Clarification of the PPP Loan Certification Requirement

In March and early April we sent you information about how the CARES Act Paycheck Protection Program (PPP) loan may help your business. Then during the following weeks various guidance and press releases have brought in uncertainty during these challenging times.

On May 13, 2020, the Small Business Administration (SBA) issued a new FAQ providing a “safe harbor” for PPP loans under $2 million. This means the SBA will assume that a borrower of an amount under $2M has limited assets and therefore automatically certifies the “necessity” for the PPP loan.

In short the new FAQ indicates that:

• Borrowers obtaining loans under $2 million “are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.”
• Providing this partial “safe harbor” for loans under $2 million “will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees.”
• If an SBA review indicates 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.
• SBA audits of PPP loans will focus on larger loans, where the compliance effort may yield higher returns.
• 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” however all loans over $2 million will be subject to a SBA review.

Note that this limited safe harbor only relates to the good-faith certification portion of the PPP application. Any defects in a borrower’s application such as false statements or employee count, are not subject to this safe harbor and enforcement actions may still proceed.

The text of FAQ 46 is the following:

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.

If you have questions or concerns, our law office has remained open and continues to serve our clients. We are available by telephone, email and Zoom.