Paycheck Protection Program: SBA Clarifies Audit and Enforcement Intent Regarding Loan Recipient’s Financial Hardship Certification

Pierce Atwood LLP

On May 13, 2020, the Small Business Administration (SBA) updated its Frequently Asked Questions (FAQs) to provide important safe harbors on the Paycheck Protection Program’s (PPP) requirement that a borrower make a good faith certification that current economic uncertainty makes the PPP loan request necessary to support its ongoing operations.

Specifically, SBA has provided a safe harbor to borrowers that, together with their affiliates, received less than $2 million in loan proceeds. These borrowers will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

With respect to borrowers who received more than $2 million in loan proceeds, if the SBA determines that the borrower lacked an adequate basis for the certification, the SBA will seek repayment of the loan. If the borrower repays the loan, it will avoid further enforcement action regarding the need determination. An open question remains as to the timeline in which repayment must be made to avoid further enforcement.

Many borrowers and potential borrowers have wrestled with what “necessary” means in such an uncertain time, with predictions for the economic fallout from the pandemic varying dramatically on a macroeconomic scale, as well as from industry to industry and business to business. With these new FAQs, the SBA appears to be taking a practical approach to enforcement with respect to the financial need determination.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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