the PPP loan amount, or any forgiveness amount claimed." Furthermore, failure to complete the form may result in the SBA seeking repayment of the loan or pursuing "other available remedies."
As explained in greater detail below, both for-profit and nonprofit borrowers must provide information and supporting documentation regarding their level of activity in 2020 (as well as certain information regarding their 2019 activities) and their liquidity. Borrowers may indicate whether the information provided is "customarily kept confidential."
For-Profit Borrowers
The for-profit questionnaire seeks information including:
Activity Assessment
- Answers and documentation showing gross revenue for the second calendar quarter of 2020, and for the second calendar quarter of 2019
- Whether, since March 13, 2020, the borrower was ordered to shut down as a result of state or local COVID-19 orders, including the applicable authority and time frame
- Whether, since March 13, 2020, the borrower was required to significantly alter its operations as a result of state or local COVID-19 orders, including the applicable time frame and a description of the change in operations (for example, reduction in number of visitors, restrictions on indoor use, reconfiguration of workspaces). The borrower must also disclose the approximate amount of cash spent on the mandatory alterations
- Whether, since March 13, 2020, the borrower has voluntarily ceased or reduced its operations because of COVID-19, including the time frame and reasons why (for example, employee COVID-19 diagnosis, supply chain disruptions)
- Whether, since March 13, 2020, the borrower has voluntarily altered its operations because of COVID-19, including the time frame and a description of the change in operations (for example, reduction in number of visitors, restrictions on indoor use, reconfiguration of workspaces). The borrower must also disclose the approximate amount of cash spent on the voluntary alterations
- Whether, between March 13, 2020 and the end of the Borrower’s forgiveness covered period, the borrower made any capital improvements unrelated to COVID-19, and the amount of cash spent on these projects
Liquidity Assessment
- The borrower’s cash and cash equivalents as of the last day of the calendar quarter predating its PPP application (along with supporting documentation)
- Whether the borrower paid dividends or distributions between March 13, 2020 and the end of the borrower’s forgiveness covered period (other than pass-through estimated tax payments), and the total amount paid (along with supporting documentation)
- Whether the borrower prepaid any outstanding debt between March 13, 2020 and the end of the borrower’s forgiveness covered period, and the total amount paid (along with supporting documentation)
- Whether, during the borrower’s loan forgiveness covered period, any of the borrower’s employees or owners were compensated at more than $250,000 annualized (including gross salary, wages, tips, commissions, separation allowances). In addition, borrowers must disclose the number of employees and owners in this category, and the total amount of compensation paid to them during the loan forgiveness covered period (along with supporting documentation)
- Whether, on the PPP application date, any of the borrower’s equity securities were listed on a national securities exchange and the amount of market capitalization on that date
- Whether, on the PPP application date, any publicly traded company owned 20% or more of any class of the borrower’s outstanding equity securities, as well as the name and market capitalization of each publicly traded company owner
- If not publicly traded, the book value (shareholders’ equity value) of the borrower as of last day of the calendar quarter predating its PPP application
- Whether, on the date of the borrower’s PPP loan application, the borrower was a subsidiary (owned 50% or more by a parent company), and whether the parent company was organized or incorporated outside of the United States. Also, whether any equity securities of the parent company are listed on a national securities exchange, or a foreign exchange, and what the parent’s market capitalization was on the date of the PPP application
- Whether, on the date of the borrower’s PPP loan application, 20% or more of the borrower’s outstanding equity was owned by a private equity firm, venture capital firm, or hedge fund
- Whether, on the date of the borrower’s PPP loan application, the borrower was an affiliate or a subsidiary of a foreign, state-owned enterprise or of a department, agency, or instrumentality of a foreign state
- Borrowers also can provide additional comments on the answers to the business activity and liquidity questions (subject to a 1,000-character maximum for each section)
Nonprofit Borrowers
The nonprofit questionnaire seeks information including:
Activity Assessment
- Documentation of gross receipts for the second calendar quarters of 2019 and 2020, and specifically documentation of gross receipts from gifts, grants, and contributions for such quarters
- Documentation of expenses for the second calendar quarters of 2019 and 2020
- Whether, since March 13, 2020, the borrower was ordered to shut down as a result of state or local COVID-19 orders, including the applicable authority and time frame
- Whether, since March 13, 2020, the borrower was required to significantly alter its operations as a result of state or local COVID-19 orders, including the applicable time frame and a description of the change in operations. The borrower must also disclose the approximate amount of cash spent on the mandatory alterations
- Whether, since March 13, 2020, the borrower has voluntarily ceased or reduced its operations because of COVID-19, including the time frame and reasons why
- Whether, since March 13, 2020, the borrower has voluntarily altered its operations because of COVID-19, including the time frame and a description of the change in operations. The borrower must also disclose the approximate amount of cash spent on the voluntary alterations
- Whether, between March 13, 2020 and the end of the Borrower’s forgiveness covered period, the borrower made any capital improvements unrelated to COVID-19, and the amount of cash spent on these projects
Liquidity Assessment
- Amount of cash and cash equivalents on hand as of the last day of the calendar quarter immediately before the date of the borrower’s PPP loan application
- Whether the borrower prepaid any outstanding debt between March 13, 2020 and the end of the borrower’s forgiveness covered period, and the total amount paid (along with supporting documentation)
- Whether, during the borrower’s loan forgiveness covered period, any of the borrower’s employees or owners were compensated at more than $250,000 annualized (including gross salary, wages, tips, commissions, separation allowances). In addition, borrowers must disclose the number of employees and owners in this category, and the total amount of compensation paid to them during the loan forgiveness covered period (along with supporting documentation)
- Details regarding any restrictions on the borrower using net income or cash savings to fund operating expenses
- Whether the borrower holds any endowment funds and the restrictions pertaining to using such funds to pay for operating expenses
- The value of the borrower’s non-cash investments (i.e., securities and real estate holdings)
- For schools, colleges and universities, details on the borrower’s median tuition for the 2019–2020 academic year, whether the borrower offered financial assistance to students impacted by COVID-19, and whether the borrower’s tuition revenues decreased from 2018–2019 because of COVID-19
- For healthcare providers, details on the borrower’s revenues from patient services in the second calendar quarters of 2020 and 2019, and whether the borrower offered a discount on such services because of COVID-19
- For borrowers other than schools and healthcare providers, whether the borrower offered a discount on services because of COVID-19
- Whether the borrower received funds from any CARES Act program other than the PPP, excluding tax benefits (such as the payroll tax deferral)
Borrowers can provide additional comments on the answers to the activity and liquidity questions (subject to a 1,000-character maximum, for each section)
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It remains to be seen whether the SBA will use this questionnaire to address loan forgiveness or to challenge for-profit and nonprofit borrowers’ original eligibility for a PPP loan. It may be that there is little substantive difference, as the cure in both cases may simply be to have the borrowers repay the loan. It is not clear whether the SBA or other agencies will aggressively pursue "other remedies," including penalties, given the lack of clarity of the original rules and the difficulties posed by assessing a borrower’s March or April 2020 good faith certification with data that post-dates the certification by several months.
Moreover, although the focus on loans of $2 million and up is consistent with the previous announcement that all such loans would be subject to audit, the SBA previously advised the Government Accountability Office (GAO) that it intends to automatically review all loans, and manually review certain loans under $2 million. (See our summary here.)
When the PPP initiative was originally rushed out to the public in the early days of the pandemic response, guidance trickled out, in the form of SBA’s FAQs document, for months. It is likely more guidance will be forthcoming here as well. We will continue to monitor new information if and as it is released.
1 As of November 2, 2020, the SBA had not published the forms on its website.