The Paycheck Protection Program was quickly put into place to address the needs of the small business community during the COVID-19 pandemic; now businesses may fear liability for unintentional inaccuracies in loan and loan forgiveness applications. The Department of Justice (“DOJ”) generally indicated only an interest in intentional misconduct, and this is reflected in the initial charges brought. While the loan applications are submitted and the majority of the funds have been spent, borrowers can still reduce their litigation risk by being careful in their forgiveness application.


In March 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide fast and direct economic assistance to citizens, families, small businesses, and industries. A piece of the CARES Act economic relief package is the Paycheck Protection Program (“PPP”), a $659 billion loan program focused on helping businesses with less than 500 employees retain and rehire laid-off staff.[1] The funds may only be used towards eligible payments of mortgage interest, rent, utilities, and payroll.[2] Eligible payroll costs include tips, commissions, bonuses, hazard pay, and employer-paid employee group health care costs paid or incurred during the covered period of the loan. Opening loan processing on April 3, 2020, the Small Business Association (“SBA”) closed the application window on August 8, 2020.

In order to apply for an adequate, yet not excessive, loan amount, the SBA directed business owners to assume none of the employees make more than $100,000 per year and then multiply the average monthly payroll costs by 2.5. With a one percent interest rate, the PPP loans initially came with a two-year maturity and an eight-week covered period. On June 5, 2020, the Paycheck Protection Program was expanded to a five-year maturity and a covered period of 24-weeks; borrowers that received their funds prior were granted the choice to opt-in to the expanded time frames. Although Congress enacted the PPP program with a primary goal of assisting borrowers with covering payroll costs, enabling businesses to retain an employee force, the expectation is that the majority of the loans will be forgiven. On August 10, 2020, the SBA opened the loan forgiveness application process.[3]

In order to qualify for loan forgiveness, 60% of the borrowed funds must have been used for eligible payroll costs; however, the amount forgiven may be reduced for a few reasons. First, the amount forgiven may be reduced based on a sustained reduction in the amount of Full-Time Equivalent (“FTE”) employees, meaning a sustained inability to maintain a business’s workforce at or above the levels noted prior to the pandemic. A business’s Full-Time Equivalent calculated at the time of the forgiveness application, or by December 31, 2020, must be greater than or equal to the FTE on February 15, 2020. If the FTE shows a sustained reduction, then the amount of the loan eligible for forgiveness is reduced proportionally to the amount of the reduction. A borrower may be able to prove an FTE reduction exemption if the borrower made a good-faith, written offer to rehire that was rejected, the employee was fired for cause, the employee requested and received a reduction in their hours, or the borrower was unable to hire similarly qualified employees to fill the vacated positions. A reduction in Full-Time Equivalent may qualify for a Safe Harbor exemption if the borrower was unable to return the FTE to its February 15 levels due to restrictions imposed for safety and health reasons related to COVID-19. Lastly, the loan amount eligible for forgiveness may be reduced proportionally if the employee salary or wages are reduced in excess of 25% during the covered period.

Once the borrower submits a loan forgiveness application to the lender servicing their loan, the lender has 60 days to submit a decision to the SBA. Next, the SBA may decide to approve the lender’s approval decision or it may decide to review the loan forgiveness application. If the lender denies the application for forgiveness, then the lender must inform the SBA and the borrower. Within 30 days of receiving the lender’s denial notice, the borrower may request, through the lender, that the SBA perform a secondary review in hopes of the SBA overturning the lender’s denial. The lender has five days to inform the SBA of the borrower’s request. The SBA has 90-days to review the forgiveness applications. While over 5.2 million loans were approved, as of October 1, 2020, only 96,000 loan forgiveness applications had been received by the SBA, with no responses having been issued to lenders or borrowers.[4] On October 8, 2020, the Department of the Treasury and the SBA released guidance on a simpler, single-sheet “EZ” application process for those that borrowed less than $50,000.[5] Presently, loans over $150,00 may use the “EZ” form if they meet certain wage continuity and operational requirements, as detailed on the form.[6]

