September 21, 2020
Authored by: Robert Klingler
On September 21st (do you remember?), the U.S. Government Accountability Office released a report on the Federal Government’s COVID-19 response, including with respect to the Paycheck Protection Program. The GAO report provides additional statistical breakdown of the PPP loans, addresses some of the SBA’s oversight plans, and then addresses the need for further guidance on the PPP forgiveness process.
The GAO Report notes that most of the largest PPP loans (those over $2 million), were made during the first phase of the program, between April 3rd and April 26th. 75% of the loans for more than $2 million were approved in the first phase, with the report noting that this may have been due to increased scrutiny from the public, Treasury and SBA.
The vast majority of PPP loans were made to borrowers with 10 or fewer employees (73.6% of the loans) while the majority of PPP loan dollars went to businesses with 100 or fewer employees (67.6%). While borrowers with more than 500 employees were granted limited access to participate in the program, less than 0.1% of borrowers had more than 500 employees.
4% of loans (and 7% of the PPP money) went to non-profits, 24% (and 4%) went to sole proprietorships, independent contractors and self-employed, 14% (and 19%) went to Subchapter S companies, 28% (and 26%) went to LLCs, and 29% (and 40%) went to Subchapter C companies. The GAO Report also notes that 96% of the loans to independent contractors and self-employed individuals were approved from April 27 through August 8, 2020, noting that the SBA guidelines for these groups weren’t published until 2 days before funding in the first phase was exhausted.
SBA’s Oversight Plans
The GAO Report noted that the SBA has provided the GAO with limited information on how it would implement safeguards against fraud in the forgiveness process. The SBA did indicate that it would review all loans of more than $2 million, both for the borrower’s good faith certification concerning the economic necessity of the loan request and, as necessary, for compliance with general program requirements. The SBA has indicated this review will initially be conducted by a third party contractor using an automated review tool, with additional manual reviews on some loans based on risks detected by the automatic tool. However, the SBA and Treasury were still working to finalize the specific review procedures.
The GAO Report notes that any use of data analytics could be of limited utility given questions regarding the reliability of the underlying data. The GAO noted that it and others had identified gaps, outliers, duplicatives, and anomalies in the PPP loan-level data.
Loan Forgiveness Process
The GAO report notes that while the SBA has published guidance on the loan review process, “uncertainty remains about some aspects of lenders’ role in the the process.” Specifically, the extent of the lender review required is unclear, with no details as to what a “‘good-faith review’ in a reasonable amount of time” would look like, particularly with other guidance indicating that an accurate calculation is the responsibility of the borrower and that lenders may rely on borrower representations.
In light of this uncertainty, it’s fairly remarkable that the GAO Report indicates that the SBA had received about 56,000 loan forgiveness decisions from lenders as of September 8, 2020. Although that only represents about 1% of the PPP loans that were issued, it does indicate that some lenders have decided to move forward with processing applications despite the ambiguous guidance. (Although not stated in the GAO Report, it would appear that approximately 0.0% of the PPP loans have completed the SBA review process for such forgiveness decisions.)
The GAO Report also noted the potential benefits for lenders and borrowers if proposed legislation providing for a simplified process for loan forgiveness for loans under $150,000. Hopefully, such legislation, with bipartisan support, will be adopted.