The SBA and Treasury Department issued a new FAQ #46 this morning (May 13) that should give clarity and comfort to many PPP borrowers. First, Borrowers with PPP loans of less than $2 million will be deemed to have made the necessity certification in good faith. The $2 million amount includes the applicable company AND all of its affiliates as determined by the SBA’s affiliation rules. For PPP loans in excess of $2 million (including individual companies with a loan of less than $2 million if its affiliated group has PPP loans in excess of $2 million), the FAQ also provides helpful information. The FAQ provides that if the SBA determines that a borrower with a loan of greater than $2 million lacked an adequate basis for the necessity certification, the SBA will seek repayment of the outstanding PPP loan balance and, if the borrower repays the loan after receiving notification from the SBA, the SBA will not refer or pursue enforcement actions with respect to the certification concerning necessity of the loan request.
A few observations on this FAQ:
- The safe harbor for sub-$2 million loans will be welcome news to borrowers that are wrestling with the government’s vague guidance on what the necessity certification requires. However, application of the affiliate rules may mean that some companies will exceed the $2 million threshold that otherwise would not on a stand-alone basis. This has implications for certain private equity– or venture capital–backed companies, as well as corporate groups with multiple borrowers.
- Borrowers who, together with their affiliates, have loans greater than $2 million will still be subject to uncertainty about how the necessity standard will be applied and interpreted by the SBA. The good news for these borrowers is that the SBA has indicated that it will seek repayment—rather than more severe penalties—for borrowers who it determines do not have an adequate basis for the necessity certification.
- For borrowers that the SBA determines did not have an adequate basis for the necessity certification and must repay their PPP loans rather than having those loans forgiven, it remains to be seen whether the SBA will allow for repayment over the 2-year term of the loan or instead require accelerated repayment.
- The FAQ does not provide immunity from all future enforcement actions or preclude third parties from potentially making claims in connection with PPP loans; therefore, it remains important to conduct a careful analysis regarding necessity to ensure that all representations are accurate and to avoid False Claims Act or other actions that are possible based on false, fraudulent, or misleading conduct.
The full text of the new FAQ #46 is below.
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.