Many thousands of businesses and nonprofit organizations across the United States have applied for Paycheck Protection Program Loans (“PPP Loans”). Recent news reports have highlighted certain borrowers who have returned PPP Loan funds because they did not believe they met the requirements for good faith certification of need for the PPP loan, as well as the intense scrutiny of borrowers’ need that will likely arise, both from the SBA and from the media, public watchdog organizations, and others. While much of this scrutiny appears focused, for now, on large borrowers with access to significant liquidity resources, all PPP Loan borrowers need to be mindful of the potential for the SBA to audit their loans, including their certifications of need and their use of PPP Loan proceeds.
Updated SBA Guidance Regarding Certification of Need and Safe Harbor
This morning, the SBA added new guidance to its FAQs regarding the PPP loan program. This much overdue guidance appears to offer significant peace of mind for PPP borrowers regarding certification of need for the loan. Specifically, on May 13, 2020, the SBA added the following to its Paycheck Protection Program Loans Frequently Asked Questions (FAQs):
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,20 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.21
20 For purposes of this safe harbor, a borrower must include its affiliates to the extent required under the interim final rule on affiliates, 85 FR 20817 (April 15, 2020).
21 Question 46 published May 13, 2020.
To summarize the guidance released by the SBA overnight,
- Borrowers that, together with their 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” and, it appears, will very likely not be audited other than review for confirming loan forgiveness.
- For borrowers who, together with their affiliates, received PPP loans of greater than $2 million, it appears the SBA is offering amnesty to a borrower that it finds lacked “an adequate basis for the required certification regarding necessity of the loan request” by stating that in those circumstances (A) the loan won’t be forgiven but (B) if the borrower repays the loan (no special time frame for repayment is mentioned) after receiving notification from the SBA, the SBA “will not pursue administrative enforcement or referrals to other agencies (seemingly including prosecutors) based on its determination with respect to the certification concerning necessity of the loan request.” Notably, this safe harbor doesn’t preclude the SBA from referrals to other agencies if there is some other basis on which the borrower may have committed fraud, but at least with respect to the certification of need, which has given many borrowers heartache, this appears to be welcome assurance that they aren’t likely to face investigation, prosecution or lawsuits.