New PPP Compliance Procedures for 2021
The government delegated approval authority to lenders for the first round of Paycheck Protection Program loans in 2020—reflecting the emergency nature of the CARES Act program. After the Small Business Administration issued the loan number, SBA screened each loan for compliance using an automated tool that compared data in the loan application with publicly available information. The tool then applied eligibility and fraud detection rules to identify information that may indicate ineligibility or fraud and abuse. SBA analyzed other data from this first round of PPP loans, including information from the Treasury Department’s Do Not Pay lists. This exercise resulted in SBA’s issuing “Hold Codes” on forgiveness or guaranty purchasing of certain first-round PPP loans, indicating that the borrower may have been ineligible for the loan (or the loan amount) it received.
Following enactment of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act in December 2020 (i.e., approval of the second round of PPP loans), SBA implemented a modified version of the automated tool for front-end compliance screening of PPP loan applications before funding the loans. The automated screening tool generates a “Compliance Check Error Message” similar to a Hold Code.
If a new PPP loan applicant is subject to a Hold Code, or if SBA’s compliance tool generates a Compliance Check Error Message, SBA’s online loan portal will notify the lender and identify the code or message (for easier reading, I’ll refer to both Hold Codes and Compliance Check Error Messages simply as Hold Codes). A recent SBA Procedural Notice guides lenders in responding to Hold Codes.
Most applications with Hold Codes are placed in “research” status. This lets the lender provide further information so SBA can move the application into the next stage of processing. Some Hold Codes require the lender to work directly with SBA to resolve the issue. For example, Hold Code 34 (a “data anomaly issue”) and Hold Code 45 (a “Multiple DUNS Number”) each require the lender to provide SBA with additional documentation. A lender receiving an “Internal SBA Hold–Details Not Publicly Available” notification must contact SBA for instructions (but if the lender receives an “Internal SBA Hold that cannot be cleared at this time–Details Not Publicly Available” notification, the lender can take no further action on the application).
Some Hold Codes may be cleared through a “lender certification” process. For these issues, SBA’s procedural notice provides examples of documentation and other information which the lender must obtain from the borrower. Most of the required information is intuitive. For example, Hold Code 5, which raises a concern that the owner or principal of the borrower is deceased, can be addressed with evidence that the person is still alive. Lenders could satisfy that code with an affidavit. Other Hold Codes require more extensive documentation, like Hold Code 48. That code indicates that the borrower is listed in the federal government’s Treasury Offset Program or Credit Alert Interactive Verification Reporting System (TOP or CAIVRS). To clear the code requires proof that the borrower has not defaulted on a loan from or guaranteed by SBA or another federal agency and caused the federal government loss within the last 7 years. Lenders may need to seek proof of loan payments, the borrower’s current credit report, and a screenshot of a CAIVRS search.
If the lender is satisfied that the information resolves the issue raised by the Hold Code, the lender may certify to SBA that it has resolved the Hold Code in compliance with PPP guidelines. If the lender is unable or unwilling to make this certification, the application must be withdrawn from consideration. The lender must retain the documentation and other information supporting the certification and provide it to SBA with the forgiveness decision or guaranty purchase request (and otherwise upon SBA’s request).
SBA’s Office of Credit Risk Management will review random samples of lender-certified applications—hence, the lender must be able to provide the documentation and other information supporting certification on request. OCRM also will review lender-certified PPP applications during its ongoing lender oversight activities.
This procedural notice, in many ways, helps lenders expedite applications for second-round PPP loans and forgiveness (or guaranty purchase) of both first-round and second-round PPP loans. But the certification process is not a rubber stamp. On the contrary, lenders should view their certification decisions as potential bases for future enforcement or even litigation by disgruntled applicants. Prudent lenders will apply the same rigorous compliance and due diligence protocols used for PPP loans as they do with other SBA loans.
Contact Johnston Clem Gifford