The U.S. Small Business Administration (SBA) has begun to issue loan necessity questionnaires to Payroll Protection Program (PPP) borrowers, adding clarity to the good faith certification they required with initial applications. The distribution of Loan Necessity Questionnaires (SBA Form 3509 or 3510) to lenders of loans of $2 million or more is the first step toward identifying loans that spur further audit or investigation.

As outlined in a previous legal alert, investigations of PPP recipients are increasing as reports of waste and abuse have captured the attention of government watchdogs and federal prosecutors. Authorities are targeting businesses that did not apply for loans in good faith or use the funds appropriately for payroll, utilities, rent, or other permitted expenses.

The approach was detailed in a recent update – question 53 – of the SBA’s PPP FAQ document.

53. Question:  Why are some PPP borrowers receiving a Loan Necessity Questionnaire (SBA Form 3509 or 3510)?

Answer: As previously announced the SBA is reviewing all loans of $2 million or more, and other loans as appropriate, for eligibility, fraud or abuse, and compliance with loan forgiveness requirements.  As part of this process, SBA is providing a Loan Necessity Questionnaire to lenders for them to provide to PPP borrowers that, together with their affiliates, received loans of $2 million or more.  Upon request from their lender, borrowers should return the completed questionnaire to their lender within 10 business days of receipt.

The information that borrowers provide on the questionnaire will help SBA assess those borrowers’ certification in their loan application that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” as required by the CARES Act.

A request to complete the Loan Necessity Questionnaire does not mean that SBA is challenging a borrower’s certification that is required by the CARES Act.  SBA’s assessment of a borrower’s certification will be based on the totality of the borrower’s circumstances through a multi-factor analysis.  As described in FAQ #46, SBA will assess whether the borrower had adequate basis for making the required good-faith certification, based on its individual circumstances in light of the language of the certification and SBA guidance.  This certification is required to have been made in good faith at the time of the loan application, even if subsequent developments resulted in the loan no longer being necessary.  In its review, SBA may take into account the borrower’s circumstances and actions both before and after the borrower’s certification to the extent that doing so will assist SBA in determining whether the borrower made the statutorily required certification in good faith at the time of its loan application.

After a borrower submits its completed questionnaire, SBA may request additional information, if necessary, to complete its review.  When additional information is requested, borrowers will have an opportunity to provide a narrative response to SBA explaining the circumstances that provided the basis for their good-faith loan necessity certification.  SBA will make a final determination that a borrower lacked an adequate basis for its loan necessity certification after reviewing any additional information that a borrower chooses to submit.  This targeted, multi-step approach will ensure the integrity of the evaluation process and expeditious processing, as well as properly allocate SBA’s finite resources to those loans that require additional review.

Borrowers have just 10 business days to complete the questionnaire upon receipt from their lender, meaning preparation should start in advance of receiving the questionnaire to ensure critical information is gathered and accurate. Loan recipients should immediately consult their tax processional, payroll company, legal counsel and other internal and external business advisors to begin preparations.

For PPP loan questions contact Josh Steele of our CARES Act team. If you are subject of a loan investigation contact Terry Flynn of our Government Compliance and Investigations Practice Group.

This alert does not purport to be a substitute for advice of counsel on specific matters.

Harris Beach has offices throughout New York State, including Albany, Buffalo, Ithaca, Long Island, New York City, Rochester, Saratoga Springs, Syracuse and White Plains, as well as New Haven, Connecticut and Newark, New Jersey.