On-Demand Webinar: Validating PPP Loan Forgiveness Requests--What Lenders Can Expect

October 29, 2020

Our panelists discussed what lenders can expect to receive from borrowers, how to validate supporting documentation, and how to identify red flags.


Transcript

Welcome everyone, and thank you for joining us. My name is Louis Bruno and I lead EisnerAmper's regulatory compliance practice within the financial service industries. Today, as mentioned, we're here to discuss a concern that's truly on every lender's mind, which is that how do we accurately validate PPP loan forgiveness applications? In today's presentation, we'll provide a refresh of the requirements of the loan forgiveness requirements. We will also discuss the process of receiving loan forgiveness applications, and really what you can expect to receive from your borrowers. We'll also share some best practices for validating the supporting documentation received. And lastly, we'll discuss PPP loan fraud, and red flags that may indicate fraudulent behavior. It'll be a great discussion and we look forward to taking your questions after the presentation.

Louis Bruno:Before we begin and I introduce my fellow presenters, I'd like to tell you a little bit about EisnerAmper and our EA Cares team. For those of you who aren't familiar with EisnerAmper, we're a US-based audit advisory firm. We do have a global presence in Europe and Asia, and we've been involved with the CARES Act and PPP loans since inception. We've been working with both borrowers and lenders. We realized right off the bat, as banks were inundated with applications during the origination process, we saw right away that validating loan forgiveness was going to be even more challenging for lenders, so we started focusing on how we could help.

All of this led us to design our EA Cares Compliance Technology Solution and launch our Lender Support Team to validate loans on banks' behalf. So today I'm joined by my EisnerAmper colleagues. Alan Wink, who is one of our client service lead. Alan's advised hundreds of borrowers on the forgiveness requirements and validated their applications. My partner, Lauren Tomlinson, who is an audit partner and leads our Lender Support Team. She's responsible for reviewing and validating forgiveness applications for our bank clients. Nelson Luis, who leads our forensic practice will discuss how to identify and monitor fraudulent behavior. And we'd like to welcome a special guest, Rebecca Ricigliano from Crowell & Moring. She is a partner in the white collar and regulatory practice, also a former assistant US Attorney in the southern district of New York.

Before we start, we'd like include this disclaimer, which is this presentation reflects the guidance issued by the SBA up til the October 14th date. The material that we're going to present is truly for illustrative purposes only. We may paraphrase some of it, and it's not necessarily comprehensive of all the PPP loan requirements.

We're going to start with a brief refresher of the PPP loan program, the forgiveness requirements, and the SBA's guidance to lenders. I'm going to hand it over to Alan, who is going to remind us what's happened since the inception of the CARES Act.

Alan Wink:Thank you very much, Louis, and good afternoon everybody. I guess it seems like years since the CARES Act was first signed into law on March 27th, and there certainly have been major changes to the program, and also many guidance changes to the program since its inception. Before we discuss some of the more significant changes to the PPP program, let's quickly review some of the program metrics.

The initial allocation of PPP funds was used up very quickly, and an additional $310 billion was allocated in late April. The last PPP loan was actually approved on August 8th, and in total 5.2 million loans were made. PPP loans were issued totalling $525 billion. The average loan size was actually $107,000. And two very interesting statistics, 87% of the loans were $150,000 or less, and the 13% of the loans that were above $150,000 also represented 75% of the total dollars loaned.

Some of the more significant changes in the program that have transpired over the last four or five months, various PPP rules were modified favorably for borrowers under the PPP Flexibility Act, which was signed into law on June 5th. The covered period was extended from the original 8 weeks to 24 weeks. There were several safe harbors put into play where reductions in full time employee or employee equivalents. The minimum maturity of PPP loans was extended from two years to not less than five years.

At least 60% of the forgiveness amounts must be used for payroll costs. Payment of principle and interest is deferred until the date that the forgiveness amounts are remitted by the SBA to the lender. Also, the forms for applying for forgiveness were simplified. Two new forms were developed, one was the 3508EZ form, and the 3508S form, and I'll discuss those in a couple of slides forward. Owner-employees with less than a 5% ownership stake are not subject to the owner-employee compensation rules. And rent payments to a related party are eligible for forgiveness, but are limited to the amount of the mortgage interest paid by the owner.

