The Payroll Protection Program (“PPP”) was created by Congress under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to lend money to certain businesses for the primary purpose of providing money to fund salary expenses, and other eligible expenses. If the PPP loan funds are used for designated purposes, all or part of the PPP loan will be canceled. Loans that are not fully canceled are guaranteed by the Small Business Administration (“SBA”), the government agency appointed by Congress to oversee and administer PPP loans.
PPP loans are granted under the SBA 7 (a) program, which already existed before the CARES Act. SBA 7 (a) loans are made directly by lenders to qualified borrowers, but are fully or partially guaranteed by the SBA. Being guaranteed by the SBA means that if there is a default on the loan, the SBA will reimburse the lender the remaining balance once certain conditions and requirements set out in the SBA regulations have been met.
PPP loans are different from other 7 (a) SBA loans in that the application process is much more streamlined, the loans are unsecured, and the principals of a borrowing business entity are not required to execute a personal guarantee. . If the borrower uses the proceeds of the PPP loan for a qualified purpose, in many cases all or part of the PPP loan will be canceled. However, not all PPP loans will be canceled, or at least not completely canceled. When this happens, the borrower will have to repay the PPP loan to the lender.
Since other SBA 7 (a) loans are secured by collateral, if a borrower defaults, the lender should make its best efforts to liquidate the collateral and / or collect the guarantor. However, because PPP loans are unsecured and have no guarantors, a lender’s obligations in the event of default are less clear. Lenders under the SBA 7 (a) program are required to do their best to collect overdue PPP loans, as they would with any other SBA 7 (a) or non-SBA unsecured loan.
Lenders should consider taking the following steps if a borrower defaults on a PPP loan before requesting payment of the SBA guarantee or requesting that the PPP loan be canceled:
- Workouts: Just like any other unsecured loan of the same size and type, if a borrower starts to miss loan payments, the SBA lender should try to work with the borrower to remedy the default.
- Research borrower assets: Lenders need to consider whether obtaining a judgment would likely result in monetary recovery.
- Site visits are not mandatory with SBA 7 (a) PPP loans as the loans are unsecured. However, depending on the loan amount and the details of what the lender knows about the business, site visits can still be important in determining the assets of the business.
- Carrying out asset searches at this point is also important in determining whether it would be worth seeking a judgment against the company in an attempt to collect the debt.
- Lenders should also identify any property or assets that the borrower has recently transferred out of their name or transferred for less than fair market value, as these are signs of fraudulent transfers that can be put aside and recovered.
- Accelerated loan: After careful attempts to help the borrower remedy the default, if the loan remains unpaid for sixty (60) consecutive days, the lender should expedite the loan, send the borrower a formal notice and notify the SBA that the loan is in progress. litigation status.
- Litigation plan: Once the PPP loan (or any SBA 7 (a) loan) is placed in litigation, the lender must submit a litigation plan to the SBA. The litigation plan template is available on the SBA website at https://www.sba.gov/document/support–litigation-plan-7a-504-loans. Placing a PPP loan in litigation status does not mean that the lender will be required to plead the recovery of the loan. The elements to consider are:
- Results of the site visit
- If the lender has not made a site visit, the lender should provide an explanation as to why they did not visit the site. A typical explanation may include, among other things, that (1) an on-site visit was not necessary because the loan is unsecured, or (2) the search for assets did not reveal any assets to be collected.
- Feasibility of training with the borrower
- What is the likelihood that the lender will be able to come to a settlement with the borrower, or the borrower may be able to repay the loan if they have a loan modification, etc. ?
- Expected recovery of unencumbered assets
- The results of the site visit and the asset search will help with this explanation.
- Disclosure of all other non-SBA loans the borrower has with the lender
- The lender is not allowed to collect any other loans it has from the same borrower at the expense of the SBA loan.
- This can sometimes lead to a conflict, and a clear understanding with the SBA regarding how the recovery from the borrower will be distributed among the loans should be determined.
ASB litigation plan approval is not required for (1) current and uncontested disputes, (2) current and uncontested foreclosures and (3) current and uncontested bankruptcies as long as the expected costs are lower. to $ 10,000. All other litigation plans must be approved by the SBA.
- Request invoicing by SBA: The lender can request the cancellation of the PPP loan when:
- All reasonable efforts have been made to obtain the reinstatement of:
- Voluntary payments on the note;
- Compromise with the borrower;
- Liquidation of the guarantee; and
- Forced collections.
- The estimated cost of the additional collection efforts will likely exceed the expected recovery;
- The only remaining avenue of collection is that of borrowers who cannot be found or who are unable to pay the remaining balance; or
- The loan balance is uncollectible for a legal reason, such as discharge from bankruptcy or expiration of the statute of limitations.
- All reasonable efforts have been made to obtain the reinstatement of:
The Customs Clearance Checklist can be found on the SBA website at https://www.sba.gov/document/sba-form–sba-charge-tabswrap-report-test.
- Guarantee purchase package: A warranty purchase package can be sent to the SBA to request the purchase of the warranty before completing the liquidation and write-off request. However, the SBA specifically encourages all lenders to liquidate all available assets first. The SBA website offers a model warranty purchase package at https://www.sba.gov/sites/default/files/2020-03/7aPurchaseTabs-03062020.pdf.
Lenders and attorneys for lenders should be aware that lenders are required to represent the interests of the SBA in the event that a borrower files for bankruptcy or takes any action that could affect the ability to collect the PPP loan before the SBA does. pays the collateral and accepts no responsibility for the collection of the PPP loan.
Even though PPP loans are unsecured and unsecured by the borrower’s principals, and are 100% guaranteed by the SBA, the SBA still expects lenders to do their utmost to collect these PPP loans. that are in default (if not forgiven) just like a lender would. do on a non-SBA unsecured loan. The payment terms for the SBA Guarantee are the same as for any other SBA 7 (a) loan and are described above.