SBA’s Extended “Safe Harbor” Is About to Close for PPP Borrowers Without Economic Need

May 11, 2020

Categories : Coronavirus

Types : Alerts

The Small Business Administration (“SBA”) has extended by seven days – to May 14 – the “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.

The May 5 announcement provides an extra window of time for recipients concerned about the possible negative ramifications of a later audit to return the funds without fault.

By way of background, the PPP has been heavily covered since its rollout, and criticized, in the media, with several stories describing how very well-capitalized, publicly-traded business entities made their way to the front of the line during the first tranche of PPP loan funding, which was depleted in 13 days. Some of those business entities have received many millions of dollars in PPP loans while other, more traditional small businesses and other entities are still waiting for their applications to be processed – hopefully in time before the second tranche of funding is depleted.

Questions naturally arose as to whether some recipients of substantial PPP loans actually need the funds to continue their operations or even whether they reasonably anticipated that the pandemic would have a significant adverse effect on their ongoing operations and revenue streams.

The intense, negative media spotlight was not lost on the Trump Administration. The SBA has since stated its intent to audit all recipients of PPP loans exceeding $2 million dollars. PPP loan guidance recently issued by the SBA (FAQ 43) indicates that PPP audits will include inquiry into the good faith basis for applicants’ required loan certifications of necessity. That certification requires an affirmation from the applicant that current economic uncertainty (at the time of the loan application and again when executing PPP loan documents) “makes this loan request necessary to support the ongoing operations of the Applicant.” False certifications to the SBA can be a very serious matter, with potential civil and criminal penalties. In fact, though the program is only about one month old, the Department of Justice has already taken action against alleged fraudulent applicants with respect to the PPP.

According to the SBA, “all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.” As a practical matter, PPP loans are dependent on good faith certifications of necessity, whereby applicants 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.” (FAQ 31)

If you are one of the lucky applicants who has already received a substantial PPP loan, then we recommend that you immediately review the basis for your good-faith certification of loan necessity. There is no one-size-fits-all approach, but your review should include, for example, documenting the state of your entity at the time of your PPP loan application, as well as your then-contemporaneous understanding of how the economic uncertainties surrounding the pandemic likely would affect your continued operations, income, liquidity, and ability to maintain your employees on payroll.

Finally, although the SBA has stated its intent to provide additional guidance on how it will review applicants’ good-faith certifications of necessity prior to the “safe harbor” deadline of May 14, 2020, as of this publication, the supplemental guidance has not been issued.

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.


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