Now that the dust has settled on the PPP loan program, federal agencies are backtracking on their original promises of loan forgiveness. Dvorak Law Group is currently assisting clients in audits requested by federal agencies in relation to the client’s original PPP loan application, and in all aspects of the appeal process when such federal agencies are denying the client’s application for PPP loan forgiveness. The below discusses the implications of a recent increase in audits by federal agencies following distribution of PPP loan proceeds, and the steps for appealing a PPP loan forgiveness application denial.

Purpose of the CARES Act and PPP Loan Program

Under the CARES Act, the Small Business Administration (“SBA”) ensured continued employment and income for millions of Americans employed by small businesses through the Payment Protection Program (“PPP”) loans.  Congress pledged to forgive the loans—reimbursing the bank that provided the loan—if the borrowers used the majority of the loan proceeds to pay their employees’ wages.

Congress would forgive such PPP loans to the extent the borrower used the funds to pay expenses related to payroll, mortgage interest, rent, and utilities during a specified period following the loan’s origination.  While the intent of the PPP program was to generally provide payroll assistance to any business with fewer than 500 employees (with some exceptions), federal agencies have been auditing companies and finding reasons to deny loan forgiveness applications.

Federal Agencies Conducting PPP Audits

The SBA is the main federal agency responsible for conducting PPP loan audits. Specifically, the SBA Office of Inspector General and SBA Government Accountability Office ensure a number of things, including that borrowers comply with PPP loan eligibility requirements, that the PPP loan amount is accurately calculated, and that various other business-specific requirements are met.

Several other federal agencies assist the SBA in these audits, particularly where there is reason to suspect fraudulent or false information. These agencies include, but are not limited to, the following:

  • Federal Bureau of Investigation (FBI)
  • Department of Justice (DOJ)
  • Internal Revenue Service (IRS)

If your business is audited, it may be beneficial to retain an attorney to assist in responding to the federal agencies’ audit.  The attorneys at Dvorak Law Group can assist in determining what documentation is beneficial to provide in response to an audit in order to increase the likelihood that your company’s PPP loan forgiveness application will be granted, or to ensure the correct documents are in front of the federal agency for an appeal.

Changed Eligibility Requirements for PPP Loan Forgiveness

Prior to the CARES Act, the SBA treated certain classes of businesses as ineligible for other SBA lending programs. Because of this, the CARES Act intentionally increased eligibility for forgivable PPP loans, making them widely available to small businesses employing 500 or fewer employees.

Notwithstanding the purpose of the CARES Act, on April 15, 2020, the SBA adopted an Interim Final Rule—the “Exclusion Rule”—that imposed pre-CARES Act exclusions on PPP loan eligibility, ultimately affecting PPP loan forgiveness eligibility.  More frequently, the SBA has started to apply the Exclusion Rule retroactively to PPP loans submitted before the Exclusion Rule went into effect, after PPP loan proceeds were distributed.  By retroactively applying the Exclusion Rule, the SBA alleges small businesses that were originally eligible for the PPP loans now ineligible for their forgiveness.  This is in direct contradiction of the original promise of loan forgiveness for those PPP loans issued prior to April 15, 2020.

If the SBA or other federal agency determines that your company’s PPP loan was ineligible and, consequently, determines that all or part of your company’s PPP loan must be paid back, the attorneys at Dvorak Law Group can assist you in analyzing whether to file an appeal of such decision.

Process to Appeal a Denial of Loan Forgiveness

If a borrower is denied loan forgiveness, there is a rigid process that must be complied with in order to file an appeal of the federal agencies’ decision: 

  1. Within 30 days of receiving a final decision denying PPP loan forgiveness, a borrower must file a petition with the SBA’s Office of Hearings and Appeals (“OHA”). The filing of the appeal extends the loan deferment period until the OHA issues a final decision. Failure to file an appeal may waive the right to appeal the SBA’s PPP loan forgiveness decision.  Therefore, it is imperative to contact an attorney within this timeframe in order to get an appeal on file within the deadline.
  1. After an appeal is filed, an administrative law judge will issue a Notice and Order establishing certain deadlines.
  1. Within 20 days after issuance of the Notice and Order, the SBA must submit the administrative record, which is the record the SBA had at the time it made its determination on the borrower’s PPP loan forgiveness application. The borrower will have the opportunity to object to the administrative record if, for instance, there are certain documents the borrower sent to the federal agency in response to an audit that are not included in the record.

In an appeal from a final SBA loan review decision, there is no exchange of additional documents, nor are there any oral hearings. Instead, the decision is based solely on the judge’s review of the appeal petition, the subsequent filings discussed below, and the administrative record.   

  1. Within 45 days after the Notice and Order is issued, the SBA may file a response to the borrower’s petition. The borrower is permitted to file a reply upon motion to the OHA.
  1. Within 45 days after close of record, the judge must issue a decision.
  1. Within 10 days after service of the written decision, SBA or borrower may request reconsideration of judge’s decision by filing and serving petition for reconsideration. If no party requests reconsideration, then the decision becomes final.  Final decisions are generally published, without redaction, on the OHA website.

Judicial Review of PPP Loan Forgiveness Denial.  

If the judge’s final decision incorrectly determines that the borrower is ineligible for PPP loan forgiveness, the borrower may seek judicial review of the OHA final decision in federal district court. 

 As more and more companies are having their loan forgiveness applications denied, courts have started to hear cases regarding PPP loan forgiveness denial more frequently.  In these cases, courts have taken Congress’s intended purpose with the CARES Act seriously in reviewing the SBA’s PPP loan forgiveness denials.  In addition, courts have considered several defenses to the retroactive application of the Exclusion Rule to PPP loans issued and disbursed prior to April 1, 2020.  These potential defenses include, but are not limited to, claims that the Exclusion Rule:

  • Constitutes impermissible and harmful retroactive application of the law.
  • Impermissibly extends the SBA’s statutory authority beyond what was intended by Congress in enacting the CARES Act, interfering with Congress’s authority to determine PPP loan eligibility.
  • Directly conflicts with the language and purpose of the CARES Act.

Although there is not yet a clear standard or outcome in these cases to date, courts will generally consider these factors in determining whether to overturn the PPP loan forgiveness denial, rendering the PPP loan forgivable, as Congress originally promised.

The information provided is intended to be a general guideline and should not be considered professional advice. Every client’s unique circumstances will be considered and may vary the guidelines described above. The Business, Corporate, and Dispute Resolution attorneys at Dvorak Law Group can assist with any audits, administrative appeals, or federal court filings related to your company’s PPP loan forgiveness application.  Please contact Dvorak Law Group for specific questions and recommendations. We look forward to the opportunity to assist you.