Payment Protection Program Fraudulent Borrowing

Within weeks of the initial disbursements, the Department of Justice announced their dedication to locating citizens that were submitting fraudulent applications and using the PPP funds illegally. U.S. Attorney, Aaron L. Weisman, for the District of Rhode Island explained that “Attorney General Barr has directed all U.S. Attorneys to prioritize the investigation and prosecution of crimes related to…COVID-19, and we are doing just that.”[7] The DOJ had become aware of applicants using fake employees, false business and tax information, and some submitting a questionably high number of applications. The DOJ, as of October 7, 2020, had criminally charged 65 individuals with defrauding the Paycheck Protection Program through stealing or attempting to steal nearly $227 million, collectively.[8]

Within one month of the first PPP loan disbursements, the DOJ filed the first PPP- related criminal charges alleging conspiracy to make false statements to influence the SBA and conspiracy to commit bank fraud by two Rhode Island men.[9] The charges in the subsequent cases filed by the DOJ allege crimes such as wire fraud, bank fraud, conspiracy, and providing false statements to the SBA and FDIC-insured banks. While the borrowed funds are prescribed to be used for both payroll and a specific set of approved non-payroll costs, a Lamborghini, a presidential Rolex, real estate, and other luxury vehicle purchases are not on the approved list. As part of their swift investigations, the DOJ has recovered or frozen over $30 million in assets. Currently, sentences are ranging from 12 months with a guilty plea and 51 months with a conviction.[10] There are no charges filed yet in relation to information found solely during the forgiveness application process. While these aforementioned cases have been made public in an effort to deter any other potential bad actors, they have also led to a sense of confusion for borrowers.

What Is Confusing Borrowers?

Observing the charges that are filed, borrowers may wonder (1) what will trigger an investigation by the DOJ, (2) will audits be performed across the board to catch issues, and (3) will the current attention to PPP loans make the loan forgiveness application process more cumbersome? The issues the DOJ appears to be flagging are significant bank fraud, ostentatious non-business related purchases, and a bad-faith intent to defraud the CARES Act funds.

Borrowers face the greatest liability from the (1) initial loan application and use of funds, and (2) forgiveness application. All of the charges, currently, are focused on the first phase, but it is likely that eventually there will be cases brought on the basis of alleged misrepresentations on forgiveness applications. The issues are, predominantly, misrepresentations and disallowed spending; both of these issues relate to bad actors and fraudulent intent. U.S. Attorney, Stephen J. Cox, of the Eastern District of Texas assured borrowers, “[w]e will not punish companies that accessed the stimulus funds in good-faith compliance with the rules. Nor will we seek out applicants who made technical mistakes in processing paperwork or honestly misunderstood…requirements.”[11] The DOJ is focused on fraud. Borrowers that are operating based on good-faith effort should feel somewhat at ease knowing that the government is looking for those that are intentionally trying to steal money from federal funding meant to help those struggling because of the pandemic; technical errors and misunderstandings are not the same as fraudulent intent, deceit, or theft.

As to loan forgiveness, the PPP loans require that 60% of the funds be used for payroll in order to be eligible. Depending on the total amount disbursed, the borrower may need to provide significant information and perform complex calculations to prove the adequate amounts of payroll, hours worked by the employees, and adequate rehire and retention. The government reserves the right to deny forgiveness, reduce the amount able to be forgiven, and grant full forgiveness; the burden is on the borrower to meet the requirements and prove they were met. The lenders perform the initial forgiveness application review, but the SBA retains the option to review any applications a second time. The loan forgiveness applications, for loans over $50,000, capture a holistic representation of the loan disbursement and the loan usage, so a borrower may have their entire PPP loan record reviewed twice-once by the lender and once by the SBA. As to forgiveness applications, Treasury Secretary, Steven Mnuchin, stated that the SBA will conduct a stricter, “review [of] all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.”[12] Requiring less documentation, the SBA has streamlined the forgiveness application process for loans less than $50,000, which may reduce the risk of unintentional errors. As a loan disbursement amount moves from the $2 million-automatic-review or intentional fraud, a borrower is moving farther from the potential burden of multiple loan reviews. A potential exists that an honest mistake, misunderstanding, or miscalculation might lead to a borrower’s application receiving multiple reviews.

