So your borrower received a Paycheck Protection Program loan but has not yet applied for forgiveness—what happens next?
By this point, everyone in the banking industry is at least somewhat familiar with the 2020 Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, which included the Paycheck Protection Program (PPP). The PPP provided U.S. Small Business Administration (SBA) backed loans to qualified small businesses in order for them to keep their workforces employed and compensated during the COVID-19 crisis. What made the PPP so appealing to small businesses was that the loan could ultimately be forgiven in its entirety if the funds were expended in accordance with the program’s guidelines. PPP proved to be so popular with small businesses that in 2021 a round of funding known as Second Draw Loans was authorized after the initially approved funds (First Draw Loans) were fully disbursed. Ultimately, by the time the PPP closed on May 31, 2021, the SBA approved approximately 11.8 million loans totaling almost $800 billion. With the PPP now closed, it begs the question as to what happens next – when will borrowers apply for forgiveness and worse, what happens if they don’t apply for forgiveness?
While the PPP loan forgiveness process is well underway, a reasonably straightforward and lurking question for borrowers and one that can be easily monitored by lenders is how to address PPP loans for which there has been no application for forgiveness. While Second Draw PPP forgiveness data is not yet available, of the approximate 5.2 million First Draw Loans, forgiveness has only been sought for 3.5 million loans, leaving 1.7 million loans in the balance and for which lenders must start taking action from a servicing standpoint until a loan: (i) is fully forgiven or paid in full; and (ii) an event of default or other qualifying event causes the SBA to purchase the guaranty and charge off the remaining balance.
Chief among lenders' servicing responsibilities for PPP loans for which no application for forgiveness has been submitted is establishing contact with its borrower to determine whether an application will be forthcoming. In the event that an application is not received within 10 months following the end of the covered period associated with the PPP loan, it is imperative that lenders use their best efforts to determine whether the borrower remains open, closed or perhaps in bankruptcy. All such communication attempts and results should be fully documented and will help determine next steps in the servicing process, which may include any of the following items: (i) issuing a demand letter; (ii) submitting a request for repurchase and charge-off; (iii) issuing loan statements for repayment; or (iv) filing a proof of claim in bankruptcy.
While most of these servicing actions are likely to become routine for each lender and handled on an internal basis given the number of loans for which forgiveness has not yet been sought, will not be sought or which may involve fraud or other unique facts, Chuhak & Tecson has a dedicated PPP team that is at-the-ready to be your go-to resource.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.