SBA Provides Long-Awaited Guidance Regarding the Paycheck Protection Program Loan and Liquidity Requirement
Today, just one day prior to the May 14, 2020 safe harbor deadline for returning Paycheck Protection Program (“PPP”) loan funds, the Small Business Administration (“SBA”), in connection with the Treasury Department, issued long-awaited guidance that clarifies how the SBA will handle its review of a borrower’s need certification. The SBA position on PPP loan forgiveness requests, liquidity requirements, and the borrower need certification were discussed in our previously issued alerts here https://www.aalrr.com/newsroom-alerts-3710 and here https://www.aalrr.com/newsroom-alerts-3701.
This new SBA guidance once again came in the form of a Frequently Asked Question (“FAQ”), i.e., FAQ 46. FAQ 46 does two things.
Initially, for borrowers which received a PPP loan with an original principal amount of less than $2 million, it provides that the required certification regarding the necessity of the loan will in all cases be deemed to have been made in good faith. This means that businesses which received a loan of less than $2 million will not need to be concerned that the business’s failure to access alternate sources of liquidity will in any way affect their eligibility for the PPP loan.
For borrowers with loans of $2 million or more, FAQ 46 also provides some assurances. Specifically, if the SBA determines during a review of the PPP forgiveness application that there was not an adequate basis for the borrower to make the required need certification, the SBA will request repayment of the loan and inform the lender/borrower that the borrower is not eligible for loan forgiveness. If the borrower then repays the PPP loan after receiving that notification, the SBA will not pursue administrative enforcement or referrals to other agencies based on the certification.
FAQ 46 in its entirety states as follows:
“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.”
This guidance is definitely good news for PPP borrowers. There are a couple of takeaways from the guidance and, as has often been the case with respect to PPP loans, some remaining ambiguities.
The first takeaway is that the new SBA guidance does not mean that loans of less than $2 million will not ultimately be audited. We expect random and targeted audits of PPP loans. Even for borrowers whose PPP loans were less than $2 million, there may certainly be audits with respect to loan eligibility requirements other than the need certification, the use of the PPP loan funds, and/or the calculation of loan forgiveness. What the new guidance does provide assurance on is that the borrower’s certification of need will not be questioned as a part of such an audit.
Additionally, for loans of $2 million or more, repayment will be required in full after notification from the SBA that the SBA has determined the borrower lacked an adequate basis for the required need certification, and as such is not eligible for forgiveness. One remaining ambiguity relates to the timing of the repayment. While FAQ 46 appears to require immediate payment following notice from the SBA, this is not entirely clear. Another relates to what any appeals process will entail.
Finally, for loans of $2 million or more which are repaid after notification from the SBA that there was not an adequate basis for the need certification, the SBA states that it will not pursue administrative enforcement or referrals to other agencies based on the inadequate need certification. However, a remaining question is whether there is nonetheless the risk of an action being brought by a whistleblower under the False Claims Act. We assume there is still such a risk, but the guidance is not entirely clear on this point.
In any event, the FAQ provides some very good news for PPP loan borrowers by providing some assurances as to the position the SBA may take with respect to the adequacy of their need certification.
If you have questions on the Paycheck Protection Program, you can reach out to the attorneys at Atkinson, Andelson, Loya, Ruud & Romo.