Let's just take a moment to discuss some of the key principles of PPP loan forgiveness. The borrower is responsible for the accurate calculation of the loan forgiveness amount, and lenders may rely on the various borrower representations. From the borrower perspective, the borrower is eligible to have all or a portion of the loan, plus any accrued interest, forgiven. You're entitled to forgiveness for the amounts that are spent on eligible costs during the 8 week or 24 week covered period or anything in between. The forgivable expenses are either paid during the covered period or incurred during the covered period and paid before the next regular due date. Borrowers who are seeking forgiveness for their PPP loans are required to file an application with their lender, and there are three different application forms. The 3508, the 3508EZ, and the 3508S.

The lender must confirm receipt of the borrower certifications contained in the SBA forms and the documentation to support payroll and other non-payroll expenses. The lender must confirm the borrower's calculations, except in the case of the 3508S form. And the lender is also responsible for reviewing the loan forgiveness application and supporting documents, and also getting back to both the borrower and the SBA within 60 days after receiving the loan forgiveness application.

Louis Bruno:Great, thank you Alan. It's very helpful to take a refresh, and quite honestly we've all been inundated and reviewed the IFRs and the guidance from the SBA. It's certainly a lot to follow. Alan, I wonder if you could take us through the process of receiving the applications, and the common challenges that we've seen.

Alan Wink:I guess at this point, there are three forms that can be used for a borrower to apply for forgiveness, and each of these forms has its own set of requirements, qualifications, and rules.

First, the 3508S form. Now, this form can only be used by borrowers if the total amount of their loan was $50,000 or less, or if this was part of a group of affiliates that the total loans from the affiliate group were less than $2 million. Next is the 3508EZ form, and this can only be used by borrowers who are either self-employed and have no employed and have no employees, or borrowers that did not reduce the wages or salaries of their employees by more than 25%, or did not have any reduction in FTEs. And last is the 3508 form, with its associated Schedule A and worksheet, and this must be used by borrowers who do not qualify for either 3508S form or the 3508EZ form.

As Louis said in the introduction, the firm has worked with many borrowers on their PPP loan forgiveness applications over the last several weeks, and we've seen borrowers face many challenges and struggles in putting this documentation together. The first set of challenges certainly has to do with the area of eligibility. Selecting the right covered period, whether it's 8 weeks, 24 weeks or something in between as a way of potentially maximizing their total forgiveness. Borrowers are struggling with applying safe harbors for FTE reductions, and borrowers are also being faced with the challenge of which form to use before they file their application.

Borrowers are challenged to interpret the forms and accurately calculate forgiveness amounts, calculating their payroll or the covered period and FTE reductions. They're challenged with understanding the reduction exceptions for such things as terminations for cause, employee resignations, and trying to rehire terminated employees. They're also challenged with identifying eligible non-cash compensation expenses such as health insurance, retirement plans, and state unemployment insurance tax. Borrowers are struggling to determine the appropriate level of detail to submit as supporting documentation for their forgiveness application.

Louis Bruno:Yeah, thank you Alan. And you know, we've seen this firsthand. It's truly difficult for a borrower to know all the requirements, if not impossible, and accurately calculate their forgiveness amount without some guidance. We'd like to take this as an opportunity to show you our approach to guide the borrower through the application process. And in the EA Cares Compliance Borrower Portal that we talked about, we'll show you specifically how we guide the borrower through the process, identify the requirements that are applicable to their specific situation, and then capture the required information.

Speaker 4:The Cares Compliance PPP Loan Forgiveness Borrower Portal allows borrowers to review all the necessary data to apply for loan forgiveness, and automatically customizes questions to prevent unnecessary work, as well as customize the forgiveness application to the appropriate form based on the latest guidance from the SBA for qualifications for EZ and S forms. Payroll data, for instance, will take into consideration both the individual's ownership percentage, as well as the organization's incorporation type.

The borrower will submit attestations for all relevant fields, and then will be able to tie the documentation for those attestations directly to each value. This enables the lender review of evidence to be as efficient as possible. Non-payroll expenses, like mortgage interest, lease payments and utilities, will likewise be added by the borrower, and evidence documenting each payment will be attached. Once the borrower has completed all application requirements, they will be able to review the estimated forgiveness amount based on their answers and submit a pre-populated SBA form to their lender for preliminary re-

Louis Bruno:So, as you can see, we take a very narrative approach to guiding the borrower through the process, which allows them to provide the right information and limits their ability to make a mistake when entering the calculations. So I'd like to hand it back to Alan to discuss how to validate the borrower calculations, and then ask Lauren to walk us through how to evaluate the supporting documentation.

