Earlier today, the Small Business Administration (SBA), in consultation with the Department of the Treasury, updated its Paycheck Protection Program Frequently Asked Questions (FAQs) by adding FAQ #46, which addresses how the SBA intends to review a borrower's good-faith certification that their loan was necessary.
This has been an area of considerable concern, especially since the SBA issued FAQ #31 last month that appeared to retroactively modify earlier PPP eligibility rules. Given that the current safe harbor date is May 14, 2020, this new guidance is very timely.
In its new FAQ, the SBA states, "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." The SBA included a footnote that the definition of affiliates, which typically include commonly-owned entities, is spelled out in its Interim Final Rule issued on April 25, 2020.
The SBA notes that borrowers with loans below the $2 million threshold generally have less access to other forms of capital in the current economic environment. This safe harbor will also help PPP borrowers with limited resources in their efforts to retain and rehire employees, a key goal of the program.
By establishing this $2 million threshold, the SBA states that it will be able to focus its limited audit resources on reviewing larger loans.
To that end, the SBA also amended the potential consequences for borrowers with loans greater than $2 million if the SBA determines that the borrower did not have an adequate basis for the good-faith certification. Whereas its previous guidance threatened civil and criminal penalties, the SBA appears to be softening its stance.
In addressing borrowers with loans greater than $2 million, FAQ #46 states, "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."
This breaking update should come as good news to the many PPP borrowers who are still wrestling with the eligibility rules and trying to decide whether to repay the funds before May 14. However, the FAQ also leaves open the possibility that borrowers could be forced to repay loans, even though they used funds for permitted purposes. Because of this, it is still critical that borrowers carefully consider the propriety of their original certifications, consider the potential impact of repayment on their financial condition, and develop appropriate contingency plans.
We expect additional guidance to be issued by the SBA and/or the Treasury in the coming days. We are actively monitoring the situation and will keep you appraised of any developments. If you have any questions about these or any other matters in the meantime, please contact your Kreischer Miller relationship professional or any member of our team. We also continue to update our COVID-19 Resource Center, which you can access here.
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