Safe Harbor Guidance on Necessity and Uncertainty Certification for PPP Borrowers
Recipients of PPP loans less than $2 million who were worried about the “necessity” certification they made on the loan application, and whether they should return their loans before the safe harbor date, can breathe a sigh of relief. A new SBA FAQ says their loan applications will be deemed to have been submitted in good faith. In the last few weeks, many businesses that received Paycheck Protection Program (“PPP”) loans have been struggling with whether they had to return the money following ambiguous guidance issued by the Small Business Association (“SBA”). By way of background, in order to receive a PPP loan, a business was required to certify that “[c]urrent economic uncertainty [made] the loan request necessary to support the ongoing operations of the [business].” This, at first blush, seemed like a fairly innocuous certification. For most businesses, the critical component of this certification is what it does not say: there is no requirement for the business to try to access other sources of capital prior to applying for the loan.
However, several weeks ago, several businesses fell under the scrutiny of the media for taking loans when they had other potential sources of capital available. In response to this, the SBA added two controversial FAQs to its website, suggesting that businesses have at least some requirement to evaluate other potential avenues for cash before applying for the loan, and that public companies were unlikely to qualify. This raised a number of flags for businesses that applied for loans but may have had lines of credit, cash reserves, or at least some other source of capital.
The SBA said that businesses that didn’t qualify under this new guidance but took loans anyway, had until May 7, 2020 to return the funds and avoid investigation by the SBA (the “safe harbor date”). That deadline was subsequently extended until May 14, 2020, so that the SBA could provide more thorough guidance on this issue.
In the interim, the SBA’s Office of Inspector General issued a report on the SBA’s handling of the PPP loans that was, in places, critical of the SBA’s decision to make rules that were not memorialized in the CARES Act, the enabling statute for the PPP loan program. This left advisors and business owners wondering what “guidance” they would receive from the SBA prior to the May 14, 2020 safe harbor date. Any further limitation on the PPP loans would surely be improper given the intent of the legislature in crafting the CARES Act and what the actually statute says.
On May 13, 2020, the day before the safe harbor date, the SBA issued FAQ #46, which is a welcome relief to businesses that were uncertain as to whether they qualified for the PPP money or needed to return it. The FAQ is excerpted in full below:
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.
The guidance provided by the SBA can be broken down into two categories. For businesses that borrowed less than $2 million, their “necessity” certification will be deemed to have been made in good faith. Does this mean that borrowers with loans below $2 million have a “free pass”? Absolutely not; however, the SBA and Department of Treasury will be giving the benefit of the doubt to those borrowers based on the analysis in the first and second paragraphs. Most importantly, there is no mention of a specific “needs-based” test or liquidity analysis that was of concern for most small business owners. In short, it is approaching a full retreat of previous FAQs issued by the SBA on this subject—at least for those borrowers who received less than $2 million.
For businesses that borrowed more than $2 million, the analysis is more complicated. All PPP loans over $2 million will be audited, which the SBA had previously said would be the case, and if it is determined that the certification was incorrect, the borrower will have an opportunity to return the funds. If the borrower is unable to do so, administrative enforcement and other civil and potentially criminal enforcement action may follow. More importantly, however, forgiveness of the PPP loan will not be available in such an instance.