On July 15, 2021, the SBA issued its procedural notice regarding lender requests to the SBA for guaranty recovery of PPP loans. The PPP loan program has offered billions of dollars in assistance to small businesses across the country. However, many PPP borrowers have since begun defaulting on their loans. What should lenders do when borrowers can no longer make payments and associated loans are still outstanding?
What Obligations Do Lenders Owe PPP Loan Borrowers?
Per the notice, the lender is obligated to continue servicing PPP loans until they are: (1) paid in full; (2) forgiven in full; or (3) the SBA purchases the guaranty and provides for charge-off of the remaining balance.
Under the SBA’s 7(a) loan program, secured lenders are generally responsible for pursuing collection against guarantors, liquidating collateral, and obtaining recovery through bankruptcy before requesting guaranty recovery. However, the SBA has recognized alternative procedures for unsecured PPP loans.
If a lender meets the criteria for requesting guaranty recovery and, if necessary, has rendered a forgiveness decision regarding any outstanding loan in question, they owe no further obligations.
When Can a Lender Request Guaranty Recovery for PPP Loans?
A lender is eligible to request guaranty recovery and charge-off of the loan if any of the following apply:
- The loan is sixty (60) days past due and the default has not been cured;
- The borrower has permanently closed and will not submit a forgiveness request;
- The borrower has filed for Chapter 7 bankruptcy (no proof of claim needs to be filed) or for Chapter 11, 12, or 13 bankruptcy (proof of claim must be filed and the lender must monitor the bankruptcy); or
- The borrower is a self-employed individual, sole proprietor, single-member LLC or independent contractor, and the owner is deceased.
If none of the above are applicable, a lender may still request guaranty recovery (without charge-off) only in either of the following circumstances:
- The borrower or any owner of 20% or more equity of the borrower has been indicted or convicted of a felony related to the PPP loan; or
- Sixty (60) days have passed since the borrower has filed an appeal of a final SBA loan review decision with the Office of Hearings and Appeals (OHA)
If a lender qualifies for guaranty recovery or charge-off under the above circumstances, they may request the SBA to honor the guaranty of the PPP loan(s).
What Do Lenders Need to File With the SBA?
Lenders of record must utilize the existing PPP platform to request guaranty purchase and charge-off. The SBA encourages lenders to process first and second draw loans together, if applicable. Lenders are responsible for retaining and producing PPP loan information, documents, and certifications through E-Tran.
The notice also provides that the SBA will pay interest through the payment deferral period plus up to 120 days of additional interest due to payment default, which could be an indication of intent to repay the lender within 120 days. Further, SBA’s guaranty expires 180 days after the loan reaches maturity.
Required Information for Guaranty Recovery
To submit a complete guaranty purchase request, lenders, in accordance with PPP loan requirements must:
- Confirm the accuracy of data prepopulated by SBA and resolve discrepancies before proceeding;
- Request purchase of the First Draw PPP Loan, Second Draw PPP Loan, or both, if applicable;
- Check off the appropriate boxes, when prompted, to identify the reasons for requesting guaranty purchase and charge-off;
- Provide the principal balance and accrued interest associated with any eligible loan and upload the official transcript of account, which should be based on a pay-off date within ten (10) days from the date of guaranty purchase submission;
- Retain, and provide upon SBA request, the following documents:
- The applicable borrower application forms, or lender’s equivalent borrower documentation to confirm the amount of the borrower’s average monthly payroll costs that were used to calculate the PPP loan amount;
- [For a Second Draw Loan greater than $150,000 or a loan of $150,000 or less where the borrower provided documentation of revenue reduction] The documentation submitted by the borrower to confirm the borrower’s 25% revenue reduction; and
- Borrower’s written certification and supporting documentation relied upon to resolve hold codes and/or compliance check error messages (if applicable)
- Complete and execute the SBA Assignment for referral to treasury and upload it into the platform; and
- [If the loan involves a change of ownership not yet reported to the SBA] Provide data related to the details of the sale of the business, including purchaser information and, if requested, assumption agreements or other documentation related to the change in ownership.
Required Certifications for Guaranty Recovery
For each request, an Authorized Lender Official must certify the following in accordance with PPP Loan requirements:
- The lender requested the SBA purchase the guaranty within 180 days of loan maturation;
- The documentation and information provided by the lender to SBA with this submission accurately reflects the lender’s records for the PPP loan;
- The official transcript of account provided by the lender is true and accurate;
- The data reported by the lender as reflected in E-Tran as of the date of this certification, including the loan status and the outstanding balance of the loan, is true and accurate;
- The lender has made, closed, and serviced the loan in accordance with the PPP Loan Program Requirements;
- The PPP loan has not been cancelled, repaid in full or forgiven by SBA in full;
- The PPP loan is evidenced by a legally enforceable promissory note executed by an authorized borrower representative, and the promissory note and any modification(s) met PPP loan program requirements;
- The lender has resolved all underwriting requirements in 86 FR 3692 and 86 FR 3712; and
- The lender has met document collection and retention requirements described in the lender application forms (SBA Form 2484 or 2494-SD).
What if a Borrower Files for Forgiveness After Guaranty Recovery is Requested or Submits Payment to the Lender After the Loans Have Been Purchased?
Lenders are obligated in all circumstances to process the application and submit their decision on forgiveness to the SBA. If the SBA has not yet rendered a decision on the request for recovery, lenders must remit their requests and wait for the SBA’s review of the forgiveness decision. If the SBA has already purchased and charged-off PPP loans, any possible forgiveness payments will be used to reduce the borrower’s outstanding debt.
Whether made voluntarily or through a formal proceeding, payments by borrowers after PPP loans have been purchased and charged-off must be submitted to the SBA.
What’s Next?
Submitting a complete application for guaranty recovery and charge-off requires extensive documentation and attentiveness to strict deadlines. Outside legal counsel may be instrumental for lenders attempting to recoup the cost of defaulted PPP loans.
Authors:
- Brandon C. Meadows
- Ty D. Robare, JD Candidate