By Jacob W. Scott of Smith, Currie & Hancock LLP
Published May 13, 2020
On May 13, 2020, the Department of the Treasury and the Small Business Administration updated the Paycheck Protection Program Loans Frequently Asked Questions (“FAQs”), which provide guidance to borrowers regarding how the Small Business Administration interprets the provisions of the CARES Act that created the Paycheck Protection Program. The update to the FAQs clarifies how SBA will determine whether borrowers certified their need for a PPP loan in good faith. We addressed the details of that requirement here.
This morning, Treasury published the promised guidance on how SBA would determine whether a borrower’s representation of necessity was made in good faith. This new guidance may impact a borrower’s decisions to take advantage of the safe harbor for return of PPP funds, which closes on May 14, 2020. The short version of the guidance is this:
- Loans under $2 million: SBA will deem the required loan application certification of necessity to have made in good faith, without further audit by SBA.
- Loans of $2 million and above: Any borrower that is later determined not to be eligible for forgiveness because its certification of necessity was not made in good faith will be given the opportunity to repay the loan in full to avoid civil or criminal enforcement action.
The full text of FAQ No. 46 reads:
46. 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.
This revised guidance significantly walks back previous guidance from Treasury and SBA that any borrower found not to have made its representation of necessity in good faith may be subject to civil and criminal enforcement actions.
Jacob W. Scott is Of Counsel in Smith Currie’s Washington, D.C. office. In serving his extensive national client base, Jake practices government contract law and construction litigation, with a focus on federal construction law, where the intersection of his skill sets in litigation and contracts manifests. He can be reached at email@example.com or 202.452.2140.