In the past few weeks, the SBA has been providing guidance to borrowers related to the PPP Loan. Recently, the SBA opened a “can of worms” when they wrote FAQ #31 (click here to see how the SBA addressed FAQ #31). Frankly, FAQ #31 just created more confusion and questions than provided clarity and answers to borrowers. Many business owners who applied for the PPP loan under the CARES Act have been wondering how to address the ‘Good Faith’ certification regarding the necessity of their loan request (addressed in FAQ #31) or, whether pursuant to the guidance, they should return their PPP money.
Just in the nick of time (just one day before the date the SBA said people could return their PPP money without consequences (including criminal consequences)), the SBA addressed this issue in FAQ #46, below (and can be found on page 16 of the complete list of FAQs).
In short, the new FAQ #46 clarifies that borrowers of less than $2 million in PPP (including amounts borrowed by all affiliates of the borrower) can safely assume that they made their loan request in good faith. The SBA has stated that their assumption is that borrowers of less than $2 million are generally less likely to have had access to sources of liquidity in the current environment than those who took loans in excess of $2 million.
Borrowers of more than $2 million in PPP money, on the other hand, should consider documenting and being prepared to justify their decision to take the PPP loan and address the concerns raised in FAQ #31. However, the SBA clarified that if it concludes that the borrower lacked “adequate basis for making the good-faith certificate based on their individual circumstances”, then the SBA will notify the borrower that their loan will not be forgiven. If the borrower then repays the loan, then the SBA will not take further action (which could have potentially including criminal prosecution and significant fines).
FAQ #46 should come as great news to all borrowers of amounts less than $2 million. In essence, such borrowers are provided with “safe harbor” exemption from the examination of their good faith certification on the need for the loan.
Here is the text of FAQ #46 (with emphasis added by Stan Doida):
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, 20 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.