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SBA Issues Clarification on PPP Loan Necessity Certification and Extension of “Safe Harbor” Period

May 14, 2020


As discussed in our previous alert, the Small Business Administration (“SBA”) previously extended by seven days – to May 14 – a “safe harbor” period during which recipients of SBA Paycheck Protection Program (“PPP”) loans under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act may repay the funds and the SBA will deem such recipients’ required loan certifications of necessity to have been made in good faith.  When granting this extension of time, the SBA also stated its intent to provide additional guidance on how it will review applicants’ good-faith certifications of PPP loan necessity prior to the “safe harbor” deadline – that guidance was just issued as #46 in the SBA’s PPP FAQs, along with a further extension of the “safe harbor” deadline to May 18, 2020.

The good faith certification of necessity requires the PPP loan applicant to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations” of the applicant.  On April 23, the SBA issued FAQ #31, indicating that borrowers must make the required certification in “good faith,” taking into account 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.”

FAQ #46 clarifies the “good faith,” language in FAQ #31, yet does so more for borrowers who, along with their affiliates, received loans with an aggregate principal amount less than $2 million than it does for those with loans in excess of that amount. FAQ #46 specifically states as follows:

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.

While this guidance may be somewhat comforting for PPP borrowers with loans that are less than $2 million, it fails to clarify the SBA’s position on a “good faith” certification for borrowers of loans greater than $2 million – who are arguably taking on a higher level of guaranteed risk in taking the loan (which can be converted either in whole or in part into a grant), as the SBA will be conducting automatic “reviews” or “audits” of such borrowers prior to forgiving their loans.

As a result, many borrowers of large PPP loans are required to conduct a further risk analysis to determine whether they can afford to take on what should be a grant but may turn into a significant loan – albeit with a low interest rate – without much further guidance from the SBA to date.  In addition, the FAQ does not address the level of review the SBA might impose on even borrowers of less than $2 million when it comes to verifying information submitted for forgiveness request.

Montgomery McCracken’s attorneys are available to readily advise and assist clients. If you have questions regarding the “safe harbor” and/or the PPP loan that your business or entity has received or applied for, please do not hesitate to contact us for a free initial consultation. Visit the firm’s Coronavirus (COVID-19) Resource Center for more information and updates on this constantly evolving situation.