The issuance of Q&A 46, which is restated at the end of this post, is a welcome and sensible shift from those prior SBA intimations, particularly for those with loans under $2,000,000. While the May 14th “safe harbor” deadline remains, the risk to borrowers is now significantly lower. The new guidance indicates that those who borrowed less than $2,000,000 (on an affiliated basis) will be “deemed” to have made the required certification of necessity in good faith, creating a new safe harbor based on the size of the loan. Therefore, for such borrowers, it would seem that there’s no need to consider returning the funds by the May 14th deadline, and ostensibly such borrowers will not be examined by the SBA for compliance with the certification.
For those who borrowed more than $2,000,000, there is no such “deeming” of good faith, but the new guidance is still a significant improvement for such borrowers. While it remains true that such borrowers may still need to make an adequate showing of need, the stakes are much different. If the SBA were to later determine that such a borrower was not in need of the funds, the new guidance indicates that civil and criminal penalties will not be imposed if the borrower returns the funds. Thus, the risk to such borrowers is substantially lessened, so long as the borrower remains able to repay the funds. Of course, if a borrower is in a position to repay the funds later on, it does beg the very question of whether the borrower really needed the funds; and vice versa. Nonetheless, it ratchets down the legal risk to borrowers, and makes the original May 14th deadline much less relevant.
As per prior guidance, Borrowers with PPP loans over $2,000,000 should still immediately document and memorialize their need for the funds, including documentation of actions that would have been taken (e.g. layoffs, furloughs, etc.) had the PPP funding not been available, as well as impacts of the crisis on revenues, cash flow, workflows, etc. While those who have borrowed less than $2,000,000 should not need to make a case for the necessity of the loan, it is still advisable for such borrowers to follow a similar practice.
The position as expressed by Q&A 46 is more aligned with the terms of the CARES Act than the SBA’s prior guidance, which is a positive turn of events. Unfortunately, there are other areas where the SBA’s guidance is inconsistent with the CARES Act, and yesterday’s updated guidance has not addressed those other areas (e.g., the requirement that 75% of the loan be used for payroll costs in order to qualify for any forgiveness). Further, we still hope to receive further SBA guidance (or legislation with technical corrections) regarding a number of forgiveness computation issues, as well as deductibility for tax purposes, and will plan to communicate further in that regard.
Michael Mills is a Partner with Antheil Maslow & MacMinn, LLP, practicing in their business law, estates & trusts and tax law departments.
U.S. Small Business Administration – Paycheck Protection Program Loans
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,20 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.
20 For purposes of this safe harbor, a borrower must include its affiliates to the extent required under the interim final rule on affiliates, 85 FR 20817 (April 15, 2020).