On May 13, 2020, the Small Business Administration (SBA) announced additional guidance regarding the good faith “necessity” certification for Paycheck Protection Program (PPP) loans in the form of a new Frequently Ask Question #46.
In short, for loans of less than $2.0 million to one borrower (together with its affiliates), the SBA will deem the borrower “to have made the required certification concerning the necessity of the loan request in good faith.” The SBA determined it will not focus its finite audit resources on borrowers below this threshold, who are less likely to have access to adequate sources of liquidity in the current economic environment. For loans of $2.0 million or more, the borrower may still need to justify its good faith certification of necessity if its loan is reviewed by the SBA.
Importantly, the SBA also stated the consequences to a borrower if the SBA determines that the borrower did not have an adequate basis for its good faith certification of the necessity for its PPP loan. If that adverse determination is made by the SBA, the new guidance states that the loan will not be eligible to be forgiven, and the SBA will ask that the borrower repay the loan. If the loan is then repaid, the SBA stated that it “will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification” (i.e. the Department of Justice, for prosecution).
Note, however, that this new guidance is the SBA’s position on just the good faith certification of necessity. It relates only to that particular certification, and not to the many other certifications and loan application responses required to receive a PPP loan – such as the number of the borrower’s employees being sufficiently small to qualify for the PPP loan. It also does not bind other agencies with possible jurisdiction to pursue PPP loan applicants for false statements in their PPP loan application. While other agencies will likely defer to the SBA on most cases where the SBA asks for PPP loan repayment based on inadequate support for good faith necessity, there could still be situations where the Department of Justice would independently pursue a civil or criminal case if clear fraud was involved in making the good faith necessity certification.
The full text of the new FAQ 46 is as follows:
“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.”