Devine Millimet | NH Law Firm

Pressure Release: Some Needed Guidance on the PPP Loan Certification of Necessity

Joseph P. Rheaume, Esq.

Tabitha Croscut, Esq.

May 13, 2020

The U.S. Small Business Association (the “SBA”) previously published a list of frequently asked questions (“FAQ”) with answers which confused and alarmed borrowers who had been approved for and received loans from SBA lenders under the Coronavirus Aid, Relief, and Economic Security Act’s (the “CARES Act”) Paycheck Protection Program (the “PPP”).  FAQ #31, published on April 23, 2020, almost a full month after the CARES Act was enacted, raised concerns for borrowers regarding the SBA’s requirements for supporting a certification in all PPP applications that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  Prior to its publication, companies made the necessity certification without batting the proverbial eye because there was no further guidance. However, with FAQ #31, the SBA introduced the concept of access to other sources of liquidity as a consideration for whether borrowers can make the necessity certification in good faith.  The example in FAQ #31 included a public company with substantial market value and access to capital markets and posited that such a company would likely be unable to make the required necessity certification.

Then on April 28, 2020, the SBA added FAQ #37, clarifying the applicability of FAQ #31 to privately held companies and adding an additional layer of uncertainty around what borrowers would be required to establish and support the necessity certification.  Less than twenty-four hours later, on April 29, 2020, the SBA published FAQ #39, which asked whether the SBA would review individual PPP loans.  The SBA indicated that it would review (aka audit) all PPP loans in excess of $2 million, and other PPP loans as appropriate, for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form.  This further alarmed borrowers who borrowed above and below $2 million because FAQ #39 left more questions than answers and did not clarify FAQs #31 or #37.

Adding additional stress to borrowers was the fact that FAQ #31 added a time constraint to borrower’s decisions, which stated, “any borrower who applied for a PPP loan prior to April 24, 2020 and [repaid] the loan in full by May 7, 2020 [would] be deemed by SBA to have made the required certification in good faith.”  On May 5, 2020, the SBA published FAQ #43, which extended the deadline for returning loans to May 14, 2020, and stating that the SBA intended to provide additional guidance on how it intends to review the certification.

Today, SBA, in consultation with the Department of the Treasury, published FAQ #46, which 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.  Essentially this indicates that the SBA will not audit PPP loans under $2 million.  SBA determined that the safe harbor is appropriate because, according to the SBA, 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.

The SBA states in FAQ #46 that “this safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees” and the approach would enable the “SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.” According to the SBA, 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.

Importantly for borrowers, rather than face harsh penalties, if the SBA determines in the course of its review that a borrower of loans greater than $2 million lacked an adequate basis for the required certification concerning the necessity of the loan request, the SBA will seek repayment of the outstanding PPP loan balance, will inform the lender that the borrower is not eligible for loan forgiveness; and if the borrower repays the loan, “then the 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.”

The SBA also published FAQ #47 several hours after publishing FAQ #46, which extends the deadline of the safe harbor period from May 14th to May 18th.  FAQ #46 and #47 are comforting guidance to many borrowers who have been struggling to decide whether to return their PPP loans by the May 14th safe harbor period, for which they now have four additional days to assess their certifications in light of FAQ #46.  For many borrowers, this is good news!   For more information on the PPP and forgiveness, please contact an attorney at Devine Millimet at (603) 669-1000.


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