FAQ 46 does not provide any further guidance for a borrower’s substantive assessment of its need for a PPP loan. Previously released FAQ 31, read in the context of several CARES Act provisions, remains the only guidance on the meaning of the standard for necessity. SBA has provided a safe harbor for borrowers to return PPP loan funds if they made the necessity certification based on a misapplication of the standard. This safe harbor has been extended for a second time and now closes on May 18, 2020. Borrowers who return PPP loan funds by May 18 will be deemed to have made the certification in good faith. See FAQs 31 & 47.

The new guidance is procedural. It establishes a second “safe harbor” – more accurately, a presumption: “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.” For application of this safe harbor, the original principal amounts of all loans within an affiliated group of companies will be aggregated. Affiliates are determined under the interim rules applicable to the PPP.

FAQ 46 explains that the safe harbor for loans under $2 million 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.” By providing this safe harbor to borrowers of smaller PPP loans, the SBA will “conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.”

The distinction between loans over and under $2 million remains unclear. First, FAQ 46 notes that a borrower with a loan over $2 million may have an adequate basis for certifying that the PPP loan is necessary based on its specific circumstances. Second, the safe harbor for PPP loans under $2 million will not prevent an audit if SBA determines that review of a particular loan is appropriate.

FAQ 46 addresses the consequences for a borrower if SBA determines that it “lacked an adequate basis” for its necessity certification. If SBA makes this determination, it will: (1) seek repayment of the outstanding loan balance and (2) inform the lender that the loan is not eligible for forgiveness. If the borrower then repays its loan, the SBA will not pursue administrative enforcement or make referrals to other agencies. While SBA’s commitment not to pursue administrative enforcement or a referral will not entirely preclude an enforcement action by the Department of Justice or the Special Inspector General for Pandemic Recovery, those authorities may be unlikely to independently pursue a company that the SBA did not refer for enforcement absent fraud or other egregious circumstances.

Ultimately, the guidance in FAQ 46 underscores the need for every PPP borrower to compile contemporaneous documentation detailing the basis for its certification of necessity. We have provided insights into the review that should be undertaken by a borrower to document its “adequate basis” for certifying necessity. It is critically important that each borrower document its need for its PPP loan now – rather than have to re-create the basis for the necessity certification during an SBA audit weeks or months after making the certification.