May.13.2020
On May 13, 2020 – one day before the May 14, 2020 repayment safe harbor deadline[1] – the Small Business Administration (SBA) extended the deadline to May 18, 2020. Additionally, the SBA released a new FAQ providing further safe harbors with respect to the “economic necessity” certification. The full text of FAQ #46 (which provided such further guidance) and FAQ #47 (which extended the deadline) is set forth at the end of this article.
PPP loans under $2 million
FAQ #46 provides that: “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.”[2] This appears to be a blanket safe harbor for all such borrowers (absent, of course, fraud or other egregiously negative factors).
PPP loans in excess of $2 million
FAQ #46 notes that, as the SBA previously stated in FAQ #39, all PPP loans in excess of $2 million (and other PPP loans as appropriate) will be subject to compliance review by the SBA. FAQ #46 provides the following clarification:
“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.” (Emphasis added.)
In other words, a borrower that has made an economic necessity certification that is found in an SBA audit to be incorrect will be (i) required to repay the loan and (ii) ineligible for loan forgiveness. It appears that the SBA would pursue no other penalties against the borrower (again, absent fraud or other egregiously negative factors).
Other considerations
FAQ #47, which was also published on May 13, 2020, extended the repayment safe harbor deadline to May 18, 2020 “to give borrowers an opportunity to review and consider FAQ #46.” (FAQ #46 also confirms that, “Borrowers do not need to apply for this extension.”)
May 14, 2020 repayment safe harbor deadline. The May 14, 2020 repayment safe harbor remains in effect. However, in the wake of FAQ #46, borrowers may feel more comfortable relying on their original determinations of economic necessity.
Can a borrower that has previously received and repaid a PPP loan reapply? Absent further guidance, the answer appears to be, no. Although FAQ #46 is silent regarding this question, Interim Final Rule 1 stated that “no eligible borrower may receive more than one PPP loan.”[3] Additionally, the Borrower Application From requires a loan applicant to certify that: “During the period beginning on February 15, 2020 and ending on December 31, 2020, the Applicant has not and will not receive another loan under the Paycheck Protection Program.”
Other certifications and eligibility criteria. Similar to the May 18, 2020 repayment safe harbor, FAQ #46 refers only to the economic necessity certification. It appears, therefore, that the safe harbors and other relief under FAQ #46 relate only to the economic necessity certification and would not apply to other types of incorrect certifications or ineligibility criteria. For example, the safe harbors and other relief under FAQ #46 would not necessarily help a borrower in breach of the 500 employee threshold.
FAQ #46 stated rationale. FAQ #46 provides the following rationale regarding the safe harbor for loans under $2 million:
“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.”
We will continue monitor PPP-related developments and provide updates.
FAQ #46, in full, provides as follows:
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.
FAQ #47, in full, provides as follows:
47. Question: An SBA interim final rule posted on May 8, 2020 provided that any borrower who applied for a PPP loan and repays the loan in full by May 14, 2020 will be deemed by SBA to have made the required certification concerning the necessity of the loan request in good faith. Is it possible for a borrower to obtain an extension of the May 14, 2020 repayment date?
Answer: Yes, SBA is extending the repayment date for this safe harbor to May 18, 2020, to give borrowers an opportunity to review and consider FAQ #46. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor.21
21 Questions 46 – 47 published May 13, 2020
[1] For a discussion of the May 14, 2020 repayment safe harbor, please refer to our prior alert dated May 6, 2020.
[2] Footnote omitted.
[3] Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20811, 20813 (April 15, 2020).