Alan Wink:So, the lender ultimately has a responsibility for validating the borrower's submissions, and this includes reviewing and confirming all permissible expenses. And permissible expenses include wages, salary, bonuses, commissions, cash tips, payments for vacation, parental, family, medical, or sick leave. Any separation payments, payments for employee benefits including health insurance and retirement, payments for state unemployment insurance taxes, and allowable expenses for rent, utilities and mortgage interest.

Then lender is also responsible for identifying and rejecting non-permissible expenses, which include salary, wages of any employee whose principal place of residence is outside of the United States, compensation of any employee in excess of an annual salary of $100,000, federal employment taxes imposed or withheld, and finally, qualified sick and family wages for which a credit is allowed under Section 7001 and 7003 of the Families First Coronavirus Response Act.

As we all know by now, borrowers may have their forgiveness amounts reduced if they experienced a reduction in employee head count, or a reduction of employee wages of greater than 25%. All reductions in FTE and wages will be captured on Schedule A and the corresponding two tables of the Schedule A worksheet. Two things need to be looked at here. Were salary or wages reduced by more than 25%? And secondarily, was the safe harbor met?

In order to determine if salary or wages were reduced by more than 25%, you must initially compare the average salary, or average wage, during the covered period divided by the average salary or hourly wage for the period January 1, 2020 to March 31st 2020. If this amount is 75% or more, there was no reduction in salary or wages greater than 25%.

Then lender also has a responsibility for reviewing and validating FTE reductions. The lender must confirm that no FTE reduction occurred between January 1st, 2020 through the end of the covered period, or the date of the forgiveness application. The lender also has a responsibility to verify any exceptions to the FTE reduction.

Examples of these reductions are positions where the borrower made a good faith written offer to rehire a terminated employee but the employee refused the offer, the borrower made a good faith written offer to restore hours that were lost at the same salary or wage and the employee rejected the offer, or situations where employees were fired cause, employees that voluntarily resigned, or employees that requested and received a reduction in hours.

At this point I'd like to turn it over to Lauren Tomlinson, who is going to continue the discussion about payroll expenses.

Lauren Tomlinson:Thank you Alan, and good afternoon to everyone. I'm going to discuss a few observations and tips based on our experience in completing loan support validation on behalf of our bank clients. And I'd first say, as an overall comment, to make sure that the individuals tasked with this, with validating the support that comes in, have experience. Have experience looking at payroll reports and bank statements, et cetera.

First I'll talk a little bit about the review of documentation to support payroll. The bank will need to verify that the amounts were incurred and paid. To verify that the amounts were paid, we would look to review the bank statements showing the disbursement, keeping in mind the date paid. And then we'd also want to see from the borrower that the amounts applied for included as cash compensation is accurate. And we would do so, generally, by looking at a payroll report. And when looking at the payroll report, the lender will need to be aware that owners may also be included, and that owners have separate limits for forgiveness. And then also be on the lookout for employees that have an annual over $100,000 because not all of that amount would be eligible for forgiveness. So it may be difficult to tie in the payroll report in total to the amount claimed because of these situations with owners potentially being included, as well as those over 100,000 being included.

Most borrowers that we've seen so far have utilized a third party payroll provider and third party payroll reports as support. In some cases, third party payroll reports may not be available. The borrower themselves may keep their payroll in house. The borrower may also submit tax forms to support their compensation, such as form 941 and state business tax wage reports for the periods that overlap the covered period. One thing to be aware of, if they are submitting tax forms as a form of support, is that they would also likely need to submit a reconciliation between the total amount on the tax form and the amount being applied for for forgiveness. For instance, they would need a reconciliation to get to the right covered period because that period may not be the same if the payroll tax report is on a quarterly basis.

And then lastly, then bank would look to review support such as bank statements, account statements, et cetera, for employer contributions to health insurance and retirement plans that are included in the forgiveness application.

