By David L. Cahn and Jordan M. Halle of Whiteford Taylor Preston LLP
Published May 13, 2020
This morning, the SBA provided, via FAQ, the guidance it had promised regarding how it would review whether PPP applicants had a good faith basis for certifying that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
According to FAQ #46, any borrower that, together with its affiliates (applying the same rules used to determine PPP loan eligibility), 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. In other words, if a borrower receives a PPP loan of less than $2 million, the borrower is automatically considered to have certified to its need for the loan in good faith.
For borrowers that received a loan of $2 million or more, FAQ #46 acknowledges that they may still have an adequate basis for making the required good-faith certification, based on their individual circumstances. If upon its review of the PPP loan the SBA determines 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. As long as the borrower repays the loan, 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. However, if the borrower does not return the funds when required, the government could bring civil or criminal enforcement actions against the borrower's principal owners or officers.
That said, borrowers of $2,000,000 or more in the aggregate (including PPP loans made to affiliates) should document their business need in preparation for the SBA’s review of the PPP loan. Borrowers who have a questionable necessity argument should either return the PPP funds unspent or make contingency plans to be able to repay the loan if SBA determines that the borrower did not have an adequate basis for the necessity certification.
You can also access Whiteford Taylor Preston’s recently updated PPP Loan Q&A article by navigating here.
David L. Cahn is a Partner in the Baltimore office of Whiteford Taylor Preston LLP. His practice focuses on franchising law and entrepreneurship. He can be reached at firstname.lastname@example.org or 410.347.9442.
Jordan M. Halle is an Associate at Whiteford Taylor Preston; his practice focuses on business and corporate law, partnership and individual tax matters, franchising law and corporate transactional matters. He can be contacted at email@example.com or 443.263.8205.