PPP Financial Reporting for Lenders

Introduction

Funding for the Paycheck Protection Program (PPP) ended on June 30, in accordance with the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Late on June 30, the Senate passed S. 4116, by voice vote, to amend the CARES Act to extend the program through Aug. 8. On July 1, the House passed the bill by unanimous consent. On July 4, President Trump signed the bill into law, officially extending the program for another five weeks.  

On June 30, the American Institute of CPAs (AICPA) issued three Technical Questions and Answers (TQAs), Section 2130.42-44, to address the following financial reporting questions: 

• 42 Classification of Advances Under the Paycheck Protection Program
• 43 Consideration of the SBA Guarantee Under the Paycheck Protection Program 
• 44 Accounting for the Loan Origination Fee Received From the SBA 

The TQAs were developed by the AICPA’s Depository Institutions Expert Panel (DIEP) and cleared by the AICPA’s Financial Reporting Executive Committee (FinREC).  

PPP loans and the allowance

Q1: Should the lender account for the advance under this program as a loan or as a facilitation of a government grant?

Master Glossary – Loan¹

¹ In the master glossary, there are two definitions of loan. This is definition two.

A contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the creditor's statement of financial position. Examples include but are not limited to accounts receivable (with terms exceeding one year) and notes receivable.

A1: The instrument is legally a loan with a stated principal, interest, and maturity date. The lender is expected to collect amounts due from either the borrower or small business administration (SBA) as guarantor. The lender should account for this arrangement as a loan.

Q2: How should the loan be classified?

A2: It depends on management’s intent, as follows:

Loans and Trade Receivables Not Held for Sale [emphasis added]

310-10-35-47 Loans and trade receivables that management has the intent and ability to hold for the foreseeable future or until maturity or payoff shall be reported in the balance sheet at outstanding principal adjusted for any chargeoffs, the allowance for loan losses (or the allowance for doubtful accounts), any deferred fees or costs on originated loans, and any unamortized premiums or discounts on purchased loans.

Nonmortgage Loans Held for Sale

310-10-35-48 Nonmortgage loans held for sale shall be reported at the lower of cost or fair value. This paragraph applies only to nonmortgage loans. See Topic 948 for guidance related to mortgage loans classified as held for sale.

Q3: Should the SBA guarantee be considered in estimating credit losses on the loan under ASC Topic 326, “Financial Instruments—Credit Losses,” or the incurred loss model?

A3: Yes. The SBA guarantee exists at the inception of the loan and throughout its life. If the loan is transferred, the guarantee transfers with it. The arrangement does not contemplate the loan existing without the guarantee. As a result, the guarantee would not meet the definition of a freestanding contract as defined by ASC 326-20-20.

ASC 326-20-30-12 requires credit enhancements that mitigate credit losses (other than those that are considered freestanding contracts) to be considered in estimating credit losses. The SBA guarantee is considered “embedded” and would, therefore, be considered when estimating credit losses on the loan.

For lenders that have not yet adopted ASC 326, SBA guarantees would similarly be considered embedded guarantees (that is, contracts that are not freestanding financial instruments) in determining the allowance for credit losses under ASC 450, “Contingencies,” or ASC 310, “Receivables.”

Q4: Is the fair value option available to lenders?

A4: Yes, a loan is an eligible financial asset. In accordance with ASC 825-10-25-4:

An entity may choose to elect the fair value option for an eligible item only on the date that one of the following occurs:

1. The entity first recognizes the eligible item.

Also consider the following from ASC 825-10-25-2, which states: [emphasis added]

1. Shall be applied instrument by instrument, except as discussed in paragraph 825-10-25-7


2. Shall be irrevocable (unless a new election date occurs, as discussed in paragraph 825-10-25-4)


3. Shall be applied only to an entire instrument and not to only specified risks, specific cash flows, or portions of that instrument.

The result of electing the fair value option is immediate recognition of costs and fees, in accordance with 825-10-25-3:

Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred.

Crowe observation: Given the low interest rate and the maturity terms, the fair value could be below the origination amount (for example, the cost basis or principal amount) and, in turn, offset some of the benefit of immediate recognition of costs and fees.

