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April 28, 2020

Update to Paycheck Protection Program FAQs Provides Limited Guidance on Required Applicant Certifications

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UPDATE : On May 5, 2020, the Treasury Department again updated the FAQ document — this time, notably, to extend the May 7 “Safe Harbor” date for repayment of Paycheck Protection Program loans by one week — to May 14. The text of the added question is below:

Question: FAQ #31 reminded borrowers to review carefully the required certification on the Borrower Application Form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA guidance and regulations provide that any borrower who applied for a Paycheck Protection Program loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. Is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date?

Answer: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.

(ORIGINAL POST BELOW)

On April 28, 2020, U.S. Department of the Treasury added two additional questions and one answer to its Paycheck Protection Program Frequently Asked Questions that address the requirement that all applicants must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  The question and the corresponding answer are set forth below in their entirety:

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer (to both): In addition to reviewing applicable affiliation rules to determine eligibility, 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. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking 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. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

The answer sheds some light on the vague and subjective certification by indicating that the availability of alternative sources of liquidity that “are not significantly detrimental to the business” and the applicant’s “current business activity” are factors that SBA will consider when determining whether the certification was made in good faith.  Unfortunately, the answer does not provide any guidance on (1) the meaning of “significantly detrimental to the business”; (2) what particular aspects of an applicant’s “current business activity” are relevant to the determination of good faith; or (3) what other factors or circumstances may be relevant to the SBA’s analysis on the question of “good faith.”

Finally, the most significant aspect of the answer is the provision allowing any applicants that have since changed their mind about the necessity of the PPP loan or grown concerned about the validity of their certifications to avoid any potential liability by repaying the loan in full by May 7, 2020.

If you have questions about the Paycheck Protection Program, other aspects of the CARES Act, or other topics involved in the COVID-19 pandemic, please visit our COVID-19 resource page.

This alert does not purport to be a substitute for advice of counsel on specific matters.

Harris Beach has offices throughout New York State, including Albany, Buffalo, Ithaca, Long Island, New York City, Rochester, Saratoga Springs, Syracuse and White Plains, as well as New Haven, Connecticut and Newark, New Jersey.

Update to Paycheck Protection Program FAQs Provides Limited Guidance on Required Applicant Certifications

Insight

UPDATE : On May 5, 2020, the Treasury Department again updated the FAQ document -- this time, notably, to extend the May 7 "Safe Harbor" date for repayment of Paycheck Protection Program loans by one week -- to May 14. The text of the added question is below:

Question: FAQ #31 reminded borrowers to review carefully the required certification on the Borrower Application Form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA guidance and regulations provide that any borrower who applied for a Paycheck Protection Program loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. Is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date?

Answer: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.

(ORIGINAL POST BELOW)

On April 28, 2020, U.S. Department of the Treasury added two additional questions and one answer to its Paycheck Protection Program Frequently Asked Questions that address the requirement that all applicants must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  The question and the corresponding answer are set forth below in their entirety:

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer (to both): In addition to reviewing applicable affiliation rules to determine eligibility, 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. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking 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. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

The answer sheds some light on the vague and subjective certification by indicating that the availability of alternative sources of liquidity that “are not significantly detrimental to the business” and the applicant’s “current business activity” are factors that SBA will consider when determining whether the certification was made in good faith.  Unfortunately, the answer does not provide any guidance on (1) the meaning of “significantly detrimental to the business”; (2) what particular aspects of an applicant’s “current business activity” are relevant to the determination of good faith; or (3) what other factors or circumstances may be relevant to the SBA’s analysis on the question of “good faith.”

Finally, the most significant aspect of the answer is the provision allowing any applicants that have since changed their mind about the necessity of the PPP loan or grown concerned about the validity of their certifications to avoid any potential liability by repaying the loan in full by May 7, 2020.

If you have questions about the Paycheck Protection Program, other aspects of the CARES Act, or other topics involved in the COVID-19 pandemic, please visit our COVID-19 resource page.

This alert does not purport to be a substitute for advice of counsel on specific matters.

Harris Beach has offices throughout New York State, including Albany, Buffalo, Ithaca, Long Island, New York City, Rochester, Saratoga Springs, Syracuse and White Plains, as well as New Haven, Connecticut and Newark, New Jersey.

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Content current as of March 23, 2023 7:18 pm