On May 13, 2020, the U.S. Small Business Administration (SBA) issued guidance that further clarified the audit process for Paycheck Protection Program (PPP) loans and creates a new safe harbor. In summary, SBA has created a safe harbor whereby any PPP loan borrower that, together with its affiliates, “received PPP loans with an original 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.”
This means that PPP borrowers with loans under $2 million will not be subject to a PPP loan audit by the SBA based on the good faith certification. However, the SBA may still decide to audit a PPP loan for other purposes, such as possible misuse of PPP funds. There are three reasons outlined in the SBA guidance for this determination:
- borrowers with loans below the $2 million 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;
- it will promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees; and
- given the large volume of PPP loans, this approach will enable the SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
The SBA further states in this new guidance that borrowers with loans greater than $2 million that do not satisfy this safe harbor will still be subject to SBA review, but may still have an adequate basis for making the required good certification “based on their individual circumstances in light of the language of the certification and SBA guidance.” If following the review, the SBA determines that a borrower did not make the certification in good faith, the 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 the SBA, the SBA will not pursue administrative enforcement or referrals to other agencies based on its determination. The exact SBA guidance can be found below and at this link here.
If you have questions, FMJ can help – please contact 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.
HOW WILL THE SBA REVIEW BORROWERS’ REQUIRED GOOD-FAITH CERTIFICATION CONCERNING THE NECESSITY OF THEIR LOAN REQUEST?
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, 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.
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