With the issuance of Frequently Asked Questions 31 and 37 a couple of weeks ago by the Small Business Administration (SBA), many business owners were unsure how to proceed with their Paycheck Protection Program loans. The SBA highlighted that a business must “need” the loan (and certify the “need”) in order to receive one without potentially being subject to penalties. Further confusion was created as no clear definition of “need” was provided with the guidance.

The SBA has now issued new guidance that attempts to bring additional clarity to defining “need” by providing a safe harbor test. The safe harbor test will apply to loans with an original principal amount less than $2 million for a borrower when combined with any loans for affiliated businesses. These borrowers will be deemed to have met the required certification of “need” in good faith.

Borrowers with loans greater than $2 million will not meet the new safe harbor. Instead, they will need to demonstrate they had an adequate basis for making the good-faith certification based on their individual circumstances. Should the SBA determine that there was not an adequate basis for making the certification, the SBA will require the loan to be repaid. As long as the borrower returns the full loan proceeds, they will not be subject to any administrative enforcement. While this guidance still doesn’t provide a clear definition of “need” for these borrowers, it should help those still struggling with determining their “need” for these larger loans to move forward with the loans without fear of being charged any significant penalties. The SBA has made it clear (and has already begun pursuing actions) that it will seek potential criminal and civil penalty enforcement against applications who obtained loans through fraudulent filings.

The full text of FAQ 46 is below. Borrowers who do not feel they can certify the “need” in good faith have until May 14, 2020 to return the funds.

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, 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 the 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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Len Nitti

Author Len Nitti

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