On May 13, 2020, the Small Business Administration (“SBA”), in consultation with the Department of Treasury, updated its Frequently Asked Questions (“FAQs”) regarding implementation of the Paycheck Protection Program (“PPP”), to specifically address the required good-faith certification with respect to an applicant’s economic necessity for PPP funds.

As we have discussed in previous alerts, in submitting a PPP application, borrowers must carefully review and certify in good faith that, among other things, “[c]urrent economic uncertainty makes [the] loan request necessary to support the ongoing operations of the Applicant.” Per prior alerts, borrowers who applied for a PPP loan prior to April 24, 2020 and who repay such loan in full by May 14, 2020, will be deemed by the SBA to have made the foregoing certification in good faith.

Through the updated FAQs, the SBA has stated that  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 in good faith, on the basis that borrowers below the $2 million threshold are generally less likely to have had access to adequate sources of liquidity under the current circumstances. The FAQs further clarify that borrowers that have obtained PPP loans in excess of $2 million may still have an adequate basis for making the required certification but will be subject to SBA scrutiny for compliance with program requirements set forth in prior SBA Interim Final Rules and the Borrower Application Form.

In the event that the SBA determines that a borrower lacked an adequate basis for obtaining PPP funds based on economic necessity, the updated FAQs provide that the SBA will seek repayment of the outstanding balance of the PPP loan and will inform the lender that such funds are not eligible for forgiveness. They also clarify that if, after receiving such a notice from the SBA, the borrower voluntarily repays the loan, the SBA will not pursue administrative enforcement or referral by the SBA to other agencies regarding a potential violation of the loan necessity certification.

The updated FAQs also provide that any borrower that repays a PPP loan by the safe harbor deadline will be treated as though it had not received a covered SBA loan and, therefore, will remain eligible for the Employee Retention Credit under the CARES Act.