Coalition of Attorneys General Opposes SBA Paycheck Protection Program Appeals Procedures as Violating Borrowers' Due Process Rights and the Administrative Procedure Act

4 min

On September 28, 2020, a coalition of eighteen state attorneys general submitted comments regarding the SBA's interim final rule (IFR) relating to Appeals of SBA Loan Review Decisions under the Paycheck Protection Program. This IFR, which we previously summarized, relates to borrowers' appeals of SBA decisions to the SBA's Office of Hearings and Appeal (OHA). The attorneys general concluded that the appeals procedures outlined in the IFR "do not comport with due process and run afoul of the Administrative Procedure Act (APA)." In particular, the attorneys general contended that:

  1. The procedures outlined in the IFR are too vague and offer borrowers few protections. The attorneys general wrote that the SBA "has failed to provide any guidance on how it either evaluates PPP loans in its initial investigation or how it makes a final loan review decision about whether a borrower is eligible for a loan and loan forgiveness." This leaves borrowers in the dark, which compromises their ability to successfully defend their PPP loan eligibility or request for forgiveness, and it also means that the SBA "has no criteria to consult in making these decisions or in compiling the administrative record supporting its decisions." The attorneys general further noted that the appeals process is particularly important to many small businesses suffering from the economic fallout of the COVID-19 pandemic because they lack the resources to defend against an SBA investigation. Further, the attorneys general expressed concern that the lack of specific procedures to safeguard borrowers' confidential information heightened the risk that confidential information will be publicly disclosed.
  2. Borrowers' loans should continue to be deferred during the appeals process. The IFR explicitly states that an appeal does not extend the PPP's loan deferral period, which means that borrowers who undertake an OHA appeal must continue to make loan payments while the appeal is pending. The attorneys general opined that this is unfair, considering that "the entire appeals process takes months and must be exhausted before a borrower can hope for judicial relief in the courts."
  3. SBA decisionmakers are not independent and neutral, which raises due process and APA concerns. The attorneys general described the SBA's appeals process as "an unconstitutional, circular review process" because "[t]he OHA judge, who reviews the Administrator's final PPP loan review decision, is subordinate to the Administrator," yet there are no protocols in place to ensure that the OHA judge is independent from the Administrator. In addition, to exhaust its administrative remedies prior to seeking relief in federal court, a borrower must appeal an OHA judge's decision (regarding the Administrator's loan eligibility or forgiveness decision) to the Administrator, which means that "the Administrator reviews an appeal of her own decision, which creates serious due process concerns." According to the attorneys general, this process also violates the APA, which bars any SBA employee involved in the investigation of a PPP loan (here, the Administrator) from "participat[ing] or advis[ing]" in a subsequent review of that same loan.
  4. The IFR procedures leave borrowers "fatally hamstrung" with respect to briefing, discovery, and the applicable standard of review. The attorneys general criticized the IFR's briefing rules because:
    1. Borrowers must file their appeal petition prior to being provided with the administrative record, yet borrowers are not guaranteed the opportunity to file a reply brief once they receive the administrative record from the SBA. According to the attorneys general, this "catch-22" hampers borrowers' ability to provide a "full and specific statement as to why the SBA loan review decision is alleged to be erroneous," as the IFR directs.
    2. Borrowers are barred from conducting discovery or even requesting leave to take discovery. Yet the SBA may request leave to take discovery, which will be granted upon good cause.
    3. The standard of review is illogical because it combines "the distinct legal concepts of clear error and preponderance of the evidence" by requiring borrowers to prove, by a preponderance of the evidence, that the SBA's loan review decision was clearly erroneous. In addition, because borrowers must file their petitions before receiving the administrative record, "[t]his places an impossible burden on borrowers, particularly given that the 'clear error' standard gives considerable deference to the initial adverse loan review decision."

The attorneys general urged the SBA to amend the interim final rule to correct the identified deficiencies. According to the IFR, although it was effective without advance notice and public comment, and to allow for "immediate implementation of the OHA appeal feature of this program," the SBA will consider comments "and the need for making any revisions as a result of these comments." Whether the comments provided by the attorneys general will ultimately result in a revision or amendment to the IFR remains to be seen.