November 10, 2020
Hot Topic Tuesday — Lenders Concerned about the Definition of “Necessity” on New SBA PPP Forms
On October 26, 2020, the SBA filed a Federal Register notice seeking approval from the U.S. Office of Management and Budget (OMB) for two new PPP borrower questionnaires intended to determine the necessity of loans over $2 million. The first, SBA Form 3509 PPP, is to be completed by for-profit borrowers and the second, SBA Form 3510, has been constructed for nonprofit borrowers. The draft status of these new questionnaires as well as the specific questions being asked give rise to a host of questions and concerns about how responses will be used.
Initially, many lenders interpreted language within the CARES Act to mean that they did not need to check for credit elsewhere, perform a personal resources test, or take any other additional steps to prove that the borrower had been adversely impacted by COVID-19 when making PPP loans. However, FAQ guidance released in May suggested that the SBA would be considering “necessity” when issuing forgiveness decisions. Further guidance on how necessity would be determined appeared to come when the SBA forgiveness Form 3508S was released along with instructions noting that the lender could rely on borrower certifications for loans under $50,000. However, language within the new questionnaires suggests that larger-sized PPP loans may not receive full forgiveness if the borrower is unable to prove necessity on the basis of liquidity.
Given the language used in the new forms, lenders are beginning to voice their concerns over how the SBA will define “necessity”. Some have suggested that their borrowers may be put in the awkward position of being scrutinized more closely for having fared better during the pandemic than was anticipated. Others have noted that their borrowers may have improperly certified as to their necessity and may now be facing a large unforgivable loan at the end of their deferment period.
The Federal Register Notice regarding these new forms notes that comments on the necessity questionnaires will remain open until November 25, 2020. Both borrowers and lenders are encouraged to comment via mail (please note that no electronic comments are being accepted).