A few observations that we've had based on our experience reviewing applications. The first is a reminder that the federal income tax's Medicare, Social Security paid by the employer, both the employer and the employee portion, are not allowable on the forgiveness application. Only state and local jurisdiction taxes that have been assessed on the employee's compensation are permissible. And the second observation is to make sure that the pay periods that the borrower is applying for don't overlap. We have seen several instances where borrowers submit applications where pay periods do happen to overlap with each other, so we certainly recommend being diligent when checking those pay periods.

Moving on to the other expenses that are eligible for forgiveness, which are rent and lease payments, mortgage interest, and utilities. First, as an overall observation for these three items, be aware when the support is submitted that the company name and address on the invoice, statement, agreement, et cetera match the borrower. Be aware of the covered period with respect to the payment date and the date incurred, and then certainly check that the amount on the invoice, statement, or agreement match the amount that's being paid and claimed. And then one other observation on an overall basis is just to be aware of related parties. Is the landlord a related party? Is the mortgage lender a related party? Because there's certain parameters with respect to both of those.

So first off, with rent and lease payments, the first thing I want to note with respect to rent is that the gap amount that's recorded on the books of the borrower may be different than the amount that's includable for forgiveness. So if the company keeps its books on a gap basis and does accrual based accounting they may be straight lining their lease expense and recording an equal expense every month over the lease term. For loan forgiveness purposes, the right amount to include would be the contractual amount, the amount that was paid. So this question could come up as borrowers reach out, and it's important that they're putting in their contractual amount, which will not necessarily agree to their books.

The next item with respect to rent is that it's important to review the lease agreement or the lease renewal showing that the original lease was in effect prior to February 15th, 2020. We've also seen instances where the support provided was not signed, it was in draft form, and it's important to make sure that the borrower submits final executed versions. Also when looking at the support, for instance a rent invoice, there may be billbacks included in that invoice from the landlord, such as cleaning, janitorial services or utilities. So it's important that the amount that they're claiming on their application excludes these types of billbacks and is just for the rent with respect to this one line.

For leases that are allocated to business or personal entities, the lender will want to verify that the rent is allocated in the same manner as the 2019 tax filings. And lastly, rent amount paid to related parties may be eligible for forgiveness, which Alan mentioned earlier, so it's important to obtain all of the relevant documentation of related party rent and related mortgage obligations to make sure that the amounts claimed are valid.

Next up is mortgage interest. The reviewer would be looking to see both the documentation of the amount, for example an account statement or invoice, and they would also want to see support for the payment such as the bank statement. It's important to check that only the interest piece has been claimed for forgiveness. The principle payment is not eligible, and I suspect that not all borrowers are going to realize this when they fill out their applications. And the reviewer would want to confirm that the calculations exclude the allocable portion of interest based on the relative fair market value of the space that's leased out to their other businesses, as compared to the total fair market value of the property.

And lastly, utilities such as gas, electric, water, transportation utility fees assessed by state and local governments, telephone and internet. The reviewer would generally look to see that the borrower provided an invoice and payment support. The bank would look to see that the services were incurred or the invoice paid during the covered period. If the service period is prior to the covered period, the borrower must provide proof that the payment was made during the covered period. And I should note that this is the same as with mortgage and rent payments.

And the last observation is that the invoice must be in the borrower's name. We've seen several cases where this is not the case and we've requested additional documentation and support from the borrower to verify that these expenses are valid business expenses.

Louis Bruno:Thank you Lauren. It's clear, I think we can safely say that most lenders didn't realize the amount of validation work that would be expected of them, and many of the banks and borrowed lenders that we've talked to just don't have the amount of resources to process all of the forgiveness application requests. We're going to come back and show you again our approach to support the lender in this process. And our EA Cares Compliance Lender Portal is what we're going to demonstrate here. We'll show you how it truly allows the lender to evaluate the documentation provided by the borrower, just as Lauren explained. Verify the data entered in the calculator and align the two. Align the data in the calculator to the evidence provided by the borrower. The thing to note for all the compliance people on the line today, you'll certainly appreciate the fact here that this was designed by auditors for auditors, and it truly maintains the audit trail and the submission and validation activities to all interested parties.

Speaker 4:The Cares Compliance PPP Loan Lender Review presents all borrower responses, the required documentation, and pairs it with the attached evidence for each attestation. This allows a reviewer to confirm that all documentation is included before submission to the SBA. Reviewers will attach the evidence and page number for each approved response to document the approval of evidence. Each required response has a line item breakdown so the values can more easily be identified in the provided documentation. When evidence is missing or inaccurate, the application can be returned to the borrower with details of what is required.

