This is an update on rules set forth by the Small Business Administration (SBA) regarding the Payroll Protection Program (PPP).
 The SBA’s FAQ 31
On April 23, in an apparent reaction to negative publicity surrounding large public companies receiving PPP funds, the SBA issued PPP frequently-asked-question (FAQ) number 31. It is reproduced in full below. FAQ 31 provides that PPP loan recipients who have not faced COVID-19 crisis liquidity problems and economic harm were not PPP-eligible borrowers.

The original PPP loan application provided only a certification that “Current economic uncertainty makes this loan necessary to support the ongoing operation of the Applicant.” FAQ 31 is interpreting this certification to require that Applicants take into account “their current business activity” and "their ability to access other sources of liquidity sufficient to support their current business activity.”

While the FAQ 31 “Question” concerns large companies, its “Answer” applies to all borrowers.

FAQ 31 states that anyone who received PPP funds has until May 7 to return unneeded funds without violating the “good faith” certification made about suffering economic harm. Last night, the Treasury Department extended this deadline to May 14.

1.    How can the SBA change the rules?
The PPP statutory provisions expressly set aside nearly every typical SBA loan underwriting standard, including credit scores, collateral and personal guarantees, and the demonstration that the borrower cannot obtain credit elsewhere.

A March 31, 2020 SBA Q&A statement read:
Question. Do I need to first look for other funds before applying to this program?
Answer. No. We are waiving the usual SBA requirement that you try to obtain some or all of the
loan funds from other sources (i.e. we are waiving the Credit Elsewhere requirement).

The Q&A clearly does not state that an entity must first assess its “ability to access other sources of liquidity” as is now being stated in FAQ 31.

2.   FAQ 31 standards regarding “level of current business activity,” “sources of liquidity,” and “not significantly detrimental to the business” are highly subjective – what do they mean? How much does a business’s “level of activity” need to be affected and what is the measurement period? What is a “source of liquidity” exactly; does it include owner loans to the business? What does “significantly detrimental to the business” mean – going out of business, declaring bankruptcy or something else?

3.    What is a “large business?” There is no definition by the SBA. As stated earlier, the SBA’s position is that FAQ 31 applies to “all borrowers.”

However, Treasury Secretary Stephen Mnuchin has stated that all borrowers with PPP funds exceeding $2 million will have their certifications audited.

4.   What if I don’t pay back my loan and the SBA later determines I was ineligible for it? The SBA has not said what the consequences of not returning funds would be. Nor did it say how it will enforce its new interpretation provided in FAQ 31. It may be no more than turning the forgiven portion of the proceeds into a two-year loan at 1%. Or it could result in penalties or even legal action against the Applicant.

5.    I applied for the PPP loan in good faith in accordance with the rules in place at the time. Should I pay the loan back? Applicants will need to make that decision individually. What these new SBA rules indicate to us is that there will be more SBA scrutiny of certain Applicants’ financial records, if they keep the proceeds and use them on “covered” expenses. That would include possibly looking at factors identified in FAQ 31, and closely reviewing documentation that loan proceeds were properly spent on covered expenses such as payroll, health insurance, retirement, rent, and utilities

This SBA guidance in FAQ 31 appears to be in direct conflict with the original PPP rules. Furthermore, it seems contrary to the congressional intent of the PPP program. It is possible that the SBA will change their position taken in FAQ 31. However, we wanted you to be aware of the SBA’s current rules so you could determine how it might affect your individual situation.

We can help you assess the impact of FAQ 31 on your business, and assist you in analyzing your financial records and gathering required documentation. Please contact Andrew, Kenny, or any of our team members if you have questions.

Andrew Bailey andrewb@csbcpa.com
J. Kenny Crow, Jr. kennyc@csbcpa.com
Phone 251-343-1012
Small Business Administration (SBA)
Paycheck Protection Program Loans
Frequently Asked Questions (FAQs)
31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: 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.