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.
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