The Paycheck Protection Program established as part of the CARES Act provides that the Small Business Administration pay processing fees of up to 5 percent to lenders based on the volume of the PPP loans disbursed. Until recently, however, the SBA has remained silent on further guidance, leaving many questions regarding the reporting requirements, fee recognition and timing of receipt of the processing fee unanswered.
On May 21, the SBA released a procedural notice to inform PPP lenders of the reporting process of PPP loans and the collection of processing fees on fully disbursed loans, using SBA form 1502. After submitting this form, lenders must submit PPP loan information on a monthly basis to the SBA. Using this monthly report, lenders must report loan status information for their PPP loans. Loans that have been canceled or voluntarily terminated and repaid after disbursement will also be reported. Lenders will be able to report PPP loan disbursements, voluntarily terminated loans, and canceled loans on a single form 1502. Information on each loan will be reported monthly until the SBA is notified that the loan is paid in full.
If a loan balance remains after forgiveness, the lender must report the reduction in the loan balance and service the remaining balance in accordance with requirements set forth by the PPP program. If a loan is sold, processing fees will still be provided to the originating lender.
Under 15 U.S.C. § 636(a)(36)(P), the fee is based on the balance of the PPP loan outstanding at the time of full disbursement. The SBA will issue PPP processing fee payments to lenders using ACH information provided by the lenders on the FTA website. Payments will be issued for each fully disbursed loan to help the lenders track on an individual loan basis.
Lenders should record processing fees in accordance with ASC 310-20 as capitalized origination fees and recognize the fees into income utilizing the interest method. ASC 310-20-35-26 requires the repayment terms required by the contract and should not estimate prepayment of principal to shorten the loan term when determining the amortization period of the deferred processing fees. This would be the “loan by loan method.” If the bank determines that the PPP loans are considered to be similar loans for which prepayments are probable and the timing and amount of prepayments can be reasonably estimated, the bank may consider estimates of the future principal prepayments in the determination of the amortization period of the PPP loans. This method is referred to as the “prepayment method.” If the bank does not elect the prepayment method and instead elects the loan by loan method, processing fees will be amortized over the contract life and adjusted based on actual prepayments.
A lender will not receive a processing fee for PPP loans that have not been fully disbursed, were canceled before disbursement, were canceled or voluntarily terminated and repaid after disbursement but before the borrower certification safe harbor date of May 18, 2020, or were canceled, terminated, or repaid after disbursement because SBA conducted a loan file review and determined that the borrower was ineligible for the PPP loan.
The procedural notice indicates that if the SBA reviews a PPP loan and determines the applicant was ineligible within one year after the loan was disbursed, the SBA will pursue repayment of the processing fee from the originating lender. If a lender has not fulfilled its obligations under PPP regulations or if the SBA determines the fee was paid erroneously or in the incorrect amount, the lender is responsible for repaying the fee to the SBA.
This guidance from the SBA raises the question if contingent liabilities should be considered for PPP loan processing fees. Under generally accepted accounting principles, contingent liabilities should be recognized if the liability is both probable and reasonably estimable. Based on guidance lenders had during the loan funding process and the reliance on the applicant’s certifications, lenders are unlikely to conclude that a fee repayment event is probable and the amount reasonably estimatable. In the specific case where a lender has knowledge that a borrower misrepresented eligibility on the certification, a lender should document considerations of the potential for a contingent liability for the subject loan.
Another item to consider before recording a contingent liability is which loans the SBA will be reviewing. SBA FAQ No. 39 indicates that the SBA will review all loans in excess of $2 million, in addition to other loans as appropriate. On May 13, the SBA provided relaxed guidance with FAQ No. 46 that indicated any borrower (with affiliates) that received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
The ability to estimate an initial contingent liability will be difficult since banks will have no previous history with similar types of loan programs. This does not relieve the bank from determining and documenting their consideration of the potential contingent liability. Enhanced information regarding clawback history will emerge over time specific to each individual bank’s experience. Additionally, there likely will be publicly available information related to clawbacks that have occurred. Banks will need to identify reliable and consistent sources of information to support their assessment of whether a contingent liability exists or not as of each external reporting period.
For those banks that also have audited financial statements, the disclosure requirements in ASC 450-20-50-3 through 6 should be considered. Briefly, in those cases in which an estimate of potential liability cannot be reasonably determined, disclosure should be made of describing the nature of the contingency and an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made.
Most loans under $2 million, unless other reasons are prevalent, are more than likely to be safe for recognition. Upon submitting the forgiveness application, the loan officer will have a sense for the reasonableness of forgiveness.
Upon notification from the SBA of the amount of the PPP loan to be forgiven, that portion of the loan balance should be reclassified from loans receivable to SBA receivable on the balance sheet and for any regulatory reporting required. If the bank has elected the loan by loan method of accounting for the processing fees, the acceleration of recognition of deferred loans will occur for the percentage of the loan forgiven. Additionally, the accrual of interest on the amount of the loan forgiven should stop on notification date from SBA that the loan has been forgiven.