Lenders then can employ a secondary review to have a second set of eyes go over the documentation, confirm that the first review was accurate before sending back to the borrower, or submitting the final request for forgiveness to the SBA.

Louis Bruno:Okay, so you can see how we align the documentation to the calculations and go through the validation of both. We're going to move on to the last topic of today's presentation which is, certainly the question that is in every bank compliance officer's mind, which is truly how do we identify fraudulent behavior, and really integrate the detection of the fraudulent behavior into the existing compliance program. For that I'm going to ask Rebecca to give us an overview of what to expect from the Department of Justice, and then also Nelson is going to talk about identifying and monitoring the risks.

Rebecca Ricigliano:Thank you, appreciate that Louis, and look forward to chatting with you all today. Thank you for taking the time to be with us. I think what's interesting from my perspective, as a prosecutor from the southern district of New York and as somebody who now practices on the defense side representing banks, is what we have seen out of the Department of Justice and other enforcement agencies, both on the criminal and civil side, since the onset of the pandemic.

And what is telling about that is who is investigating. So we've seen actions on the criminal side from the DOJ, both their criminal section, their fraud section, their money laundering and asset recovery section, as well as the antitrust criminal division. US Attorney's offices are obviously active in this space, and they're scattered throughout the country, which is also quite telling. There does not necessarily seem to be a cluster of activity in any one particular region. We've seen a combination of state and federal task force announcements and joint efforts on the enforcement side for those, all of whom are being supported by not only state and local but criminal authorities like the FBI, the postal inspectors, secret service, FDA criminal, and then an array of OIG agencies.

On the civil side, we've seen enforcers out of DOJ, their civil division, their commercial and consumer protection branch sections. US Attorney's offices obviously play a key role on the civil side as well. And then we've civil actions out of the FDA, HHS, as well as the FCC and CFTC. So there's a lot of players in this space, and as we'll see in the next couple of slides and chat about, they're making their mark so far.

So, what have we seen in terms of criminal enforcement? And I think what's interesting about the past seven or eight months since the onset of the pandemic, since the flow of CARES Act money, is the targeting of the obvious low hanging fruit, right? So these are indictments and criminal complaints relating to the obvious frauds, and the easy to prove frauds where the issue of intent is, for lack of a better term, self-evident from the documentation. So use of false identities, creation of fraudulent shell companies, diversion of funds purportedly to benefit the company or its employees to pay bills or purchase lavish items like Lamborghinis and expensive jewelry and things of that nature. We've also seen these indictments and complaints touch on an array of different fraudulent activity, obviously relating to the Paycheck Protection Act funding, but obviously misrepresentations about PPE, and more importantly for our public health, misleading and fraudulent COVID-19 treatment or cure claims.

And these low-hanging fruit, in addition to being the readily provable, are ones that are focusing on individuals that have a deterrent effect, right? People who are going to make a splash in the newspaper. So we're talking about professional athletes, Hollywood film executives, reality TV stars, ranking executives that have salacious use of the funds that were diverted from the company and their employees, things of that nature.

And what we've also seen, very helpfully, at the beginning of October the Deputy Attorney General, Jeff Rosen, in remarks to the Better Business Bureau's national advertising division, summarized the department's efforts, and the efforts of enforcement across the country, to date. And this is a little bit dated, and obviously there have been charges in the past two weeks, but as of early to mid October, DAG Rosen talks about how charges had been filed in over 110 cases and that there were hundreds more under active investigation. He mentioned over 74,000 calls to the National Center for Disaster Fraud, which triages those calls and refers them to the appropriate authorities.

There were various fraud statutes that were used to bring these criminal cases, not only the suite of fraudulent criminal statutes under Title 18, mail fraud, wire fraud, 1341, 1342, 1343, bank fraud, but also the FDA Food, Drug and Cosmetic Act criminal provisions. The Defense Production Act and other less well-known acts and statutes that have criminal authority. And I think the lesson learned from this, if past is any prologue and thinking about TARP and SIGTARP, what we will see in the next coming months is not only a continuation of this low-hanging fruit, maybe a phase two of that, but in the six to nine months from now, start seeing some of the larger investigations. Obviously JP Morgan made an announcement about a month ago about activity that it had uncovered, but seeing more sophisticated frauds, more difficult to prove in terms of intent, less obvious, the once that are more nuanced and take some more time, those will be yet to come. And we can expect to see those types of matters that are larger, more broad, say in the next anywhere between 6 to 12 months.

