Legal Alerts

COVID-19 Response: New Administrative Appeal Process for PPP Loans – Some Questions Answered and Others Not

Washington, D.C. (August 17, 2020) - On August 11, 2020, the Small Business Administration released a major new procedural framework for legal challenges to its rulings on loan eligibility and forgiveness under the Paycheck Protection Program (PPP), which has approved more than 5.1 million loans and dispensed more than $520 million to small businesses suffering economic losses from the COVID-19 pandemic. The program has been criticized for confusing and contradictory ground rules, inconsistent funding decisions, and numerous management issues; a number of dissatisfied small businesses have won relief against the SBA’s eligibility determinations through successful court challenges. 

The new rules come just as the PPP loan forgiveness process is ramping up, with every reason to anticipate numerous appeals of SBA eligibility and forgiveness determinations. While laying out the requirements for internal appeal procedures, the new rule leaves many unanswered questions, and PPP borrowers who are depending on the benefits of loan forgiveness should carefully review the new process and how it works. 

Key Elements of the New Appeal Process

  • Only final determinations (“official written decisions”) by the SBA are subject to appeal through the new process. Decisions by lenders cannot be appealed, but borrowers can request an SBA review of a lender decision, which would bring the decision within the new appeals framework. The new rule notes that “[a] borrower may exercise any other rights it has under applicable law against a PPP lender regarding a lender decision.”
  • The appeal will be heard by an Administrative Judge or Administrative Law Judge. Appellants may appeal further to the SBA Administrator. Borrowers must pursue this new process in order to exhaust administrative remedies and have the right to seek judicial review of the SBA decision.
  • The appeal process involves specific requirements on timing, content of the appeal petition and supporting documentation, and legal standard of review (clear error of fact or law; appellant has the burden of proof, by a preponderance of the evidence). Discovery and oral argument are generally not permitted. 
  • The new rule will appear as Subpart L of the SBA’s rules for the Office of Hearings and Appeals (OHA), 13 C.F.R. Part 134. However, “[a]ny OHA decision pursuant to this subpart L applies only to the PPP and does not apply to SBA’s 7(a) Loan Program generally or to any interpretation or application of the regulations in part 120 (7(a) loans) or part 121 (small business size standards) of this title.”
  • Only those provisions of the OHA Rules of Practice at 13 C.F.R. § 134.201 et al. that are specifically referenced apply to the PPP appeal process. 
  • Filing an appeal through this process does not extend the deferral period for repayment of a PPP loan. 
  • Any determination by the SBA’s Office of Inspector General concerning a PPP loan – that is, an enforcement action – is not appealable to the OHA. 
  • The SBA promulgated the new regulation as an interim final rule, effective as of the date of publication in the Federal Register (expected during the week of August 17, 2020); comments will be accepted, but, based on the SBA’s consistent practice in implementing the PPP program, are unlikely to change any aspect of the new process. 

Unanswered Questions

While the new rule establishes ground rules for appeals from formal SBA determinations on a borrower’s eligibility for a PPP loan or forgiveness, or the extent of forgiveness, it leaves some questions unanswered. For example: 

  • A number of parties that disagreed with the SBA’s interpretation of PPP loan eligibility – such as exotic dance clubs and entities in bankruptcy proceedings – have successfully challenged the SBA’s conclusion that they were ineligible for PPP loans: can parties still challenge such interpretations in court, but only if the SBA has not issued a formal written decision, since the latter action must now be pursued through an appeal to the OHA? 
  • The new rule states that “if SBA remits to the lender the PPP loan forgiveness amount set forth in the decision issued by the lender to SBA (except for the deduction of any Economic Disaster Loan advance), the borrower may not file an appeal with OHA, and the borrower must begin repayment of any remaining balance of its PPP loan.” This could include borrowers that received a decision of partial forgiveness from their lenders. Does this mean the borrower in such a situation must sue the lender to challenge its decision, and if so, what authority allows for such a legal claim, as this would not appear to be a “final agency action,” which is the legal prerequisite for a challenge under the Administrative Procedure Act?
  • What legal precedent related to OHA proceedings under the 7(a) program applies to the new appeals, as administered by Administrative Judges and Administrative Law Judges, the SBA Administrator, and the courts?
  • What is the process for challenging an SBA Office of Inspector General enforcement action, which this rule does not cover?

As the new appeal process gets underway, and with the great mass of PPP loan forgiveness applications set to begin, doubtless more questions will arise, including how the internal SBA administrative law apparatus will handle the major influx of appeals and meet the tight deadlines imposed by the new rules. Borrowers seeking PPP loan forgiveness will need to pay close attention to how to effectively navigate the new process to make sure they protect their rights. 

For more information on this new process, contact the authors of this alert. Visit our COVID-19 Response Resource Center for more alerts on the many areas of law impacted by the pandemic.


Thomas A. Brooks, Partner

Katherine I. Funk, Partner

Jane C. Luxton, Partner

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