Where To Look Next

On the whole, borrowers remain in a space of uncertainty. It is clear the DOJ is after individuals committing intentional fraud, yet the line between what constitutes as fraud versus genuine mistakes has not been clarified and will likely lead to litigation. As the loan forgiveness applications begin to be processed, the business community will gain a clearer picture of what the SBA and DOJ are planning to address. In the meantime, borrowers should make every effort to diligently complete their loan forgiveness applications fully and correctly, making their best effort to avoid the risk of any litigation. Another area that remains to be seen is the focus of the new presidential administration. Will the new Democratic administration place a greater focus on loan forgiveness than catching the fraudulent borrowers? While that remains to be seen, President Biden signed into law an additional $7.25 for the PPP Loan programs that is set to expire on March 31, 2021.[13]

[1] U.S. Small Business Administration, Paycheck Protection Program, SBA.GOV, (last visited March 13, 2021).

[2] U.S. Small Business Administration, Paycheck Protection Program, Frequently Asked Questions (FAQs) on PPP Loan Forgiveness, SBA.GOV (Aug. 4, 2020), (last visited Aug. 5, 2020).

[3] U.S. Small Business Administration, SBA.GOV, (last visited Aug. 4, 2020).

[4] Stacy Cowley, Small Business Loans Will Be Forgiven, but Don’t Ask How, THE NEW YORK TIMES (Oct. 9, 2020), (last visited March 13, 2021).

[5] U.S. Small Business Administration, SBA.GOV, (last visited Oct. 10, 2020).

[6] U.S. Department of the Treasury, TREASURY.GOV,–Loan-Forgiveness-Application-Instructions–Form3508EZ-1192021.pdf (last visited March 10, 2021).

[7] The United States Department of Justice, Two Charged in Rhode Island with Stimulus Fraud, JUSTICE.GOV (May 5, 2020), (last visited Sept. 21, 2020).

[8] The United States Department of Justice, Keynote Address of Deputy Attorney General Jeffrey A. Rosen on Combatting Fraud in the Age of COVID-19 at the BBB National Programs NAD 2020 Conference (Oct. 27, 2020), (last visited March 10, 2021).

[9] The United States Department of Justice, supra note 7.

[10] Press Release, U.S. Attorney’s Office, Eastern District of Virginia, Repeat Fraudster Sentenced for COVID-19 Loan Fraud Scheme (March 11, 2021), Repeat Fraudster Sentenced for COVID-19 Loan Fraud Scheme | USAO-EDVA | Department of Justice; Press Release, U.S. Attorney’s Office, Eastern District of Virginia, Man Sentenced for COVID-19 Fraud Involving Paycheck Protection Program (Nov. 13, 2020), Man Sentenced for COVID-19 Fraud Involving Paycheck Protection Program | USAO-EDVA | Department of Justice

[11] Stephen J. Cox, Combating CARES Act Fraud: Ensuring Economic Relief for Americans Through Law Enforcement Efforts, TEXAS LAWYER (July 8, 2020), (last visited March 13, 2021).

[12] U.S. Department of the Treasury, Joint Statement by Secretary Steven T. Mnuchin and Administrator Jovita Carranza on the Review Procedure for Paycheck Protection Program Loans, TREASURY.GOV (April 28, 2020), (last visited Sept. 21, 2020).

[13] Ken Tysiac & Jeff Drew, House gives final approval to $1.9 trillion pandemic aid bill, J. OF ACCOUNTANCY (March 10, 2021), (last visited March 13, 2021).


                MEET THE AUTHOR

Ashley is a member of the University of Mississippi School of Law Class of 2022. She is an 11.5 year Navy veteran, and she completed her bachelor’s degree in literature online at Excelsior College while active duty military. This summer, Ashley will be interning with both Judge Samson in Gulfport, MS, and with Huntington Ingalls Shipbuilding. In the fall, Ashley will be doing an externship with Judge Woodard. She plans to practice bankruptcy after graduation.