Lender and Borrower Impacts of Newly Released Form 3508S
My colleague, Todd Sprang, Financial Institutions Principal, authored this blog.
On October 8, 2020, SBA and Treasury posted an interim final rule (“IFR”) to inform lenders and borrowers of SBA’s newly created Form 3508S and a related clarification of the lender process for reviewing Paycheck Protection Program (“PPP”) loan forgiveness applications submitted by borrowers. The following represents our analysis of this IFR and related considerations for PPP lenders.
The Possibility of Automatic Forgiveness Seems Remote
The widespread support for automatic forgiveness for borrowers with balances of $150,000 or less was well publicized, but now seems like it will not become reality.
Since Form 3508S is available to eligible applicants with balances of $50,000 or less, it seems like the simplest route to forgiveness for them. Borrowers above that threshold will be able to choose 3508EZ, if eligible, or complete the full Form 3508. It seems unrealistic, at this point, to re-introduce automatic forgiveness without upsetting both lenders and borrowers who have completed and processed the new Form 3508S.
Form 3508S Seems Better for Lenders than Borrowers
Borrower Impact
One clear benefit of Form 3508S is that it exempts borrowers from reductions of forgiveness in the event they reduced full time equivalents (“FTE”) or wages. This is good news for those small borrowers. However, it should not be confused with automatic forgiveness thus, some borrower education might be necessary. Borrowers still need to maintain the same documentation as previously communicated and to submit all required supporting documents to the lender with their application. Note that this exemption does not benefit independent contractors or self-employed PPP borrowers. Without the proposed reduced documentation requirements that would have accompanied automatic forgiveness, those borrowers receive little benefit compared to automatic forgiveness.
Another benefit is that Form 3508S results in less stringent lender review requirements than Forms 3508EZ or 3508. This should reduce back and forth communication between lenders and borrowers about the detailed support for allowable expenses.
One potential downside we see for borrowers who utilize the Form 3508S is that if SBA reviews their submission and questions the forgiveness amount (either during their 90-day review period or during a subsequent audit), those matters may not involve the lender. Unlike Forms 3508EZ and 3508, lender procedures for Form 3508S involve much less verification of the borrower submission. As a result, the borrower does not receive the accompanying piece of mind that comes with a more thorough lender review or the related lender support during a potential SBA audit where the lender would defend the appropriateness of their review of the borrower expenses.
Another potential downside is that the introduction of a new form requires lenders to modify their related application processing and SBA has to create an application programming interface submission process of lender decisions on Form3508S. This will naturally elongate the forgiveness approval process such that borrowers may actually receive forgiveness notifications more quickly by filing Form 3508EZ. This depends on how quickly SBA begins to accept and process Form 3508S submissions.
Lender Impact
Lenders do not benefit significantly from borrower use of Form 3508S because they still need to verify borrowers have submitted the proper documentation. While that review is not as time consuming as tying out every dollar of support, it does not relieve the lender from looking at documentation at a high level.
As mentioned above, we believe lenders will benefit from reduced involvement in SBA inquiries and subsequent audits of borrower documentation. Since the lender is not required to tie out every number to support, it appears they will not be held responsible for catching borrower errors and omissions.
Lenders also benefit from the clarification in the IFR that they only need to review forgivable expenses until the total approved forgivable expenses exceed the loan balance. This relieves lenders of the extra review time associated with borrower applications that document expenses well in excess of their balance.
How can we help?
Throughout the PPP process, we have continuously seen changing guidance for both lenders and borrowers and that may continue as we move deeper into the forgiveness phase for borrowers. CLA is here to know you and help you, and we can help you understand SBA guidance or assist with your processing of borrower forgiveness applications. Please contact your CLA representative anytime for more information. We are here to help you navigate through it.
Susan is a CPA with more than 20 years of combined experience in public accounting and the financial institution industry, including experience with Fortune 500 financial services companies. Susan serves as the managing principal of CLA’s financial services group. Her responsibilities include providing engagement oversight in the areas of assurance and internal audit. In addition, Susan provides board advisory and management consulting services in the areas of strategic planning and mergers and acquisitions. Susan has been involved in multiple mergers and acquisitions of sizes ranging from $150 million to $500 billion with engagement at all stages of the process.
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