Good News for Businesses: New PPP Loan Guidance Highlights Safe Harbor Provisions
May 13, 2020 by Joshua Smeltzer
Many businesses sought the popular CARES Act relief under the Payroll Protection Program (PPP), which provides loans to businesses to retain employees and maintain payroll. The loan amount could also be completely forgiven under the proper circumstances. Although additional guidance was pending, many borrowers were not overly concerned until the Treasury Department responded to news reports of many public companies receiving PPP loans at the expense of smaller businesses. In response, the Treasury Department promised audits for any loan over $2 million and “spot-checks” for lower loan amounts. On April 23, 2020, the SBA and Treasury issued FAQ 31 telling borrowers to reevaluate certifications that loan amounts were “necessary to support ongoing operations.” Specifically, FAQ 31 indicates that borrowers must, as part of the certification, take into account “current business activity” and the ability to “access other sources of liquidity…in a manner that is not significantly detrimental to the business.” The terms “necessary” and “detrimental to the business” are not defined and “sources of liquidity” was not explained. As an example, the SBA and Treasury indicated that it is “unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith.” Businesses owned by private companies were also advised to make the same reevaluations if the private company had sources of liquidity available to the business.
As a result of the public uproar and supplemental guidance, many companies repaid loan amounts to avoid negative publicity. The SBA guidance, however, provided a limited safe harbor for businesses. The SBA explained that repayment of loan amounts before May 7, 2020 would “be deemed by SBA to have made the required certification in good faith.” This deadline was extended until May 14, 2020 because the SBA indicated it would issue additional guidance concerning how the agency will review the required certification. Today, the day before the deadline, borrowers finally received the promised additional guidance in the form of an additional FAQ – FAQ 46.
Here’s what borrowers should know regarding the new guidance:
- Loans Below $2 Million Avoid Audit. Borrower certifications for loans below $2 million are deemed to have been made in good faith. In support of this position, the SBA explained that these borrowers are “less likely” to have access to adequate sources of liquidity. Probably more accurate is the SBA’s comments that it must conserve “its finite audit resources” so it is focusing on larger loans “where the compliance effort may yield higher returns.”
- Loans $2 Million or Above Receive an Opportunity to Make Their Case. The SBA acknowledged that loans above $2 million may still have a basis for their good-faith certifications based on “individual circumstances.” The SBA will still review the loans for compliance, but if that review results in a determination that a borrower “lacked an adequate basis for the required certification” the result is not immediate enforcement. This is welcome news for many borrowers who were weighing the repayment of loan amounts against potentially large penalties and other negative civil or criminal enforcement repercussions. The new guidance indicates that the SBA will provide notification to the borrower that it believes they lacked adequate basis for the certification. The lender will also be notified that the borrower is not eligible for forgiveness. However, if the borrower repays the loan after receiving this notification (no indication of timeframe) then the SBA “will not pursue administrative enforcement or referrals to other agencies based on its determination.”
- Documentation Remains Important. If a borrower of more than $2 million decides to keep their PPP loan amounts, they will still undergo scrutiny by the SBA. The forgiveness request procedure is not completely finalized. However, since some borrowers are approaching the end of the 8-week loan period, details should be released soon. Audit review will occur, according to SBA guidance, following the request for forgiveness. This request for forgiveness may require, or at least provide, the opportunity to make an affirmative showing of good faith compliance. Documentation clearly showing a need for the funds and explaining how any potential sources of liquidity could not be used without being detrimental to the business will be a key factor in receiving a positive result. Obviously, documentation at the time of application is better than current projections. However, documentation now is better than documentation created during an audit. The point is to diligently investigate your eligibility decisions and gather documentation from the time of application and put current corporate decisions in writing.
Guidance on PPP loans and their enforcement changes quickly, usually daily, and any situation requires analyzing the current state of the law. Also, any legal determination requires a complete understanding of the relevant facts and circumstances. If you have questions regarding your specific situation, please contact a Brown Fox attorney.