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Payroll Protection Program Loan Audit Considerations and Guidance

On May 22, 2020, the U.S. Small Business Administration (SBA), in consultation with the Department of Treasury, issued an interim final rule on review procedures and related borrower and lender responsibilities with respect to Payroll Protection Program (PPP) loans. This interim final rule provides information to borrowers who have received a PPP loan as to what to expect in the SBA’s review of an individual PPP loan and/or audit of a PPP loan. Additionally, the interim rule expressly states the SBA may review any size PPP loan issued under the PPP loan program at any time (and noting that borrowers must retain PPP documentation for six (6) years after the date the loan is forgiven or repaid in full) and provides information as to what the SBA may review.


Specifically, the interim rules states the SBA may review borrower eligibility requirements for a PPP loan based on the provisions of the CARES Act, the rules and guidance (FAQs) available at the time of the borrower’s PPP loan application. Thus, eligibility requirements for borrowers (and certain borrower’s representations and statements) will be reviewed according to the standards issued at the time of the borrower’s application for a PPP loan. If subsequent regulations or guidance (FAQs) would have made a borrower later ineligible, that borrower is provided a safe harbor for eligibility so long as the borrower was eligible at the time of its loan application based on the rules and guidance available at the time of filing. The FAQ list (as of May 23, 2020) is a summary and timeline of the guidance (FAQs) issued by the SBA. This FAQ timeline should be reviewed to confirm a borrower’s eligibility for a PPP loan at the time of application.

The SBA states that it may also review whether a borrower calculated its loan amount correctly and used loan proceeds for the allowable uses (generally, payroll, mortgage interest, rent obligations and utilities). In its consideration of use the use of loan proceeds, the SBA may also review whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s forgiveness application. The interim rules states that it is the responsibility of the borrower to provide an accurate calculation of loan forgiveness and to attest to the accuracy of its reported information.

With respect to the certification all borrowers made at application stating “[c]urrent economic uncertainty make this loan request necessary to support the ongoing operations of the Applicant,” guidance published on May 13, 2020 has confirmed that any borrower, together with its affiliates, who received a PPP loan with an original principal amount of less than $2 million will be deemed to have made this required certification in good faith.


In the event the SBA reviews/audits a borrower’s PPP loan, the SBA will notify the lender, who is required to notify the borrower in writing within five (5) business days of receipt of notice from the SBA and to request information from the borrower, if requested by the SBA. The SBA may also request information directly from the borrower. A borrower’s failure to respond to the SBA may result in a determination that the borrower was ineligible for a PPP loan or ineligible to receive the loan amount or loan forgiveness claimed by the borrower. While the interim rules did not specify how much time a borrower has to respond, it does require that the lender respond to the SBA with all requested documents within five (5) business days of the request from the SBA. The SBA intends to issue a separate interim final rule addressing any appeal process granted to a borrower after a SBA review/audit.

If the SBA determines that a borrower was ineligible for a PPP loan, the loan amount granted or total loan forgiveness claimed, the SBA will direct the lender to deny the loan forgiveness (in whole or in part) and may seek repayment of the outstanding PPP loan balance or pursue other available remedies, depending on the determination of ineligibility made by the SBA.


All borrowers should review and confirm their eligibility based on the FAQs issued at the time their PPP loan application was submitted. Borrowers should document this review and confirmation. All PPP related information and documentation should be maintained for six (6) years after the date the loan is forgiven or repaid in full, whichever is later. If a borrower receives written notice from its lender that the SBA is reviewing the borrower’s PPP loan, the borrower should respond to all correspondence in a timely manner and strongly consider engaging counsel to assist/support the borrower in the review/audit process by the SBA.

Running list of FAQ’s as of 5/23/2020.

