McCarter English, LLP, can assist lenders with requesting that the SBA honor a PPP loan guaranty upon a borrower’s default
” In essence, a PPP loan is funded by the lender with the understanding that the SBA will refund that portion of the loan that is forgiven and any remaining outstanding loan balance that the borrower fails to pay, in both instances with accrued interest thereon. Accordingly, the SBA is the real party in interest in a PPP loan, and it would seem to follow that the decision whether to accelerate the loan upon a default-particularly during the Covered Period and thereafter until the forgiveness amount has been funded by the SBA-should be made by the SBA.
Most lenders originated PPP loans based on the assumption that as long as it reasonably followed SBA guidance in the origination and processing of the loan forgiveness application, the SBA would make the lender whole. Therefore, the overarching concern for a lender is to do no harm that may cause the SBA to fail to honor its 100% guarantee. Unfortunately, without SBA guidance, a lender cannot be certain as to whether the SBA will second guess its decisions and actions made in connection with the occurrence of a default.
Absent further SBA guidance, particularly since, unlike most other Section 7(a) loans, a PPP loan is not secured by any collateral or the guarantee of the owners of a borrower, it would seem prudent upon the occurrence of a default that a PPP lender should (a) promptly notify the borrower of the default but not accelerate the loan until the SBA has funded any outstanding loan forgiveness application, (b) promptly notify the SBA of the default, and (c) “put” the loan to the SBA under its 100% guarantee, so that the lender can be taken out of the loan.
Contact the SBA Servicing Center to request the loan be placed in liquidation status and transferred to the National Guaranty Purchase Center. Please visit SBA Servicing Centers.
SBA designed the Guaranty Purchase Package and associated tabs (“Purchase Package”) to assist lenders of 7(a) loans with assembling requests for SBA to honor loan guaranties. Fill out and submit the associated tab pages, Memorandum, and Certification electronically to the SBA using Send This File.
If upon an event of default a lender accelerates a PPP loan during the Covered Period it would seem that a borrower will be precluded from having any portion of the PPP loan forgiven-a principal goal of the PPP in the first instance
- SBA Loan Guaranty Demand Letter. Use the SBA Loan Guaranty Demand Letter form to request that SBA purchase the guaranteed portion of a 7(a) loan. (See Tab 1.)
If upon an event of default a lender accelerates a PPP loan during the Covered Period it would seem that a borrower will be precluded from having any portion of the PPP loan forgiven-a principal goal of the PPP in the first instance
- SBA Promissory Note (See Tab 4.1.)
If upon an event of default a lender accelerates a PPP loan during the Covered Period it would seem that a borrower will be precluded from having any portion of the PPP loan forgiven-a principal goal of the PPP in the first instance
- Memorandum detailing the event of default should be submitted with the Purchase Package. (See Tab 7.2.)
If upon an event of default a lender accelerates a PPP loan during the Covered Period it would seem that a borrower will be precluded from having any portion of the PPP loan forgiven-a principal goal of the PPP in the first instance
- Certification stating loan proceeds were disbursed to the Borrower in accordance with the following allowable PPP uses: to pay (1) payroll costs, (2) certain employee benefits relating to healthcare, (3) interest on mortgage obligations, (4) rent, (5) utilities, and (6) interest on any other existing debt obligations incurred before , for the applicable Covered Period, which has been extended to 24 weeks pursuant to the Paycheck Protection Flexibility Act, unless the Borrower elects to keep the original 8-week period. (See Tab 5.)
Note: The Entire Purchase Package along with associated tabs pages, Memorandum, and Certification should be electronically submitted to the SBA.
Furthermore, unlike all other Section 7(a) loans in which the SBA guarantees up to 85% of the entire loan, a PPP loan is fully guaranteed by the SBA so that a PPP lender has “no skin in the game
As PPP lenders become aware of one or more circumstances that constitute an event of default or in which lenders must determine whether the circumstance affects the borrower’s ability to repay the PPP loan and thereby constitutes an event of default, lenders are placed in a most difficult position without the benefit of any guidance from the SBA. What does it mean to materially affect a borrower’s ability to repay a PPP loan, if substantially all of the PPP loan will likely be forgiven?