“Lenders will be held harmless for borrowers’ failure to comply with program criteria.”US Department of Treasury

The Treasury Department placed an unfamiliar responsibility on PPP borrowers with the CARES Act. Consequently, in April 2020, the Small Business Association issued the Interim Final Rule, permitting lenders to rely, almost entirely, on the information/certifications provided by a loan applicant in deciding their eligibility for forgiveness and trusting how they spent the loan proceeds. 

In support of this Interim Final Rule, the Hold Harmless Clause in Section 1106(h) of the CARES Act frees lenders from any penalty that could be caused by inaccuracy or falseness of documents provided by borrowers as long as they (lenders) do their due diligence. 

What does “doing their due diligence” mean?

Lenders must ensure that loan forgiveness applicants provide all the necessary documentation and certifications required to determine their eligibility for the forgiveness. During the application processing, if the lender finds a mistake, they will work with the borrower to correct it and ensure faultless documentation. However, lenders process a high volume of forgiveness applications and some errors could slip through their fingers. Therefore, their due diligence is no guarantee that borrowers’ applications will meet all SBA requirements.

You may assume that this makes the PPP loan application process easier. However, there is more to it than meets the eyes. 

What does this mean to lenders and borrowers?

With this clause, lenders can trust that they will not be held liable for any errors or falseness in the documents provided by the applicant. However, they are responsible for granting forgiveness or issuing loans to only applicants that have filed their applications satisfactorily. Also, lenders don’t have to supervise how applicants spend borrowed money. 

These responsibilities, lifted from lenders’ shoulders, rest on the borrower’s. Borrowers will be responsible for providing accurate certification to help facilitate their PPP forgiveness application. Also, borrowers must ensure that they spend the loan proceeds appropriately. 

During the application process, making sure that all documentation and calculations are accurate and filed appropriately can be strenuous. With the technicalities of the new CARES Act and amendment of the SBA rules, borrowers may be walking a fine line between a successful PPP forgiveness application and being stuck with a pardonable debt.

So, what should borrowers do?

When applying for the SBA’s PPP forgiveness, borrowers must provide supporting documents and meet the operational requirements. Although lenders are not responsible for verifying the integrity of these documents, borrowers must provide them nonetheless. 

Upon approval of loan forgiveness, borrowers should keep the supporting documents in good condition for the next 6-7 years. Within this period, the SBA will audit borrowers to verify the credibility of their documents. The notice of audit is usually sent through the lending institution, but the SBA sometimes contacts borrowers themselves. 

We recommend that borrowers work with a financial advisor or third party familiar with forgiveness while filing their forgiveness application. This can help avoid uncommon mistakes that could lead to severe penalties during auditing. 

Upside Financial is a team of experienced PPP borrowers and financial advisors committed to supporting PPP loan borrowers as they navigate the technicalities of the forgiveness applications. 

Get forgiven for your SBA loans and avoid future SBA penalties, contact Upside Financial today for guidance on your forgiveness application.