SBA issues new FAQ to address how the SBA will review borrowers’ good-faith certification concerning the necessity of their PPP loan. 5/13/2020
On May 13, 2020, the Small Business Administration (SBA) issued FAQ 46 to address questions related to borrowers’ good-faith certifications as the May 14th safe harbor repayment date approached. This FAQ should give clarity and comfort to those borrowers considering repayment due to the uncertainty surrounding the previous guidance and the potential for legal and regulatory liability.
Background and Prior Safe Harbor Guidance
In April 2020, the U.S. Treasury and the SBA issued frequently asked questions (FAQs) on PPP loans. One question asks whether businesses owned by large companies with adequate sources of liquidity to support their ongoing operations qualify for PPP loans.
The SBA explained that — in addition to reviewing applicable affiliation rules to determine eligibility — all borrowers must evaluate their economic need for a loan under the standards in effect at the time of the loan application. The standards are set by the Coronavirus Aid, Relief and Economic Security (CARES) Act, which established the PPP, as well as subsequent regulations.
Among other things, borrowers must certify that their PPP loan request is necessary. Specifically, they must certify that “current economic uncertainty” makes the loan necessary to support ongoing operations. The certification must be made in good faith, taking into account the borrower’s current business activity and ability to access other sources of liquidity in a way that is not “significantly detrimental” to the business.
The FAQs originally provided that any borrower that applied for a loan prior to April 24, 2020, and repays the funds in full by May 7, 2020, would be deemed by the SBA to have made the certification in good faith. As of May 5, 2020, though, the FAQs were revised to reflect an extension of this safe harbor to May 14, 2020.
PPP Loans under $2 million
In its FAQ released May 13, 2020, SBA, in consultation with the Department of the Treasury, has determined that any borrower, together with its affiliates, that 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 review on larger loans, where the compliance effort may yield higher returns.
PPP Loans greater than $2 million
Borrowers with loans greater than $2 million 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 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.
Many of the factors influencing whether you qualify or should apply for these loans are organization specific. We encourage you, your organization’s management, and board of directors to carefully review your company’s financial situation and consult with legal counsel if you have questions regarding your eligibility to receive these funds. If you do receive PPP funding, it is critical that you maintain complete and accurate documentation to support your eligibility for such funding, the specific use of these funds, as well as your qualifications for forgiveness under the terms of the program. Contact us to learn more.