May 13, 2020 Update to Original Post
On May 13, 2020, the Treasury posted new FAQ #46 updating previous guidance related to PPP borrowers’ good faith need certifications in loan applications under the program. Under FAQ #46, the SBA, in consultation with Treasury, determined that the following safe harbor will apply to the 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.
This is a significant departure from where agency guidance had recently been trending on the need certification. Most importantly, for the safe harbor to apply, the borrower does not need to repay the loan. Previously, for a PPP borrower to take advantage of the safe harbor, repayment of the loan was required to be made by May 14, 2020 (see FAQ #43 and the SBA’s interim final rule posted May 8, 2020). For any borrower that received less than $2 million, this represents a significant reduction in enforcement risk that the SBA might interpret the need certification differently than the borrower did at the time of PPP application.
For borrowers that borrowed in excess of $2 million, the safe harbor provided by repaying the PPP loan by May 14 may still be relevant. However, new FAQ #46 also suggests that the SBA will not take an aggressive enforcement stance with respect to the financial need certification for that subset of borrowers. The FAQ states:
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.
This is certainly favorable language as well for borrowers who received PPP loans above $2 million, as it suggests the SBA would simply require repayment of the loan should the SBA reach a different conclusion than the borrower regarding whether the borrower could make the financial need certification in good faith. The SBA has also indicated in new FAQ #47 that it intends to amend the interim final rule for the May 14 safe harbor to extend the repayment deadline to May 18.
A word of caution is that, as of today, this revised safe harbor has not been implemented via an interim final rule, only via the FAQs (last accessed May 13, 2020). So even though the FAQs state that “[b]orrowers and lenders may rely on the guidance provided in [the FAQs] as SBA’s interpretation of the CARES Act and of the Paycheck Protection Program Interim Final Rules,” guidance does not have the force of law and, as we have seen, is subject to future changes and interpretations.
—End of May 13 Update—
May 6, 2020 (Original Post)
If you are a lender, borrower, or related professional following the Paycheck Protection Program (PPP) that was created as part of the CARES Act, you are well aware that the rules and guidance that surround the PPP have been evolving on an almost daily basis. The U.S. Small Business Administration (SBA), in consultation with the U.S. Department of the Treasury (Treasury), maintains a list of Frequently Asked Questions (FAQs) that is posted to each agency’s individual website. Since the PPP was launched on April 3, 2020, the FAQs have been updated 14 times. The SBA has passed seven different interim final rules (and counting), and the Treasury has passed its own interim final rule. While the frequent changes to significant interpretations of the PPP have been challenging to keep up with even for seasoned legal professionals, it must be even more difficult for the country’s struggling small businesses that are facing a myriad of other operational challenges due to COVID-19.
For current and prospective PPP borrowers, one of the most concerning aspects of SBA’s evolving guidance and interpretations is the agency’s interpretation of the PPP application’s financial need certification. In the PPP application, each applicant borrower must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” While on its face, this seems like a certification that almost any qualifying small business could have made in good faith five weeks ago, the SBA continues to implement guidance on its view of this need certification. In FAQ #31 (published on April 23), the SBA stated:
Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. (emphasis added).
In FAQ #37 (published on April 28), the SBA further clarified that private companies with adequate sources of liquidity to support the business’s ongoing operations will be held to this same standard when the SBA evaluates the good-faith nature of the financial need certification made by an applicant borrower that is a non-public company. For borrowers that applied prior to April 24, 2020, the SBA has created a safe-harbor rule that indicates a borrower “will be deemed by SBA to have made the required certification in good faith” so long as the borrower repays the loan in full by May 14, 2020 (see FAQs #31 and #43). The SBA also stated in FAQ #43, which was published on May 5, that it intends to provide additional guidance on how it will review the need certification prior to May 14, 2020.
Borrowers that are concerned about how the SBA is interpreting the financial need certification may wish to consider whether repayment is a prudent risk-management step. As recited in the PPP loan application, knowingly making a false statement in a loan application is punishable by both imprisonment and/or a fine. Interested parties are encouraged to frequently check the SBA and Treasury websites for updated guidance and interpretations on the PPP.