Processing fees and associated considerations

According to the SBA Lender Information Sheet:

Processing fees will be based on the balance of the financing outstanding at the time of final disbursement. SBA will pay lenders fees for processing PPP loans in the following amounts:

• Five (5) percent for loans of not more than $350,000;
• Three (3) percent for loans of more than $350,000 and less than $2,000,000; and
• One (1) percent for loans of at least $2,000,000.

Q5: What is the accounting for the processing fees from the SBA?

A5: Nonrefundable fees are within the scope of ASC Topic 310-20, “Receivables Nonrefundable Fees and Other Costs,” as follows:

310-20-20 ASC Master Glossary - Loan Origination Fees [emphasis added]

Origination fees consist of all of the following:
b. Fees to reimburse the lender for origination activities

310-20-05-2
Nonrefundable fees have many different names in practice, such as origination fees, points, placement fees, commitment fees, application fees, management fees, restructuring fees, and syndication fees, but, for purposes of this Subtopic, they are referred to as loan origination fees, commitment fees, or syndication fees.

Even though the fees are referred to as processing fees, the fees are to reimburse the lender for origination activities.

Q6: The SBA initially issued guidance on when a lender is not entitled to the processing fee on April 28, the SBA Interim Final Rule, “Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – Disbursements,” (FR May 4).

The SBA provided additional clarity on when the lender is not entitled to the fee with its May 21 SBA Procedural Notice (PN), “Paycheck Protection Program Lender Processing Fee Payment and 1502 Reporting Process,” and the May 22 SBA IFR, “Review Procedures and Lender Responsibilities” (FR June 1). The four categories are:

• Cancelled or voluntarily terminated and repaid before the borrower certification safe harbor date 
• Errors or incorrect amounts
• Borrower ineligibility 
• Failure of lender responsibilities

Note: Additional information is included in Appendix A. 

Do the claw-back provisions result in the fees being refundable or should a contingency loss be evaluated?  

A6: The nature of the claw-back provisions is similar to a violation of a representation, warranty or otherwise, resulting in an obligation. Rather than the fees being deemed refundable, and therefore not in the scope of ASC 310-20, estimated losses for the claw-back provisions should be evaluated under ASC Topic 450, “Contingencies.”  ASC 450-20-25-2 states: 

An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met: 

1. Information available before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. Date of the financial statements means the end of the most recent accounting period for which financial statements are being presented. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss. 
2. The amount of loss can be reasonably estimated. 

Q7: How should the deferred fees be established and recognized?

A7: The deferred fees should be offset against any deferred costs and amortized over the life of the loan, in accordance with 310-20, as follows:

30-2 Loan origination fees and related direct loan origination costs for a given loan shall be offset and only the net amount shall be deferred.

35-2 Loan origination fees deferred in accordance with paragraph 310-20-25-2 shall be recognized over the life of the loan as an adjustment of yield (interest income). Likewise, direct loan origination costs deferred in accordance with that paragraph shall be recognized as a reduction in the yield of the loan except as set forth in paragraph 310-20-35-12 (for a troubled debt restructuring). Paragraph 310-20-30-2 explains that loan origination fees and related direct loan origination costs for a given loan shall be offset and only the net amount shall be amortized.

Crowe observations:

• The deferred fee can be established at funding with a corresponding receivable from the SBA for fees not yet received.
• ASC 310-20 requires use of level yield. Generally, if the loans do not have prepayments or amortization, the use of a straight-line pattern would result in no difference. However, if the loan is not fully forgiven, the borrower would be responsible for paying principal and interest. If payments are made, the loan would become amortizing and would result in differences. Assuming the loan system can handle the amortization, utilizing the loan system might reduce operational complexities.

Q8: What about deferred costs?

A8: As described above, direct loan origination costs should be offset against the origination fees. The net amount is deferred. For PPP loans, direct origination costs include agent fees. According to the SBA Lender Information Sheet:

Agent fees will be paid out of lender fees. The lender will pay the agent. Agents may not collect any fees from the applicant. The total amount that an agent may collect from the lender for assistance in preparing an application for a PPP loan (including referral to the lender) may not exceed:

• One (1) percent for loans of not more than $350,000;
• 0.50 percent for loans of more than $350,000 and less than $2 million; and
• 0.25 percent for loans of at least $2 million.

