SBA to Release New Forms to Validate Paycheck Protection Program Loans in Excess of $2M

On October 26, 2020, the Small Business Administration (“SBA”) posted a notice stating that it intends to release two new forms relating to the infamous FAQ #31 relating to borrowers’ good faith certifications that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

A copy of these forms has been circulated amongst various sources. These forms are expected to be sent out by the SBA to be completed by PPP borrowers with aggregated loans of $2 million or more to determine the necessity of their borrowings. Since these forms have not officially been released publicly by the SBA, we cannot confirm these are final versions of the forms. It is estimated that these forms will apply to approximately 52,000 borrowers: 42,000 for-profits (Form 3509) and 10,000 nonprofit borrowers (Form 3510).

While this is not a surprise, the information sought by the SBA is extensive, and much of it was unknown to many borrowers at the time of their loan application.

For-Profit Form 3509

Form 3509 is broken down into two sections with an additional area to provide comments related to a company’s liquidity assessment, which has a 1,000-character limitation.

Section 1 – “Business Activity Assessment” focuses on the following:

• Sales in quarter two for 2020 versus quarter two of 2019.
• Were there ordered shutdowns by a state or local authority post the National Emergency Declaration by President Trump on March 13, 2020?
• Was the borrower ordered by a state or local authority to significantly alter its operations due to COVID-19? How were operations altered and what was the cash outlay for these alterations?
• Did the borrower voluntarily cease or reduce operations and why?
• Did the borrower voluntarily alter operations and why? What was cash outlay?
• Did the company between March 13, 2020, and the end of the covered period begin any new capital improvements not due to COVID-19? What was cash outlay?

Section 2 “Liquidity Assessment” focuses on the following:

• Cash and cash equivalents on the last day of the calendar quarter immediately before the date of the PPP loan application.
• Were any dividends or distributions (other than tax distributions) paid between March 13, 2020, and the end of the covered period to the owners? What was the amount?
• Were any loans paid off before contractually due during March 13, 2020, and the end of the covered period?
• Were any employees or owners compensated in an amount that exceeds $250,000 on an annualized basis? If so, how many? What was the total compensation for these individuals during the covered period?
• Did the borrower receive any other funds from the CARES Act? If so, from which program and what was the total amount?

Nonprofit Form 3510

Form 3510 follows the same format with additional questions around endowments, other non-cash investments like equity, bond, and real estate holdings, as well as questions specifically tailored to colleges, universities and healthcare organizations. In addition, there are questions related to any restricted funds held by a nonprofit organization.

Our understanding is your bank would be mailing these questionnaires out to you if your loan is more than $2 million. You would then have ten days to respond and return the questionnaire from the date of receipt.

It is not clear why each item of information is being requested or what the SBA plans to do with the data, but many advisers are making inferences based on the stated purpose of the form—to evaluate the borrower’s need for the loan—to determine the likely use of the requested information.

The questions in these forms suggest the SBA is evaluating how borrowers were affected by COVID-19 at the loan application date and for a period of time after the loan application date. This is odd because the certification addressed in FAQ #31 addresses the borrower’s good faith only as of the loan application date and not at any point in time after.

If you receive one of these forms or have questions on your PPP loan or forgiveness application, we encourage you to reach out to your BMF Advisor to discuss in further detail.

Check out all our Paycheck Protection Program articles and visit our COVID-19 Resource Center for information and additional resources for you and your business.