What's interesting about this too is it's not just the criminal. Back in even June, as the phase one of the pandemic was ebbing and reopening was starting, the DOJ Civil Division Principal Deputy Assistant Attorney General Ethan Davis made remarks about how pandemic-related fraud was a clear focus of the civil division. Obviously the FCA's focus, the False Claims Act, Consumer Protection Branch, protecting consumers and constituents from COVID-19 related fraud. And they've brought a wealth of actions since then. In those same remarks to the Better Business Bureau, DAG Rosen talked about the 10 injunctive actions that the DOJ's Civil Division has brought.

And the FCC and CFTC are stepping into this as well. CFTC has obviously taken some action, FCC has taken a bunch more. We're seeing a lot of activity and focus by the FCC, not only in false statements, misrepresentations, but false claims in terms of financials by their registrants, and that's yet another to watch. And obviously both agencies work in parallel often to criminal actions and criminal investigations. So that will be something to keep an eye on in the next several months.

So that's a very good sense of where we are, and I wanted to turn it over now to Nelson to talk about some more risks to the lender.

Nelson Luis:Thank you very much Rebecca. I'm going to wrap things up for us here to talk a little bit about the human condition and how fraud is an unfortunate fact of life, and the risk of fraud is present in all organizations, where ultimately fraud is a people issue. It's affecting our psyche. And if you look at studies following the last global financial crisis, in times of crisis the risk of fraud increases significantly, as people are in survival mode. So during this current pandemic, you can have people that decide to commit fraud for the first time, or those who perhaps are accustomed to walking that fine line take advantage of the circumstances that we're currently living in.

So a lot of our opinions are that the pandemic is creating an unprecedented disruption, and really ripe for fraudulent activity. Where you have the common known fraud triangle where you have obviously pressures have increased with financial difficulties. People sometimes need to pay medical bills, right? And they rationalize that. The opportunity is there, people working virtually, there's competing priorities. And then, as I mentioned from a rationalization perspective, people's psyche, their moral compass, is adjusted and they try to justify their actions.

Most recently, there was a survey that was released by the ACFE called the Fraud in the Wake of COVID-19. It's a benchmarking report that was released just last month, and they compared, not specific to PPP but just to underscore the environment amongst organizations and fraud fires out there, comparing the amount of observed fraud in organizations at the beginning of the pandemic versus now, so four to five months later, and there was a 77% increase of cases sited within organizations. And 92% of those survey respondents said that they anticipate an increase in fraud over the next 12 months.

So with that, the risk to the lenders, as you see here on the screen, we see there being three main risk areas where you have your compliance risks, so from a BSA requirement perspective where the banks have to identify and report suspected fraud to authorities. You have operational risk. This was done very hastily, so you have lenders that have their KYC programs but perhaps weren't expecting the level of volume and speed as to the amount of loans that were issued here. The control environment may not have been designed to recognize some of the red flags that we will be highlighting here shortly, such as forged documents, false claims. It's a different spin. And then lastly, reputational risk, which we eluded to earlier. Besides just the regulatory penalties, no one wants to see their bank's name plastered over the news, perhaps issuing a loan to a fraudster, being victim to some type of AML scam. So those are three risks.

To highlight how we've been approaching it with our CARES Act compliance tool, we designed a fraud module based on a lot of different discussions with those on the operations side, on the compliance side, and we're really thinking of this in four different categories.

The first category there, the PPP loan and forgiveness application data, we've created over 35 fraud red flags for lenders to be considering. Some of those are ones that can be automated, some more manual, but essentially kind of rule-based risk indicators. Where you see towards the right hand side where you can automate a number of tests so that you can get a risk score. And it could around loan eligibility, payroll expense, employment expenses, supporting documentation, bubbling up those highest risks so you can get a score so that you ultimately have an idea of where you need to really focus some of your efforts. So that's the first category there.

The second category, then, is around the banking transactions and account information. Clearly, a lot of the information that the bank already has in its accounts, its existing BSA AML, transaction monitoring reports, and how does that correlate with the PPP forgiveness claims? Leveraging the existing framework that the bank already has.

