On May 13, 2020, the Small Business Administration (SBA) issued guidance regarding the required borrower’s certification under the Paycheck Protection Program (“PPP”) that is great news for loans under $2 million, good news for loans over $2 million, and still leaves some open questions.
Newly issued Question #46 addresses the borrower’s required certification, i.e., that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA clarified:
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- That for loans under $2 million, the borrower will be deemed to have made its loan certification in good faith; and
- For loans in excess of $2 million[1], if the SBA determines that the borrower did not have an adequate basis for the certification, the SBA will request repayment of the PPP loan and so long as the borrower repays the loan upon receipt of notice from the SBA, the SBA will not pursue administrative enforcement or prosecution.
The language of the new FAQ reads as follows:
Q#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.
Borrowers with loans in excess of $2 million will need to examine the facts and circumstances at the time of their loan applications to ensure they had adequate basis to support their certifications. Click HERE for prior article.
The lawyers at Blalock Walters are keeping abreast of developments relating to PPP Loans and other COVID-19 related matters. Please contact us at 941.748.0100 if you need assistance.
[1] Pursuant to FAQ #46, the loan amount for purposes of this safe harbor, is determined by aggregating the loans for all affiliated entities, with “affiliate” having the meaning otherwise set forth in the SBA rules.
