Good News for Many PPP Loan Recipients: Treasury Department Issues New Guidance on "Necessity" Certification for PPP Loan Applicants that Should Ease Concerns
The Treasury Department issued an updated Q&A today that addressed widespread concerns among many PPP loan recipients as to whether they had an adequate basis for making the certification in their loan application that “current economic uncertainty makes this loan request necessary to support the ongoing operation of the Applicant.” The prior guidance as to how to interpret this certification was lacking, and left many PPP loan recipients in the uncomfortable position of having to decide by tomorrow whether to return their PPP loan or risk an SBA audit, a possible subsequent rejection of loan forgiveness, civil penalties and even criminal penalties.
Today’s new guidance is great news for recipients of PPP loans under $2 million, as they will automatically be deemed to have made the necessity certification in their application in good faith. Absent suspected fraud or some other grounds for declaring that the PPP loan recipient was ineligible, recipients of PPP loans under $2 million can sleep easier knowing that they won’t be audited by the SBA on the necessity certification issue.
The new guidance makes it clear that recipients of PPP loans of over $2 million that have not returned the funds by tomorrow’s safe harbor deadline (this deadline was not changed by today’s guidance), will still be subject to an automatic SBA audit of their loan, including their necessity certification. However, even if the SBA determines as part of its audit that the recipient lacked adequate basis for making the necessity certification, as long as the recipient repays the loan after being notified by the SBA, the SBA will not pursue any administrative enforcement actions or refer the loan to any other agencies that might otherwise pursue civil and/or criminal penalties. While this gives recipients of PPP loans in excess of $2 million much needed comfort as to their civil and criminal exposure for making the “wrong” decision about returning their PPP loan, such recipients are almost certainly going to be audited by the SBA. As a result, all such recipients should take the time now to draft a written position statement outlining all of the factors they considered when making the original certification in their loan application that the “current economic uncertainty makes this loan request necessary to support the ongoing operation of the Applicant.” Please feel free to contact our firm if we can be of any assistance with drafting or reviewing your position statement.
Here is a copy of the actual guidance regarding the necessity certification issued today by the Treasury Department:
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,20 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.21
20 For purposes of this safe harbor, a borrower must include its affiliates to the extent required under the interim final rule on affiliates, 85 FR 20817 (April 15, 2020).
21 Question 46 published May 13, 2020.
While the new guidance issued today is generally good news for PPP loan recipients, recipients of loans in excess of $2 million still have some issues to consider when determining whether or not to keep the PPP funds:
- If the SBA determines that the borrower lacked an adequate basis for making the required certification, will the loan be repayable in accordance with the terms of the original note signed by the borrower or on demand as a result of the SBA’s adverse determination?
- If the SBA makes an adverse determination, will the borrower qualify for loan forgiveness for the portion of the loan funds spent on eligible expenditures (payroll, rent, etc.) or will it have to repay the full amount of PPP funds originally advanced?
- Is there a risk that other federal agencies may elect to pursue claims against the borrower following an adverse SBA determination even if the SBA will not do so?
- Will third parties have standing to pursue whistleblower, false claims or other claims against the borrower even if the SBA will not take action following an adverse determination?
- For borrowers who have been holding rather than spending their PPP funds pending issuance of today’s guidance, will they be able to spend all of the PPP funds on expenses that qualify for loan forgiveness within what is left of the 8 week expenditure period that commenced on the date the borrower received the PPP funds from its bank?