13 May 2020

Small Business Administration (SBA) Issues Anxiously-Awaited Guidance on Paycheck Protection Program (PPP) “Need” Certification Reviews

As promised in a previous FAQ (summarized in this client alert), the Small Business Administration (SBA), in consultation with the Treasury Department, issued a new frequently asked question (FAQ 46) with much anticipated guidance regarding how it will review Paycheck Protection Program (PPP) borrowers’ required good faith certifications concerning the necessity of their loan requests (or “need” certifications) ahead of a looming May 14 deadline for PPP borrowers to decide whether or not to return their loan proceeds.

The most noteworthy aspects of FAQ 46 include the following:

  • SBA created a new “safe harbor” – solely with respect to the “need” certification – for PPP borrowers with loans in an original principal amount less than $2 million. These borrowers will be deemed to have made their “need” certifications in good faith.  For purposes of determining whether a PPP borrower’s loan amount is above or below the $2 million threshold, the borrower must also include the original principal amount of PPP loans obtained by its affiliates (if any).
  • SBA noted that PPP borrowers that do not qualify for the “safe harbor” (i.e., borrowers with PPP loans in excess of $2 million) may still be able to make the “need” certification in good faith based on their “individual circumstances in light of the language of the certification and SBA guidance.”
  • If SBA determines in the course of its review that a borrower that is ineligible for the “safe harbor” lacked an adequate basis for its “need” certification, then SBA will seek repayment of the outstanding PPP loan balance and inform the applicable lender that the borrower is ineligible for loan forgiveness. If the borrower then repays its PPP loan, SBA stated that it will not pursue “administrative enforcement or referrals to other agencies” based on its determination with respect to the “need” certification.

SBA concluded that the safe harbor for loans below $2 million was appropriate because, in its view, borrowers with loans below $2 million are “generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.”  SBA also emphasized that this safe harbor would provide more certainty to borrowers with “more limited resources” as they work to retain and rehire employees.

While the new FAQ 46 guidance is welcome news to borrowers with PPP loans below the $2 million threshold, the blanket “safe harbor” for such loans may increase scrutiny on PPP borrowers that do not qualify for the “safe harbor.”  Notably, for larger PPP borrowers, SBA also explained that the creation of the safe harbor for loans below $2 million would allow it to direct its “finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.” (emphasis added)

Worth noting in this context is that loans with an original principal amount of more than $2 million have accounted for only about 1% of the total number of PPP loans originated, but represent roughly 24% of the principal amount of PPP loans originated based on information made available by SBA.  These statistics, combined with FAQ 46, suggest that SBA will focus its audit and enforcement resources on a comparatively small subset of PPP borrowers who account for a relatively large amount of PPP loan appropriations.

In addition, for larger borrowers, FAQ 46 offers little additional color or direction on some of the key questions that have arisen since the issuance of FAQs 31 and 37.  For example, FAQ 46 does not clarify what types or amounts of other available sources of capital the SBA would consider relevant to its determination (after the fact) that a PPP loan request was “unnecessary.” Nor does FAQ 46 address what types of negative trends in business or economic activity would justify a borrower’s need for a PPP loan.  While these issues remain opaque, it is critically important for large borrowers to create and retain thoughtful, contemporaneous records in support of their “need” certifications in preparation for the eventual review/audit of their PPP loan files by SBA.

Miller Johnson’s interdisciplinary team of corporate and litigation attorneys are ready to work with you to identify, gather and organize relevant documents and performance data to ensure your business is best positioned to comply with the ever-changing rules governing the Paycheck Protection Program and respond to any resulting inquiry or investigation related to your business’s application for, and receipt of, PPP funds.