SBA Offers Further Guidance — and Certainty — Regarding Good Faith Certification of PPP Loan
In a significant, and overall welcome, development, on May 13, 2020, the Small Business Administration (SBA) issued additional guidance regarding the required certification by applicants for a Paycheck Protection Program (PPP) loan that the “current economic uncertainty makes th[e] loan request necessary to support the ongoing operations of the Applicant.”
Borrowers applying for a PPP loan are required to make the certification in good faith, and the SBA had previously issued guidance stating that all PPP loans of more than $2 million would be subject to audit to determine whether the borrower had an adequate basis for making the certification. This prior guidance also established that any borrower that repaid the PPP loan in full on or prior to May 7, 2020 (subsequently extended to May 14, 2020, and now further extended to May 18, 2020), would be deemed to have made the certification in good faith (see FAQ 31, FAQ 37, Interim Final Rule on Extension of Limited Safe Harbor with Respect to Certification Concerning Need for PPP Loan Requested dated May 8, 2020, and FAQ 47).
On Wednesday, May 13, 2020, the SBA further updated its Paycheck Protection Loans Frequently Asked Questions (FAQs) to add Question 46: “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?” In answering this question, the SBA has provided helpful guidance in two areas. First, it establishes a “safe harbor” for any PPP borrower that, together with any affiliates required to be included pursuant to the affiliation principles in the Interim Final Rule on affiliation, received a PPP loan in a principal amount of less than $2 million. Any borrower qualifying for the safe harbor will be deemed to have made the economic necessity certification in good faith, and therefore will not be subject to further review with respect to that issue. In justifying the creation of this new safe harbor, the SBA noted that companies that borrowed less than $2 million were likely to have less access to other adequate sources of liquidity than companies that borrowed larger amounts, and that the safe harbor would provide greater economic certainty to smaller borrowers endeavoring to retain and rehire employees. The SBA also notes that the safe harbor will allow it to focus its review efforts on larger loans.
The second effect of FAQ 46 addresses PPP loans of more than $2 million. The updated guidance reiterates that such loans still remain subject to review by the SBA. However, FAQ 46 confirms that while loans in such amount are still eligible for forgiveness, if, at the time the borrower asks for loan forgiveness, the SBA determines the borrower lacked an adequate basis for the certification, the borrower will thereafter have the opportunity to repay the loan after it is notified by the SBA of its adverse finding. If repayment is made, the SBA will not take further administrative enforcement actions against the borrower and will not refer the matter to other government agencies for further action. Thus, this guidance significantly reduces the risk of criminal or civil penalties faced by a PPP borrower who elects not to repay the loan prior to the safe harbor date of May 18, 2020, and whom the SBA subsequently determines lacked an adequate basis for making the PPP loan certification in good faith. However, in the event of an adverse determination by the SBA, a borrower will still be at risk of having to repay the entirety of the PPP loan after it may have already expended the funds.
Additionally, the SBA added FAQ 47, which further extended the previously established deadline of May 14, 2020 to May 18, 2020, for any PPP borrower to repay the loan and be considered to have made the certification in good faith. Unfortunately, this new guidance does not add any substantive discussion regarding how the SBA will evaluate whether a borrower had an adequate basis for making the certification or the criteria they will consider in their assessment. The SBA does acknowledge that borrowers with PPP loans above $2 million still may be determined to have an adequate basis for making the certification based on their individual circumstances in light of the language of the certification and SBA guidance. The SBA has also still not issued any further guidance on other features of the PPP, most importantly regarding loan forgiveness.