The third is overlaying public records and information that you can get over the web. So criminal records of the individuals that are submitting their loan forgiveness applications. Is the company legitimate? Is there anything from the source documentation perspective that makes you scratch your head as to whether the information's coming from a known reputable company, such as the payroll information? Is it a company that you've never see or heard of before?

And then lastly, Rebecca hit on a lot of this from an enforcement activity perspective. Recommend that all of these different... Whatever risk-based approach you're going to take, however you're going to be monitoring for some level of fraud with all the applications, I'll certainly recommend that you have a mechanism in place to also adapt to the current enforcement trends that you're seeing in the market. Are you focusing a number of your risk mitigation efforts accordingly and having a pulse as to where those enforcement actions are occurring is important so that you're adjusting your program accordingly.

And finally, from actual fraud red flags, we just kind of gave a number of examples here. But I think Rebecca hit it well where she talked a lot about the low-hanging fruit. So those low-hanging fruit tests, such as is this a new customer for the bank? Has the applicant or its beneficiary owners, do they have some kind of criminal history? From a payroll fraud perspective, potential ghost employees, falsified time in commissions. Is there blank information on the application such as social security information? Duplicate payment checks submitted, unusually high overtime payment, things like that. So I would say those are a lot of the low-hanging fruit areas.

And then here we provide a variety of other categories. So the first one there around supporting documentation. There is technology out there where you can take source documentation that's submitted and determine if it has been manipulated. So that's a good automated function that you could put in place because a lot of information is coming straight from the borrowers and if something has been manipulated or forged you obviously would like to know that, and that could be how you adjust your risk rating score, if you will, or for your risk tolerance level. Also, incomplete summary bills. If you have incomplete information.

From an eligibility perspective, the nature of the business does not match the application. Has there been a change of ownership since the initial application was filed? Looking at the different eligibility requirements, such as employee exceeding 500, are those tests being put into consideration?

PPP requirements, a lot of these policy related items. There's no separate account for PPP funds. Hazard bonuses have been paid, things like that. And then finally, from the PPP fund use, has there been excess lease/rent payments? And you hear, practically on a daily basis there's articles coming out about the Lamborghinis and the Ferraris and the high end jewelry, so obviously use of the proceeds for personal expenses is a way to flag some of this as well. So with that-

Louis Bruno:Thank you Nel-

Nelson Luis: ... back to you.

Louis Bruno:Thank you Nelson. It's clear that we could have and spend another hour solid on just the concept of identifying fraud, and as mentioned, most of the detective controls should be able to fit within the bank's existing control framework. One of the challenges that we continually hear from our clients is that the origination process, everyone was running 100 miles an hour to try to complete the loans and get them out. The question becomes, "Did we have the right adapted controls in place outside of our normal KYC process?" And so again, there's opportunity for a much broader conversation, which we are planning on having, so you can expect to see a followup webinar to this, specifically on identifying fraudulent behavior.

I want to thank both Rebecca and Nelson for going through this piece, and now open it up to questions. And there are a few that are coming in, but feel free again to submit the questions in the chat box. Okay, so take a first one here. This one is specifically about our portal technology, and asking the question about segregating employees on different pay periods, and how do we do it? And the answer is that we allow to capture any pay period, not necessarily one specific, given the fact that people can be paid on any date. And so we have a way of capturing not only a defined pay period, but then in addition if someone is paid off-cycle.

We'll go through and see if there's other questions. Actually Alan, I see a few in here that you might want to pick up.

Alan Wink:So Louis, the one question was asked, "We received four different loans totalling $2.5 million in the aggregate, one of those companies receiving $2 million individually. I assume we're going to file four separate forgiveness applications as we have four separate loan numbers. Is there anything we should be specifically aware about in notifying the aggregate total of our loans on any of the applications?"

Alan Wink:This is a company that will be using the 3508 form and not the EZ form, and there's actually a question on the 3508 form that states if the borrower, together with affiliates, received PPP loans in excess of $2 million dollars, check here. So that will be done.

Louis Bruno:And Alan, I'm going to pass a few more of these over to you as well, maybe even in general. Here's one asking how to know what the covered period is? We covered that a little bit, but if you want to go through that?

