Ice Miller LLP: Insights

SBA Issues Guidance on Borrowers’ Good Faith Certification of Need for PPP Loans

On May 13, 2020, the SBA issued FAQ 46 regarding the following certification each borrower must make regarding the necessity for obtaining a Paycheck Protection Program (PPP) loan: “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” FAQ 46 builds on the SBA’s prior guidance contained in FAQs 31, 37 and 43, which together provide that a borrower who returns its loan proceeds in full by May 14, 2020 will be deemed to have made the certification in good faith.

Borrowers whose loans are less than $2 million will be deemed to have made the certification in good faith.
FAQ 46 creates a safe harbor for a borrower whose loan(s), in the aggregate with its affiliates, total(s) less than $2 million. Such borrowers will be deemed to have made the certification in good faith. The SBA’s reasoning is that this safe harbor promotes economic certainty for such borrowers, who in general have more limited resources and less access to sources of liquidity than borrowers with larger loans. The SBA also notes that the safe harbor will allow the SBA to focus its resources on larger loans.

While not stating that loans under $2 million are exempt from audit, it may be that the SBA will not audit any loan under $2 million unless otherwise confronted with fraud or other indication of malfeasance, perhaps uncovered by a lender, third party or a whistleblower.

Loans over $2 million will be audited, and if the SBA determines a borrower did not have an “adequate basis” for making the certification in good faith, the borrower will be given the chance to repay the loan.
Borrowers who have loans over $2 million will be audited and will have to prove they made the certification in good faith. In this new guidance, the SBA has indicated that if they determine that any such borrower lacked an adequate basis to make the determination, the borrower will be given an opportunity to repay the loan funds. If the borrower repays the loan funds, then it appears that the borrower will not be referred to any other agency or subject to further proceedings based on the audit. If the borrower does not pay the loan funds, FAQ 46 does not explicitly state that fines and prosecution will follow, but the implication is that it is possible. Additionally, as with loans under $2 million, there would still be risks based on fraud or other indication of malfeasance, perhaps uncovered by a lender, third party or a whistleblower.

A link to the PPP FAQs can be found here: Frequently Asked Questions (5/13/2020). The full text of FAQ 46 is below.

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,²⁰received 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.

If you would like further information or to discuss this guidance, please contact Greg Gorospe or Chris Magill of Ice Miller’s COVID-19 Task Force.

Please contact our COVID-19 Task Force if you have any questions about managing the risks of the coronavirus pandemic. Our Task Force leadership consists of partners Josh Christie, Tami Earnhart and Christina Fugate. Also see our Coronavirus (COVID-19) Resource Center for additional resources, which is updated daily.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. It speaks only to guidance available as of May 13, 2020. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.