By David E. Bowers, Erica R. Haft
The Small Business Administration’s Paycheck Protection Program (PPP), established by the CARES Act in late March 2020, is a new frontier that has left individuals puzzled. However, the SBA recently issued additional guidance that we hope will provide some clarification.
To obtain a PPP loan, borrowers are required to complete an application and therein certify in good faith that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”
The Small Business Administration (SBA) has released guidance on the terms and conditions of a PPP loan through a FAQ method. FAQ #31 explained that a borrower must assess their “current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business” to make a good faith certification of the necessity of a loan. A safe harbor was afforded to those borrowers who deemed the loan not “necessary” so long as they returned the loan prior to May 14th. This guidance, however, left borrowers worried that they failed the good faith certification and whether they would be subject to penalties.
On May 13th, the SBA issued FAQ #46 which should ease many borrowers’ concerns. FAQ #46 clarified that only loans above $2,000,000 would be reviewed by the SBA to determine whether the borrower made the certification in good faith.
46. Question: How will SBA review borrowers' required good-faith certification concerning the necessity of their loan request?
Answer: When submitting a PPP application, all borrowers must certify in good faith that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA's review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA's determination concerning the certification regarding the necessity of the loan request will not affect SBA's loan guarantee.