Unforgivable: The Strange Saga of the SBA’s Ever-Changing Approach to PPP Loan Forgiveness for Mortgage Lenders

It’s hard to believe but we are approaching the 2-year mark since the CARES act launched the Paycheck Protection Program as a means to address the threat of economic harm to small businesses and their employees resulting from the COVID-19 pandemic. I can’t help but point out the irony of a program that was meant to calm the fear and uncertainty surrounding the pandemic now leaving its participants anxious, frustrated and lost in confusion. Even now, almost 2 years after the PPP rollout, there are still unanswered questions and too many are left feeling uncertain about whether their PPP loan will be forgiven.

If your company is in the majority, your first-draw PPP loan is in the rearview mirror and, as long as the SBA doesn’t decide to open Pandora’s Box, that is where it should stay. But some are still toiling over a lack of status updates, continuous follow-up inquiries, and even formal appeals to denials received from the SBA. To add to the frustration, those still seeking forgiveness know that many of their peers (with very similar business models and fact patterns) did receive forgiveness and no longer need to fight the forgiveness battle. Based on public data published by the SBA, about 70% of mortgage brokers/bankers that received PPP loans had been granted forgiveness by January 2022. That may sound positive; however, across the entire program, close to 99% of all forgiveness applications have resulted in full or significant partial forgiveness. Let’s recall a summarized timeline of the PPP to set the stage for what’s happening now.

Mar. 2020 – CARES Act signed into law – includes a section titled “Increased eligibility for certain small businesses,” which expanded on standard SBA loan eligibility to include “any business concern that does not employ more than 500 employees”

April 2020 – $349billion of initial funding is distributed in a matter of weeks. The MBA sends a letter to the SBA asking for guidance on the SBA’s long-standing eligibility rules that effectively prevent businesses involved in lending from participating in SBA loan programs. SBA never responds.

Jun. 2020 – New legislation relaxes the forgiveness parameters for PPP borrowers

Jun. – Oct. 2020 – Covered periods for use of PPP funds conclude and SBA begins to accept forgiveness applications

Nov. 2020 – The SBA introduces Loan Necessity Questionnaires initially requiring borrowers to justify their need for a PPP loan. 80+ of the largest trade groups in the country signed a letter urging Congress, Treasury and SBA to suspend use of the Necessity Questionnaire.

Dec. 2020 – The Associated General Contractors of America files a lawsuit against the SBA challenging the legality of the Necessity Questionnaire.

Jan. 2021 – Along with the Questionnaire, the SBA begins to ask follow-up questions surrounding SOP 50-10-5(K), which offers guidance on ineligibility and exceptions for mortgage lenders who sell loans within 14 days of closing

Feb. 2021 – The SBA publishes Procedural Notices to its employees and contractors about hold codes that flagged PPP loan files where the borrower’s NAICS code began with the digits 522.

Jun. 2021 – Approvals for forgiveness start to make their way to mortgage lenders. SBA officially drops the Loan Necessity Questionnaire as a requirement.

Sep. 2021 – SBA begins to get decisively inquisitive about mortgage lenders’ eligibility, and inquiry letters begin to hint at recommendations for denial.

Oct. – Dec. 2021 – SBA takes a more rigid stance on the eligibility requirements in SOP 50- 10-5(K) and issues a wave of forgiveness denials.

Jan. 2022 – SBA’s PPP forgiveness public data set is updated showing close to 200 forgiveness approvals were granted to mortgage lenders from Sep. – Dec. This at the same time that numerous companies received denials. (There are no public records on denial numbers)

The PPP roller coaster ride had plenty more twists and turns than detailed above but, trying to keep this blog from becoming a book. At one point, I can remember headlines and town halls targeted towards CPAs urging us to “be the voice that calms the PPP storm”. It was odd to hear mostly because it was a storm that no one could navigate. As soon as it became obvious that we needed to head one direction, the storm quickly changed and punished those that didn’t quickly pivot and change tactics. The best advice at many points along the way was to just sit tight and hope the inconsistency would eventually pass.   Well, although I’ve been burned by uttering these words before, it does appear as though the storm is finally letting up and that there’s hope for those still awaiting forgiveness.

In the beginning of February, I received a call from the Mortgage Bankers Association (MBA). They had been trying for months to set up a meeting with officials from the SBA to merely confirm there was awareness within the organization that mortgage lenders were receiving wildly disparate outcomes. Most loans were being forgiven, but there were some that were being denied based on facts and circumstances that likely applied to all mortgage companies in the PPP population. It just wasn’t right. Luckily, the MBA happened to get the right people at the SBA in this meeting as they proceeded to collect the answers to the questions they had been asking since their April 2020 letter. Here were the takeaways:

1. The SBA acknowledged that a variety of mistakes were made leading to inconsistent forgiveness reviews and decisions. Third party contractors were used to perform initial reviews and often recommended denial without thorough investigation into SBA eligibility exceptions.
2. In determining the number of days between when a company disburses and sells loans:

                    a. The sale date shall be equivalent to sale commitment date as commonly referred to in the mortgage lending industry.

                    b. The measurement period shall be the year ending Feb. 28^th, 2020; however, that could be substituted with calendar year 2019.

                    c. The measurement amount subject to the 14-day threshold shall be an average of all mortgage loans disbursed in the applicable period.

        3.  The SBA is planning to take corrective actions but could not expand on how quickly they would be able to act.

Currently, the MBA is attempting to gain written acknowledgment from the SBA that the framework above can be relied upon and should be applied consistently to the few remaining PPP forgiveness decisions. That said, if you receive an official denial letter, don’t count on the SBA to remedy their decision. Seek counsel and prepare for an appeal.

To end on a high note, there are a few silver linings to mention.

1. If your loan decision was prolonged beyond 2021 and you get the anticipated forgiveness decision in 2022, you will pick up income form the cancellation of debt in a period that may be more difficult to generate profits otherwise.
2. It stands to reason that SBA loan programs are not out of reach for mortgage lenders in the future and a qualifying small business may find it advantageous to seek out assistance from the SBA.

While this journey has undoubtedly been frustrating for those that are still awaiting forgiveness, there is hope that the tone from the SBA is shifting in your favor.  With any luck, you’ll be off the roller coaster soon and can turn your attention to other important issues affecting the industry and your business.

Please feel free to reach out to me with any questions.

Links:

SBA’s public data on PPP loans

SOP 50 10 5 (K) Subpart B Chapter 2 – III.A.2.a

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