Important Update: Paycheck Protection Program

Originally published by the following source: Pagel, Davis & Hill, P.C.May 15, 2020
by Kent Pagel, SBCA Legal Counsel


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Because of the uncertainty created by COVID-19, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") adopted in late March implemented the Paycheck Protection Program (the “PPP”). The PPP enabled businesses with fewer than 500 employees to receive low-interest loans, subject to loan forgiveness. On April 26, the Small Business Association (the "SBA"), which administers these PPP loans, issued Paycheck Protection Program Loans Frequently Asked Questions (the “SBA FAQ”) clarifying what it means for a PPP loan to be "necessary"—a requirement for receiving one—and by excluding and discouraging certain larger borrowers from receiving loans who were able to do so under the original statute. While waiving an otherwise existing SBA requirement that small businesses must be unable to obtain credit elsewhere, applicants for PPP loans were required to certify, in good faith, that:

"[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant."

Question No. 31 to the SBA FAQ instructed those companies that had already received PPP funding and future applicants to now take into account their “current business activity and 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” (Emphasis Added). The SBA FAQ also stated specifically that public companies (with 500 employees or less) with substantial market value and access to capital markets unlikely would be able to make this certification in good faith.

On April 27, Treasury Secretary Steven Mnuchin told CNBC that borrowers will face potential criminal liability for falsely certifying the necessity of a PPP loan and on April 29, the Treasury Department updated the SBA FAQ to announce that borrowers that have received or will receive loans over $2 million will be subject to an SBA audit. Furthermore, borrowers may face civil liability under the False Claims Act for such false certifications. Borrowers that had already received PPP funding were given until May 14, 2020 to return the funds and be deemed to have made the certification in good faith and would not be penalized. Several businesses have already returned loan proceeds received under the PPP program because of this certification requirement.

This then led borrowers and applicants, who were privately held or family owned should assess their access to capital and resulting eligibility for PPP loans. Also, privately held companies that had borrowed less than $2 million through the PPP program were left with questions and concerns as to whether they would be subject to an audit and whether they would have the resources and expertise to adequately respond to an audit.

Fortunately, the SBA issued an updated SBA FAQ on May 13 and included Question No 46 which dealt with those companies who had borrowed less than $2 million, yet were subject to a potential audit.

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. [Emphasis Added]

Further quoting from SBA FAQ No. 46,

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.

Not only does the SBA FAQ now put to rest questions raised by those borrowers who received less than $2 million in funding, there is additional protection for borrowers who received more than $2 million. If the SBA determines the borrower’ explanation for meeting the application certification was not adequate, rather than facing harsh potential criminal and civil penalties assuming the borrow pays back the loan.

Currently, there is no SBA guidance regarding meeting the loan certification requirements, other than SBA FAQ Nos. 31 and 46, for those borrowers of more than $2 million in PPP funding. There is no, what lawyers refer to as a “bright-line” test for this analysis, and every company's situation is different. Look for our next article on Paycheck Protection Program for Borrowers of Over $2 Million and our future article on calculations of the forgiveness amounts under the PPP loans titled Paycheck Protection Program—How to Calculate Forgiveness Correctly?