On May 13, 2020, the U.S. Department of the Treasury and the Small Business Administration revised their Frequently Asked Questions concerning the Paycheck Protection Program (“PPP”) to provide additional guidance on how it would review a borrower’s certification that “[c]urrent economic uncertainty makes this [PPP] loan request necessary to support the ongoing operations of the Applicant.” 

According to FAQ #46,  “[a]ny 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’s reasoning is that “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.”

Borrowers who received $2 million or more will continue to be subject to review by the SBA for compliance with the good faith certification requirement. If the SBA determines that the borrower did not have an adequate basis to certify the necessity of the loan request, then the SBA will notify the borrower of this determination and seek repayment of the PPP loan balance and the borrower will not be eligible for loan forgiveness. The guidance provides that as long as the borrower repays the loan after receiving such notification from the 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.” 

The full text of FAQ #46 reads:

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 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.

A complete and current copy of all FAQs regarding the PPP loans, can be found here. If you have any questions regarding the PPP loan program, please contact Berenzweig Leonard’s attorneys for additional information. 

Stephanie Wilson is a Partner and Co-Director of Government Contracts at Berenzweig Leonard. She can be reached at [email protected]

DISCLAIMER: This article was released on May 13, 2020 and represents Berenzweig Leonard’s interpretation of the law and circumstances at the time of publication. As the situation surrounding the COVID-19 pandemic is changing on a daily basis, new or additional developments may impact matters discussed in this article. Please contact Berenzweig Leonard’s attorneys for up-to-date information.