  1. (4/3/20) Is the lender required to replicate every borrower’s calculation
  2. (4/6/20) Are small business concerns required to have 500 or fewer employees to be eligible?
  3. (4/6/20) Does my business have to qualify as a small business concern?
  4. (4/6/20) Are lenders required to make an independent determination on affiliation?
  5. (4/6/20) Are borrowers required to apply SBA’s affiliation rules?
  6. (4/6/20) Affiliation and minority stakeholders
  7. (4/6/20) Annual salary cap of $100,000 exclude employee benefits
  8. (4/6/20) Do PPP loans cover paid sick leave?
  9. (4/6/20) Seasonal business eligibility period to be “in operation”
  10. (4/6/20) Professional Employer Organizations (PEOs)
  11. (4/6/20) May lenders accept signatures from a single individual authorized to sign on behalf of borrower
  12. (4/6/20) Felony criminals 5 years
  13. (4/6/20) Lenders use their own online portals and electronic forms
  14. (4/6/20) Time period to determine number of employees and payroll costs to calculate maximum loan amount
  15. (4/6/20) Independent contractors included in payroll costs (also below)
  16. (4/6/20) Accounting for federal taxes when determining payroll costs
  17. (4/6/20) Filing or approving loan applications based on guidance that is now changed
  18. (4/6/20) New account collection –beneficial ownership information
  19. (4/8/20) Promissory note
  20. (4/8/20) When does the 8-week period begin?
  21. (4/13/20) Do lenders need an SBA Authorization?
  22. (4/13/20) Non-bank lender enrollment
  23. (4/13/20) $10 million cap and affiliation rules for franchises
  24. (4/13/20) $10 million cap and affiliation rules for hotels and restaurants
  25. (4/13/20) 20% or greater owner satisfy lender’s beneficial ownership information under Bank Secrecy Act
  26. (4/14/20) Standards of Conduct Committee approvals
  27. (4/14/20) Statement of No Objection for Federal employees
  28. (4/14/20) What if lender submitted loan to SBA before reviewing borrower documentation and calculation of payroll?
  29. (4/15/20) Scanned copies and E-signatures or E-consents
  30. (4/17/20) Sell PPP loan into the secondary market
  31. (4/23/20) Businesses owned by large companies with adequate sources of liquidity
  32. (4/26/20) Does the cost of a housing stipend or allowance provided to an employee as part of compensation count as payroll?
  33. (4/26/20) Is there existing guidance to help applicants and lenders determine whether an individual employee’s principal place of residence is in the US? IRS regs 26 CFR Sec. 1.121-1(b)(2)
  34. (4/26/20) Are agricultural producers, farmers, and ranchers eligible?
  35. (4/26/20) Are agricultural and other forms of cooperatives eligible?
  36. (4/26/20) To determine borrower eligibility under the 500 employee or other threshold, must a borrower count all employees or only full-time equivalent FTE employees?
  37. (4/28/20) Do businesses owned by private companies with adequate sources of liquidity to support the business’ ongoing operations qualify for a PPP loan?
  38. (4/29/20) Change of ownership
  39. (4/29/20) Will SBA review individual PPP loan files?
  40. (5/5/2020) Will a borrower’s PPP loan forgiveness amount be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
  41. (5/5/2020) Can a seasonal employer that elects to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate its maximum PPP loan amount make all the required certifications on the Borrower Application Form?
  42. (5/5/2020) Do nonprofit hospitals exempt from taxation under section 115 of the Internal Revenue Code qualify as “nonprofit organizations” under section 1102 of the CARES Act?
  43. (5/5/2020) Referring to FAQ #31, is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date?
  44. (5/5/2020) How do SBA’s affiliation rules apply to counting the employees of foreign and U.S. affiliates
  45. (5/6/2020) Is an employer that repays its PPP loan by the safe harbor deadline (May 14, 2020) eligible for the Employee Retention Credit?
  46. (5/13/2020) How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?
  47. (5/13/2020) An SBA interim final rule posted on May 8, 2020 provided that any borrower who applied for a PPP loan and repays the loan in full by May 14, 2020 will be deemed by SBA to have made the required certification concerning the necessity of the loan request in good faith. Is it possible for a borrower to obtain an extension of the May 14, 2020 repayment date?
  48. (5/19/2020) What is the deadline for lenders to complete the initial SBA Form 1502 reporting process?


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