Crowe observation: Given the uniqueness of the program, lenders should evaluate process for extending these loans to determine the appropriate amount of direct origination costs to defer. Depending on the lender’s process, using direct origination costs of a low-documentation loan might be appropriate.

Q9: What amortization period should be used? 

A9: ASC 310-20 provides guidance on estimating prepayments. As noted below, prepayments of principal cannot be estimated on an individual loan but only for large numbers of similar loans. Also, note that if the accounting is on an individual loan basis, adjustments are based on actual (not estimated) prepayments.

Crowe observation: GAAP requires estimating principal prepayment to be performed at a pool level, based on shared characteristics. Given that the PPP is newly created, lenders might not have a large number of similar loans that share characteristics necessary to estimate the behavior of a pool of loans. Further, GAAP requires estimates of prepayment behavior would consider historical prepayment data including existing and forecasted interest rates, economic conditions, and published mortality and prepayment tables for similar loans which might not be available on PPP loans. See additional discussion of SBA forgiveness payments in Q10 below.   

Forgiveness

On June 22 (published on June 26 in the Federal Register), the U.S. Department of the Treasury and the SBA issued IFR, “Business Loan Program Temporary Changes; Paycheck Protection Program—Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules." This IFR revises IFRs posted on SBA’s and Treasury’s websites on May 22, 2020, (published on June 1, 2020, in the Federal Register), by changing key provisions to conform to the Paycheck Protection Program Flexibility Act of 2020. Comments are due July 27.

A few key points:

• Payroll costs are reduced from 75% to 60%
• Covered period is extended from 8 to 24 weeks  
• Maturity is extended to 5 years for loans made June 5, 2020, or after; permits extensions of the maturity date of earlier PPP loans by mutual agreement
• Application is completed by the borrower; the lender has 60 days to render a decision to the SBA 
• SBA has 90 days to remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, after the lender issues its decision to SBA

Excerpts from the IFR, “Business Loan Program Temporary Changes; Paycheck Protection Program—Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules”: [emphasis added]

Q10: How should a lender account for the portion of the loan that is eligible for forgiveness during the settlement process, which includes the time period subsequent to the lender’s determining that the borrower is eligible for forgiveness and through the receipt of payment from the SBA?

A10: The loan should continue to be accounted for as interest-bearing, including amortization of net deferred fees, through receipt of payment from the borrower or the SBA. Given that the SBA is a counterparty to the loan agreement, payments received should be accounted for, similar to payments from the borrower. Payments received from the borrower or the SBA prior to the maturity of the loan are considered prepayments of the loan.

Appendix A: References to when a lender is not entitled to the processing fee

On April 28, the SBA issued Interim Final Rule, “Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – Disbursements,” (FR May 4) to supplement previous IFRs. Comments were due June 3, 2020. The IFR includes circumstances when the lender is not entitled to the processing fee as follows: [emphasis added]

SBA will make available a specific SBA Form 1502 reporting process through which PPP lenders will report on PPP loans and collect the processing fee on fully disbursed loans to which they are entitled. Lenders must electronically upload SBA Form 1502 information within 20 calendar days after a PPP loan is approved or, for loans approved before availability of the updated SBA Form 1502 reporting process, by May 18, 2020. The lender must report on SBA Form 1502 whether it has fully disbursed PPP loan proceeds. A lender will not receive a processing fee:

(1) prior to full disbursement of the PPP loan;
(2) if the PPP loan is cancelled before disbursement; or
(3) if the PPP loan is cancelled or voluntarily terminated and repaid after disbursement (including if a borrower repays the PPP loan proceeds to conform to the borrower’s certification regarding the necessity of the PPP loan request).

