SBA Issued New Guidance Regarding Recipients’ Certifications of Necessity for PPP Loans

13 May 2020 Coronavirus Resource Center: Back to Business Blog
Authors: Pamela L. Johnston Thomas F. Carlucci Lisa M. Noller Erin L. Toomey Jamie N. Class Frank S. Murray Jr Ann Marie Uetz

On May 13, 2020, the Small Business Administration (SBA) issued new, important guidance (available here) regarding how the SBA will review a borrower’s required good-faith certification of necessity made in its loan application.  This new guidance should result in more recipients of Paycheck Protection Program (PPP) loans deciding to keep their loan proceeds to pay employees, rather than returning the monies by the “limited safe harbor” deadline, which the SBA extended to May 18, 2020.  

According to the new guidance from the SBA, for loans under $2 million the SBA will scrutinize such loans less intensely and will “deem” a borrower’s necessity certifications for such loans to have been made in good faith.  The SBA indicated that it will focus instead on the larger loans in excess of $2.0 million to preserve its own resources and for sound policy reasons.  

Regardless of this new transparency from the SBA about its expected review processes, it is still true, and was reiterated in FAQ 46, that 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.’”  

Here is a summary of the new guidance: 

  • Loans Under $2.0 Million.  For businesses that, together with all affiliates, received less than $2.0 million in loan proceeds, the SBA stated in FAQ 46 that it 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.”  (emphasis added).  This should permit borrowers of smaller loans to rest easier as long as they continue to follow the SBA’s rules and guidance regarding PPP loans, including other eligibility requirements and use of proceeds restrictions.  
  • Loans Over $2.0 Million.  For businesses that, together with all affiliates, have loans greater than $2 million, the SBA will not automatically deem the loan to have been made in good faith.  Instead, the SBA will still review these applications to determine the adequacy of the basis of a borrower’s “necessity” certification.  That means that businesses that received loans in excess of $2.0 million still are required to reassess by May 18, 2020, their necessity for the loan in light of FAQ 31’s language, the SBA’s other guidance, and the wording in the actual certification.  For these larger loans, our prior guidance available here remains applicable.  Notably, the SBA’s “limited safe harbor” provision still does not impact whether other agencies – for example the SEC and DOJ – will investigate the need for the loans and the veracity of the certifications and other representations included in the loan applications.  
  • SBA Audit Risk Has Changed.  For businesses, together with all affiliates, with loans greater than $2.0 million, the risk has changed for the better.  Now, the SBA stated in FAQ 46 that 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.” (emphasis added).  In other words, if the SBA finds a recipient misanalysed its necessity certification and paid back the full loan when directed by the SBA to do so, the SBA will forego any of its own civil money penalty remedies (set forth in 13 C.F.R. Section 142), and it will decline to refer the matter to the DOJ for criminal prosecution or civil False Claims Act enforcement.  This promise does not protect a borrower’s errors with regard to other portions of the loan application.  Nor does this promise bind any other agencies such as the DOJ or the SEC.

The PPP rules, requirements and guidance are less than perfect.  Recklessly disregarding CARES Act requirements and the rules and regulations governing PPP loans can trigger treble damages, bring scrutiny from various government agencies, trigger a criminal investigation, and bring unwanted public scrutiny.  Take time now to give your application and satisfaction of the eligibility criteria a second, careful examination to be sure you want to pursue new monies or keep the money already received.  And document as soon as possible what you relied upon and your rationale for whatever decisions you made. 

For more information, please contact your Foley relationship partner or the authors listed below. Foley has created a multidisciplinary and multijurisdictional team to respond to COVID-19, which has prepared a wealth of topical client resources and is prepared to help our clients meet the legal and business challenges that the coronavirus outbreak is creating for stakeholders across a range of industries. Click here for Foley’s Coronavirus Resource Center to stay apprised of relevant developments, insights and resources to support your business during this challenging time. To receive this content directly in your inbox, click here and submit the form. 

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Insights