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SBA Grants Safe Harbor For Good Faith Need Certification For PPP Loans Under $2 Million
On April 24, 2020, the SBA extended a safe harbor to employers who applied for a Payroll Protection Program (“PPP”) loan on or before April 23, 2020 – but who were now questioning whether they could certify in good faith that the loans were needed to support ongoing operations. A PPP loan borrower who repaid the loan in full by May 7, 2020, would be automatically deemed by the SBA to have made the required good faith certifications regarding their need for the PPP loan. On May 5, 2020, the SBA extended this safe-harbor deadline from May 7, 2020 to May 14, 2020, and also stated that it would issue additional guidance on how to assess need for certification purposes.
We now have that additional guidance! Specifically, on May 13, 2020, the SBA added to its FAQ document, question 46, “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”
In response, the SBA explains, again, that borrowers must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” However, the SBA then states that the following safe harbor will apply to the SBA’s review of whether need was properly certified: a borrower, together with its affiliates, who “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.”
The SBA justifies this new safe harbor for loans under $2 million on the basis that: borrowers with loans below $2 million generally have less access to adequate sources of liquidity; this safe harbor will promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees; and this will enable the SBA to focus its limited resources on reviewing larger loans.
With respect to larger loans, the SBA emphasizes in question 46 that borrowers with loans greater than $2 million must still have an adequate basis for making the required good faith certification of need. Additionally, the SBA states that all PPP loans in excess of $2 million, “and other PPP loans as appropriate” will be subject to review by the SBA. “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.” Moreover, 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.”
Immediate take-a-ways include:
- Borrowers with loans under $2 million will be automatically deemed to have made the required certification concerning necessity.
- Borrowers with loans in excess of $2 million must still have an adequate basis for making the required good faith certification of need.
- All PPP loans in excess of $2 million, and potentially some smaller loans as the SBA deems is appropriate, will be subject to review by the SBA, however, if the SBA determines that a such a borrower lacked an adequate basis for certifying need, the borrower will be given an opportunity to repay the loan (without any forgiveness), in which case the SBA will not pursue administrative enforcement or referrals to other agencies on the sole basis that need was not properly certified.
- Question 46 did not extend the deadline to return PPP loan proceeds. Accordingly, borrowers of loans in excess of $2 million who are still questioning whether they certified in good faith that the loans were needed to support ongoing operations, have until May 14, 2020 to repay the loans and receive the previous safe harbor designation that need was certified in good faith.
This guidance is fresh off the press, and LCW will continue to evaluate and watch for further news from the SBA. In the meantime, employers are encouraged to consult with their lenders, auditors, and other appropriate advisors for guidance on how this information impacts their individual situations.