On May 13, 2020, the U.S. Small Business Administration (SBA), in consultation with the U.S. Department of the Treasury, provided the following critical guidance on the good-faith certification requirement for Payroll Protection Program (PPP) borrowers (updated FAQ):
- Any borrower who, together with its affiliates, received PPP loans with an original principal amount of less than $2,000,000 will be deemed to have made the necessity certification in good faith.
- Borrowers with PPP loans at or above $2,000,000 may still be deemed to have made the certification in good faith, but SBA will review these files. Importantly, however, if SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification, SBA will only seek repayment of the outstanding PPP loan balance and inform the lender that the borrower is not eligible for loan forgiveness. If borrowers repay the loan as requested, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the necessity certification.
This clearer guidance will be welcome relief to many PPP borrowers considering whether to return loan funds following prior, ambiguous guidance on this topic and an announced May 14, 2020, safe harbor.
As discussed in our April 27 industry alert, a PPP loan applicant is required to deliver, among other things, the following certification in good faith: “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” Following the public outcry related to certain large market capitalization companies obtaining loans under the PPP Loan Program, SBA and Treasury amended their FAQ to provide that this good faith certification requires not only that PPP borrowers consider their current business activity, but also “their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” This guidance was later cross-referenced to extend to private, non-public borrowers. The ambiguity in these additional requirements, specifically in the “other sources of liquidity” consideration, led to widespread panic among even the most adversely impacted PPP borrowers. Many small business owners faced a looming choice between returning a much-needed PPP loan and laying off employees, or retaining PPP loan funds and assuming the personal risk that their individual circumstance may not satisfy this ambiguous test.
In response, SBA provided two very helpful clarifications on May 13, 2020. First, any borrower who, together with its affiliates, received PPP loans with an original principal amount of less than $2,000,000 will be deemed to have made the necessity certification in good faith. Second, borrowers who received PPP loans in an original principal amount of at least $2,000,000 may still be determined to have made the certification in good faith and, if the SBA later determines otherwise, SBA will seek only repayment of the outstanding PPP loan balance (no loan forgiveness).
Safe Harbor for Loans Under $2,000,000
Any borrower who, together with its affiliates, received PPP loans with an original principal amount of less than $2,000,000 will be deemed to have made the necessity certification in good faith. For purposes of the $2,000,000 calculation, a borrower must include loans taken by affiliates, using the definition of affiliate set forth in the interim final rule on affiliates, 85 FR 20817 (April 15, 2020).
Please note that we do not believe PPP loan borrowers who return a portion of the PPP loan to fall within this safe harbor will avoid scrutiny as access to the safe harbor is determined by the original principal amount.
As rationale for creating this safe harbor, SBA states that borrowers with PPP loans below $2 million are less likely to have access to adequate sources of liquidity in the current COVID-19 environment than those borrowers with PPP loans above this threshold. Also, SBA recognizes that it has limited resources for audits, and prefers to focus on larger loans, which may “yield higher returns.”
Notwithstanding the foregoing, we would caution that false certifications and fraudulent conduct in the PPP loan process will not be cured by this safe harbor and significant consequences may still result from such conduct. Borrowers should also keep in mind that this new guidance applies only to the necessity certification, and does not pertain to any of the other requirements for PPP loan eligibility, such as the requirement to be a small business, including affiliates.
PPP Loans at or above $2,000,000
Borrowers with loans greater than $2,000,000 may still have an adequate basis for making the good-faith certification, based on individual circumstances. In this regard, the SBA refers these borrowers back to earlier guidance (e.g., Q&A 31). If the borrower could not make the required good faith certification, the borrower still has until May 14, 2020, to return any loan funds.
Notably, however, if the borrower keeps the funds but SBA later determines that the borrower lacked an adequate basis for certifying the necessity of the loan, SBA will seek only 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 being notified by SBA that it lacked an adequate basis for certifying the necessity of the loan, then SBA will not pursue administrative enforcement or referrals to other agencies.
This guidance does not provide total immunity. For example, qui tam relators may still be able to file suit, and the U.S. Department of Justice (DOJ) may still be able to initiate actions against borrowers, even where SBA has not referred the borrower to the DOJ. However, practically, this is still significant guidance. In our experience, most small business enforcement actions start with penalties or a referral from SBA.
Notwithstanding this recent guidance, we still recommend that all borrowers should undertake the following:
- Review your original loan application and confirm that the certifications required under the Payroll Protection Program were made in good faith.
- Document and make a contemporaneous record of your determination. Small businesses faced with the uncertainty of the pandemic many find future avenues to thrive. Memories may fade. Memorialize your current concerns, current forecast and the uncertainty facing your business.
- Consult with advisors who can offer an independent assessment of your ability to make the required loan certification in good faith. An outside perspective may be helpful.
- Spend the PPP loan proceeds as intended under the program.
Please contact your Miles & Stockbridge lawyer for further advice regarding your individual circumstances.
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