When submitting a Paycheck Protection Program (PPP) loan request, medical providers and all other borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Due to multiple sources of CARES Act financial assistance targeted for the healthcare industry, some providers have expressed uncertainty as to their actual need when evaluated by regulators many months later with perfect 20/20 hindsight. As the May 14, 2020, safe harbor deadline approaches for PPP borrowers to return or refuse PPP loan proceeds in order to be deemed in compliance with these good-faith certification requirements, the SBA yesterday offered additional helpful guidance on how it would evaluate borrower good-faith.
The SBA published its newest FAQ on the topic 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.
Thus, PPP loan requests under $2 million will be deemed made in good faith. For loans $2 million and above, the SBA will give the borrower an opportunity to pay back a loan that is later deemed to have been requested not in good faith. All borrowers therefore face less risk of exposure under fraud or False Claims Act allegations. While not eliminating such risk entirely, particularly in a case with egregious facts (e.g., the Justice Department likely would not feel constrained by Treasury Department FAQs), the SBA is offering guidance that appears consistent with Congress’ intent, which was to help small employers stay in business and maintain employee payrolls during the most acute phase of the crisis. Financial projections made in uncertain, unprecedented times should not equal bad faith. However, all PPP borrowers should still assess their individual situation and the need for the PPP loan against the factors highlighted in FAQ 31 (i.e., borrower’s current business activity and access to other sources of liquidity to support ongoing operations in a manner not significantly detrimental to the business). FAQ 46 also leaves open questions concerning the SBA’s audit/review process, the process to dispute the SBA’s determination on the adequacy of the certification, and timing of the repayment of the PPP loan. Additional guidance concerning these matters and loan forgiveness remains outstanding.