Department of Treasury PPP Loan Audits: How to Ensure Your Businesses’ Loan Application Certification Was In Good Faith

May 2020

UPDATE: Since this original article was published, the SBA has issued an extension for the repayment date of safe harbor from May 7, 2020 to May 14, 2020. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor.

As of last week, the Small Business Administration (SBA) stated Paycheck Protection Program (PPP) loans in the amount of $2 million or more (in addition to other loans as appropriate) will be reviewed by the SBA at the time that the forgiveness application is submitted to your bank in order to determine whether the borrower made the PPP loan application certifications in good faith. Specifically, the certification that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

The SBA’s recent guidance expanded the certification further and stated that “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.” However, even with the SBA’s above expansion, what constitutes a good faith certification is still open for interpretation and the SBA has not yet issued guidance on how it plans to implement the audit procedure.

The SBA created a safe harbor which allows any borrower that applied for or received a PPP loan prior to April 23, 2020 to repay their loan in full by May 7, 2020 – if the borrower returns the PPP funds by May 7, 2020, then the borrower will be deemed to have made the required certification in good faith. This safe harbor was created in order for businesses to return PPP loan funds without question, penalty, or consequence in the event that a business received a PPP loan but now feels that it has other revenues, funds, or liquidity to survive and keep paying employees. There has already been media coverage scrutinizing large, publicly owned businesses for obtaining PPP loans because these companies generally have the means to survive economic downturns. For example, the Los Angeles Lakers and Shake Shack are among widely-known companies that have received and returned their PPP loan funds.

Given how little guidance is out there and how vague the standards are for good faith certification, there are many things to consider when determining whether a borrower has made its PPP loan application certifications in good faith. The economic viability of a business is changing weekly, making it difficult to figure out business’ ongoing need for PPP loan funds.

So with all of this uncertainty, what should you and your business do? The key thing for businesses to remember is the intention of the PPP loan is to help small businesses keep people employed. If a business is in a position where, without PPP loan funds, the business would lay-off employees or significantly reduce wages due to an ongoing business viability concern, then your business is already in a solid position to reasonably say it made the PPP loan certifications in good faith.

If you are wondering if your business should return its PPP loan funds, FMJ can help – please contact Jordanne Kissner at jordanne.kissner@fmjlaw.com, Bob Fafinski at robert.fafinski@fmjlaw.com, or Jim Seifert at james.seifert@fmjlaw.com. In addition, you can find some frequently asked questions about the PPP on our website here.