SBA Issues Guidance on How it Will Review Paycheck Protection Program Loan Necessity Certifications

Today, the Small Business Administration (SBA) published guidance regarding its intended approach to review of borrower certifications that a Paycheck Protection Program (PPP) loan was necessary to support ongoing operations:

• A borrower, that together with its affiliates, received a PPP loan or loans under $2 million in aggregate will be automatically deemed to have made the “necessity” certification in good faith.
• Borrowers subject to SBA review will not be subject to further enforcement action following an SBA determination that there was an inadequate basis for the “necessity” certification if they repay the loan upon SBA request.
• The size of a borrower’s loan for the purposes of the safe harbor includes the aggregate of all PPP loans to affiliates of the borrower (calculated on the same basis as under the interim final rule on affiliates from April 15).

The new $2 million safe harbor, much like the existing repayment safe harbor, does not apply to any other eligibility criteria or certifications made by borrowers other than the “necessity” certification, and the SBA has not provided any further clarity on how it will evaluate a borrower’s basis for making the certification, which many had expected in advance of May 14, the extended deadline by which borrowers could repay their PPP loan and be deemed to have made the “necessity” certification in good faith. (See the interim final rule and FAQ 43.) While borrowers still face uncertainty around many of their decisions related to the use of their PPP loans, this particular retreat from public threats of enforcement action (see here) is welcome and the guidance will hopefully be helpful to a borrower assessing the risk of keeping and using their loan. For borrowers counting on forgiveness who, together with their affiliates, exceed the $2 million threshold, we continue to recommend clear and transparent documentation about the basis for taking the loan and use of proceeds in order to facilitate SBA review of their decision-making.

The complete text of the new guidance, FAQ 46, is:

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,[FN20] 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.

[FN20] 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).

For background on the initial backlash against “undeserving” PPP loan recipients, and our advice an assessing the good faith basis for making the required necessity certification, see our earlier client alert.