With pressure mounting and a looming potential deadline for borrower amnesty for Paycheck Protection Program (PPP) loans inappropriately taken, the Small Business Administration (SBA) has provided good news for borrowers. The SBA released additional guidance (in the form of a new PPP FAQ) on May 13, 2020, to address the “good faith certification” regarding the borrower company’s necessity for the loan.
Specifically, the new FAQ #46 (see text below), provides total relief from audit risk associated with the certification issue for loans taken by borrowers in original principal amounts of less than $2 million.
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 FAQ does not provide a safe harbor for borrowers with PPP loans in excess of the $2 million threshold, but does allow that those companies may still be found to have made their certifications in good faith if they are able to provide an adequate basis for making that certification when they applied for the PPP loan. Essentially, these determinations will be facts-and-circumstances driven and will vary by company.
Importantly, the guidance does provide an important relief provision for larger borrowers (those with PPP loans greater than $2 million). These borrowers, if later found upon audit to not have met the good faith certification requirements at the date of application, will not be awarded loan forgiveness. As such, the borrowed amounts will be deemed a loan, repayable by the borrowing company. If the borrower then pays back the loan, the SBA will not pursue administrative enforcement or refer the matter to other agencies.
This is really great news for all borrowers that have taken advantage of the PPP loans under the CARES Act. Should you have questions, please contact Bob Grossman, Don Johnston or Mike Weber at 412-338-9300.