Alan Wink:There are two ways to calculate the covered period. The one that most people are going to use is a covered period begins the day that you received the wire from your bank of your PPP loan, and you carry that forward somewhere between the 8 and 24 weeks. The other period is the alternative payroll covered period, which allows you to start your covered period on the day your next payroll cycle begins after the receipt of the funds. It just makes it a lot easier administratively, and the only caveat there is you can only use the alternative covered payroll period if your people get paid at least every two weeks, or 26 times a year. So they need to be paid at least 26 times a year to use that. If your employees are paid twice a month, or only 24 times a year, you're not allowed to use the alternative period.

Louis Bruno:Thank you. There's another one that's coming, or a few that are related back to the types of forms, the 3508S, EZ, and 08 long form version, I guess by now we're calling it. Maybe just at a high level you can address, and again, we mentioned it a bit earlier, but talk about the documentation and then eligibility for each form.

Alan Wink:As I mentioned earlier, 3508S is primarily for borrowers whose loan, the amount of the loan was less than $50,000. I see another question here. "My PPP loan was 50,250. If I reduce the PPP by 350, may I used the form 3508S?" And the answer is no because the loan amount was greater than $50,000.

3508EZ is used by self-employed individuals or companies that have no employees, and it's also used only when there's been no reduction in wages or salaries for any employee by $100,000 or less by more than 25%, or you've had no reduction in FTEs. So once again, it's all employees who are earning $100,000 or less where there was a reduction in salary of 25% or more.

And then, if you don't qualify for the 3508S or the 3508EZ, then you must use the 3508, or the long form, which includes Schedule A and the worksheet for employees earning $100,000 and below or $100,000 or above.

Louis Bruno:Thanks. And again, just trying to summarize some of these. A lot of them talk about expectations of the SBA on the bank and in particular one that I think is important to talk about. The expectations, even specifically, for loans over $2 million. We've heard, obviously, a lot of thoughts of that any loan over 2 million will be subject to an SBA audit. And then the concept of what additional responsibility does this put on the lender?

And I'll answer generally and then open it to the group to see if they have any other comments. But the point being is that we go back to this concept of maintaining the full audit trail of all of the documents received, all the documents validated. Any back and forth between the borrower, and ultimately the borrower is required to attest to and sign off on the application, but maintaining the trail and evidence of the bank's effort to do the validation is pretty important. And again, I'll open it up to the broader group as kind of our last question here, to see if anyone wants to add to that.

Alan Wink:Louis, I'll certainly add a couple things to that. As I said in my opening comments, when you look at the real dollars of the PPP program it was in the larger loans. 13% of the loans were equivalent to 75% of the dollars, and the SBA has said that they have the right of audit on all, that they will look at all PPP loans greater than $2 million because that's where all the money is. So I think that banks should have an added level of scrutiny on those loans that are $2 million or more, just in anticipation of the possibility of the SBA spending more time scrutinizing those loans.

Also, in terms of the documentation, the borrower is responsible for maintaining the application and the documentation for six years. So the SBA really has the right to audit any of these forgiveness applications for a period of six years. And I would expect that that would happen since the SBA has to approve each application within 90 days of receiving it from the lender. I can't imagine audits being done in that period of time.

Louis Bruno:Yeah, it'll certainly be interesting next year to two years in the aftermath, after applications are forgiven. But again, many of the banks that have been through these types of inspections will have some sense of what's going to be expected. And I think, again, our main point is maintaining the audit trail.

With that note, we've almost reached time and there's a lot of questions that have come in. What I would say is that if we weren't able to answer your question, and if you're interested in any of our services, please feel free to reach out to us. The email is up here. It's sales@carescompliance.com. Again, you'll reach a team of individuals who have been heavily involved in the CARES Act since inception and dealing with a lot of banks and borrowers.

With that, I'll conclude and thank everyone for coming.

 

About Louis Bruno

Louis Bruno in Regulatory and Compliance Services has over 15 years of experience in assisting hedge funds, broker-dealers, private wealth managers and multinational corporate banks with strategic and regulatory change management initiatives.

About Alan Wink

Mr. Wink assists clients with capital budgeting, capital structuring and capital sourcing. He has worked with many tech and life science companies on developing the appropriate capital structure for their position in the business life cycle.

About Lauren Tomlinson

Lauren Tomlinson is a Partner in the Audit and Assurance Services Practice and provides audit services to public and private companies. She works with several public companies on their annual audits, internal control audits, quarterly reviews and registration statements.

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