Note: With FAQ 48, the SBA extended the deadline for lenders to electronically upload the initial SBA Form 1502 reporting information to the later of: (1) May 29, 2020, or (2) 10 calendar days after disbursement or cancellation of the PPP loan. (Added May 19)

The SBA provided additional clarity on when the lender is not entitled to the fee in its IFR on SBA Review Procedures and Lender Responsibilities (issued May 22) and SBA Procedural Notice (PN), “Paycheck Protection Program Lender Processing Fee Payment and 1502 Reporting Process” (Issued May 21), which are summarized as follows:

Cancelled, terminated, or repaid

A lender will not receive a processing fee if the PPP loan is cancelled, terminated, or repaid after disbursement because SBA conducted a loan review and determined that the borrower was ineligible.

When won’t a Lender receive a processing fee? (PN)

A Lender will not receive a processing fee:

• Prior to full disbursement of the PPP loan;
• If the PPP loan is cancelled before disbursement;
• If the PPP loan is cancelled or voluntarily terminated and repaid after disbursement but before the borrower certification safe harbor date [FN4] (including if a borrower repays the PPP loan because of a misunderstanding or misapplication of the borrower’s certification regarding the necessity of the PPP loan request); or
• If the PPP loan is cancelled, terminated, or repaid after disbursement (and after the borrower certification safe harbor date) because SBA conducted a loan review and determined that the borrower was ineligible for a PPP loan. [FN5]

FN 4: The borrower certification safe harbor date, which is May 18, 2020, refers to a borrower who applied for a PPP loan and repays the loan in full on or before May 18. A borrower that makes full loan repayment by the safe harbor date will be deemed by SBA to have made the required certification in good faith. See SBA Paycheck Protection Program Loans: Frequently Asked Questions (FAQs), FAQ 47, posted on May 13, 2020.

FN 5: Following a loan review by SBA, a borrower may be determined to have been ineligible for a PPP loan if, for example, the borrower did not meet the applicable size standard or lacked an adequate basis for the certifications that it made in its PPP loan application. 

Errors or incorrect amounts

SBA may review the payment of processing fees at time as deemed appropriate. 

Will SBA review the payment of Lender processing fees? (PN) 

SBA may review the payment of Lender processing fees at the time of forgiveness purchase or at any other time SBA deems appropriate. If SBA determines the fee was paid erroneously or in the incorrect amount, Lender is responsible for repaying the fee to SBA. 

Borrower ineligibility 

If within one year after the loan was disbursed SBA determines that the borrower was ineligible based on its review, SBA will seek repayment of the processing fee from the lender. 

Is the Lender eligible for a processing fee if SBA determines that a borrower is ineligible? (IFR)

No. If SBA conducts a loan review and determines that the borrower was ineligible for a PPP loan, the lender is not eligible for a processing fee.

Are Lender processing fees subject to clawback if SBA determines that a borrower is ineligible? [Marked to compare the IFR and PN, PN as original.]

Yes. For any SBA reviewed PPP loan, if within one year after the loan was disbursed SBA determines that the borrower was ineligible based on the provisions of the CARES Act or applicable rules or guidance available at the time of the borrower’s loan application, or the terms of the loan application, SBA will seek repayment of the processing fee from by the Lender that originated the loan. However, SBA’s determination of borrower ineligibility will have no effect on SBA’s guaranty of the loan if Lender has complied with its obligations under section III.3.b of the initial PPP Interim Final Rule (as further explained in FAQ 1)  and the document collection and retention requirements described in the lender application form (SBA Form 2484). 

Failure of lender responsibilities

If the lender does not satisfy the payrolls cost confirmation and review of documentation requirements, SBA will seek repayment of the processing fee. 

Are Lender processing fees subject to clawback if a Lender has not fulfilled its obligations under PPP regulations? [Marked to compare the IFR and PN, PN as original.]

Yes. If a Lender fails to satisfy the requirements applicable to Lenders that are set forth in section III.3.b of the initial PPP Interim Final Rule (as further explained in FAQ 1) or the document collection and retention requirements described in the lender application form (SBA Form 2484), SBA will seek repayment of the processing fee by the Lender who originated the Loan, and may determine that the loan is not eligible for a guaranty. However, even in cases where processing fees are subject to clawback, SBA’s guaranty will not be affected if the Lender has complied with these obligations.