On May 13, 2020, U.S. Department of the Treasury and SBA added an additional question and answer to its Paycheck Protection Program Frequently Asked Questions that addresses 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:
46. 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, 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.
The most significant impact of this FAQ is the level of certainty it provides borrowers that, together with their affiliates, received PPP loans of less than $2 million. These entities will now be deemed to have made the required certification concerning the necessity of the PPP loan request in good faith. For borrowers with PPP loans in excess of $2 million dollars, the FAQ provides much needed clarity with respect to the potential consequences of SBA determining that a borrower lacked an adequate basis for making the required certification by indicating that while such loans will not be eligible for forgiveness, they can avoid SBA administrative enforcement or referrals to other agencies by repaying the loan.
Significant issues that have not yet been adequately addressed by SBA and the Department of Treasury include: (1) details on the factors that SBA will review when determining whether an adequate basis existed for a borrower to make the at-issue certification for loans in excess of $2 million; (2) the method of calculating loan forgiveness and potential reductions to loan forgiveness based on reductions in full-time equivalent employees and employee salaries.
If you have any questions about the Paycheck Protection Program or any other aspect of the CARES Act, please contact Josh Steele or the Harris Beach attorney with whom you usually work.
This alert does not purport to be a substitute for advice of counsel on specific matters.
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