It is Sunday May 3, seven days after the deadline imposed under Section 1106(k) of the CARES Act for SBA to “issue guidance and regulations implementing” PPP forgiveness.  There are now more than 3.8 million PPP borrowers awaiting such guidance and regulations.

SBA has released PPP 2.0 funding data for loans approved through Friday, May 1, showing that it has approved 2.2M loans totaling $175.7 Billion in funding. That is an average loan size of less than $80k (down from $206k in round 1). This leaves $134.3B available. This morning, National Economic Council Director Kudlow said that a third round of PPP “may be” needed.

No meaningful guidance or regulations were issued on Friday relating to forgiveness or otherwise affecting borrowers.  SBA issued two procedural notices for lenders relating toparticipations in and whole loan sales of PPP loans, which are addressed at the bottom* of this email.

Meanwhile, confusion and highly-politicized rhetoric continues to surround the program at the same time it is beset with litigation and investigations.

Meanwhile, confusion and highly-politicized rhetoric continues to surround the program at the same time it is beset with litigation and investigations.

• DOJ has begun a “preliminary” inquiry into the PPP program (Yes, I know that’s like saying ATM machine), initially using data analytics, which are said to have already revealed several “red flags” that could indicate fraudulent activity.
• The SBA OIG announced that it has “has already initiated dozens of investigations involving complaints of fraud.”
• The SBA OIG announced that it has “has already initiated dozens of investigations involving complaints of fraud.”
• In addition to the numerous lawsuits pending against banks, SBA and Treasury themselves have been hit with a rash of suits alleging that the program illegally discriminates against minority-owned businesses and, in cases pending before numerous courts, debtors involvedin bankruptcy proceedings. Thus far, bankruptcy courts are split on whether SBA can validly exclude bankrupt borrowers from receiving PPP loans:
• Courts in Maine, New Mexico and the Southern District of Texas (SD) have ruled against SBA, on the theory that the PPP loan is more like a government “grant or support program”, for which the discrimination against bankrupt borrowers is prohibited under the bankruptcy code.
  • Courts in Maine, New Mexico and the Southern District of Texas (SD) have ruled against SBA, on the theory that the PPP loan is more like a government “grant or support program”, for which the discrimination against bankrupt borrowers is prohibited under the bankruptcy code.
  • Courts in Delaware and the Western District of Texas, while critical of the SBA approach, have ruled in favor of SBA, citing a lack of authority to enjoin its action

We are continuing to monitor those and other cases.

The PPP “chaos” and the frustrations of PPP borrowers and their advisors are well depicted in this NY Times article.  It accurately reflects the desperate need for actual guidance rather than political grandstanding from SBA.  Sadly, even a good article like this gets key points wrong, which will only exacerbate the confusion:

“Many lawyers are telling small-business owners that they think the loans can be used broadly, although no one is certain. Some bankers are reasoning that since the aid program is based on existing S.B.A. programs that are more flexible, the pandemic loans will be, too.

“As long as they’re using the funding for the operating expenses of the business,our interpretation — and we think it’s clear — is yes, you can use it as effectively a working capital loan,” said John Asbury, the chief executive of Atlantic Union Bankshares, a community lender in Richmond, Va. “ (emphasis added)

Reminder:  DO NOT DO THAT.   SBA regulations require that 75% of the loan be used for payroll expenses, even if the borrower does not intend to seek forgiveness.

The rest of the article accurately captures the issues though.  Our lawyers are dealing with a huge volume of questions from companies and their investors about the about whether their PPP borrowers are eligible to get or keep PPP loans and, if so, how they should use the proceeds.  I especially empathized with this guy:

“Ryan Hurst, a partner at RKL, an accounting and advisory firm, said the program had been put together hastily and remained murky on critical issues. “Every day I’m sitting at my computer, hitting refresh multiple times a day, hoping we’ll get more guidance from Treasury and the S.B.A.,” he said.”

(We have a team of 14 lawyers who have volunteered for a one-hour shift each day to check the relevant websites for updates and the last thing I do before hitting send on these emails is refresh my browser window that is constantly open to the Treasury PPP site.)

Unfortunately, the analysis depends as much on the client’s appetite for political and reputational risk as it does on actual legal analysis.  It is a terrible situation for these companies and their employees, because much of the funds earmarked to keep people employed are sitting idle and may ultimately be simply returned to the government out of fear of backlash.

In perhaps the most telling sign of the fear caused by this strong shift in political winds, Ashford, Inc., is returning its PPP loans.  Ashford had become the poster child for businesses said to be defiantly refusing to return loans obtained by “exploiting” the PPP process.  It announcedyesterday that out of “an abundance of caution” it would return “all funds” that it received under its PPP loans.  Some of us had speculated that Ashford might pay down its PPP loans only to the $20M corporate group limit announced on Thursday.  

·

• But the company chose to go further, citing “continuous SBA rule changes and evolving opinions by Administration officials” and “continuing confusion” because “the rules have changed almost daily” (insert fist-bump emoji here).
• Of course, the company also said that it “could not have known” that the initial PPP appropriations were insufficient to meet demand (insert eye-roll emoji here).

That’s it for now.  We remain on the lookout for SBA guidance on forgiveness and will provide updates as soon as possible.  In the meantime, please let us know if there are questions or other topics you’d like us to address.  Thank you.

*Highlights of SBA May 1, 2020 procedural notices for lenders relating to participations in and whole loan sales of PPP loans:

• Sales and participations may be made only to lenders with an existing SBA Guarantee Agreement.
• The lender of record must be the servicer, except that the purchaser of a PPP loan may use the originating lender as a subservicer.
• Although prior written consent is normally required for participations in SBA 7(a) loans, it is not required for PPP loans, but the originating lender still must provide “prior written notice” of any participation. (NOTE notices of whole loan sales mustNotices of whole loan sales must be provided “immediately” to SBA, so consistency is lacking even across these two ½ page documents).
• In another potentially ominous Otter-like statement, the whole loan sale guidance says: “The purchasing Lender acquires the PPP loan subject to SBA’s existing rights, including its right to deny liability on its guarantee.”