In new guidance, the SBA has quelled some of the anxiety about the necessity certification for PPP … [+]
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The Paycheck Protection Program provided under the CARES Act has given needed funding for small businesses affected by the COVID-19 pandemic. However, it has also raised uncertainty, and even anxiety, over eligibility for PPP loan forgiveness and the proper use of PPP funds.
The crux of this issue is lack of clarity in the hardship certification required by the loan application. For background on this topic, see my prior Forbes.com articles with advice from former federal prosecutors on whether to apply for the loan and how to prevent problems later on, and from small business lawyers on what to do when you get the loan.
Now the US Small Business Administration (SBA), in a new FAQ #46, has provided a needed bright-line test on the good-faith certification concerning the loan request, with a safe harbor that automatically supports your need for the funds.
The Hardship Certification In The PPP Loan Application
Soon after the PPP loan application came out, I drew attention to the vagueness of the wording in its hardship certification. As I noted, it was hard to interpret unless your business had been directly or indirectly closed by government order relating to pandemic mitigation (see Free Money For Small Business? Beware Legal Risks Of Paycheck Protection Loan Program Until More Guidance Issued). The hardship certification states: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”
As nearly all businesses are experiencing “economic uncertainty” in the unprecedented circumstances of the COVID-19 pandemic, the wording of this hardship or necessity certification left a substantial gray area. It also contributed to the initial stampede for PPP loans in the program’s first funding round. Unfortunately, in the rush for loans some smaller businesses that urgently needed crisis aid were crowded out.
For small businesses and their legal and accounting advisors, checking the guidance FAQs from the SBA has become as routine as checking scores in the NBA used to be. In FAQ #31, issued on April 23, the SBA attempted to clarify what the full wording of this certification means, at least for larger companies with liquidity (see my prior article).
But this only led to more uncertainty as to whether the guidelines apply to any company with liquidity. FAQ #39 heaped more worry on top of that when it stated that the that the SBA will review all loans in excess of $2 million, in addition to other loans as appropriate, after the lender’s submission of the borrower’s loan forgiveness application. This formalized a statement made by US Treasury Secretary Steven Mnuchin.
Now, in FAQ #46 (reproduced below in full), the SBA has at last provided a safe harbor, at least with regard to its own audits (some passages bolded for emphasis):
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.
What This Block Of Text From The SBA Means
Below are some thoughts on the SBA’s new guidance:
1. Access to liquidity appears to be the key determining factor for PPP loan eligibility.
2. Companies requesting amounts less than $2 million are automatically seen as meeting the necessity standard for the loan even if they do have meaningful savings, good banking relationships, or access to new investment capital. A possible reason for this is that the pace of PPP loan applications and use of funds by small businesses had slowed because of fear about eligibility complications.
3. Companies with loan amounts of less than $2 million will not get audited by the SBA in relation to the necessity certification. But this is not a free pass on any government investigation for fraud in a loan application or misuse of loan funds. More oversight bodies than just the SBA are watching PPP loans. As highlighted in my recent article Paycheck Protection Program Loans And Risk Of Government Investigation: Advice From Former Federal Prosecutors, suspected PPP loan fraud or funds misuse are likely to provoke a separate investigation from the Special Inspector General for Pandemic Recovery (“SIGPR”), the local US Attorney (and the Department of Justice if separate), or congressional committees.
For example, according to a statement from the US Department of Justice (DOJ), the DOJ is prosecuting two men in New England for alleged fraud in obtaining a PPP loan for much less than $2 million ($543,881). According to the allegation, the two men claimed they had “dozens of employees earning wages at four different business entities when, in fact, there were no employees working for any of the businesses.”
4. The SBA will focus its audit resources on larger loans. If a company borrowed more than $2 million and an SBA audit concludes the company did not deserve the PPP loan, repaying the loan means the SBA will not pursue the matter or refer it to other agencies for investigation. However, as pointed out above, other agencies may still do so on their own initiative.
Needless to say, if the news media report the SBA’s determination, the company risks negative publicity. Remember that Shake Shack
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5. The SBA loan guarantee is not affected by its decision about whether your company needed the loan.
Law-Firm Opinions Welcome SBA Clarification
In a COVID-19 alert, the Boston-area law firm Morse interprets the SBA’s new FAQ as a sign that the US Treasury, as a matter of administrative policy, will not subject a PPP borrower with a loan amount of under $2 million to an audit on its good-faith certification of “economic necessity” in the loan application. Morse observes that the SBA position “is materially different from prior guidelines on the subject.”
David A. Lawrence, an attorney with the Detroit-area law firm Couzens Lansky, also interprets this as “substantially softening” of the SBA position on the good-faith certification needed for PPP loans. “This is great news for smaller borrowers that had concerns about the SBA’’s prior (ominous) guidance regarding the need for the loan,” he told me. “Plus, this is great news for borrowers with loans over $2 million as well; if the SBA later determines that the borrower lacked a good-faith basis for the certification of necessity, the SBA will give the borrower an opportunity to repay the loan before pursuing penalties.” He is also reminding clients that the safe-harbor deadline to return a PPP loan and avoid the issue remains May 14, 2020.
My Other Articles On PPP Loans At Forbes.com
You Got Your Paycheck Protection Program Loan. Now What? Advice From Small-Business Lawyers