[NOTE: Effective May 14, SBA further extended the safe-harbor payment deadline to Monday, May 18th]
As you know if you read our May 5th blog post regarding the economic uncertainty certification in your PPP loan application, there has been a lot of call for clarification concerning how the SBA will review the borrower’s certifications. The SBA had offered to borrowers the chance to avoid this question, and possible civil and criminal penalties associated with it, by repaying the funds by May 14. Yesterday, the SBA issued a new clarification in the form of FAQ #46, the text of which appears below.
This clarification offers significant relief. If your loan amount was under $2,000,000, the SBA will deem your certification to have been made in good faith. Interpretation – if you borrowed under $2,000,000, no one is going to knock on your door and require that you prove that your business was experiencing economic uncertainty caused by the pandemic and that there was no readily available source of liquidity for you to weather the storm. You still need to spend the funds in the manner required by the program in order to achieve loan forgiveness and you should still document your analysis of the uncertainty at the time you made your certification.
If your loan was over $2,000,000, you don’t fall within that safe harbor and will need to deal with an audit at the time you apply for forgiveness of your loan. At this time, it remains unclear what those audits will entail, but you should be prepared to support your certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” However, the potential civil and criminal penalties which would come with making a false certification (one not made in the good faith belief in its accuracy) have seemingly been taken off the table. The guidance says that if the SBA determines that you were not eligible for the loan, you’ll be asked to pay it back (with applicable interest), but will not be at risk of civil and criminal penalties. One assumes that’s not the case if there is a finding of outright fraud. It should also be noted that this FAQ does not have the force of law, though agencies interpreting their regulations are given significant latitude by the courts.
From FAQ #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.
What does this mean?
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 the 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.
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