PPP Loan Deadline to Payback or Face Potential Investigation Extended to May 14th
May 6, 2020 by Joshua Smeltzer
The adage, “no good deed goes unpunished”, seems applicable to the current status of the Paycheck Protection Program (PPP) loans provided under the CARES Act. Many businesses were facing an uncertain future and but for the government assistance would have terminated or furloughed employees. One of the most popular programs were PPP loans offering money to keep workers employed and the potential of full forgiveness of the loan amount after an 8-week period. However, in the wake of some news stories the Small Business Administration (SBA) and the Treasury Department have asked some businesses to reconsider and repay their loans or face potential civil and criminal consequences.
The Treasury Department has threatened audits for any loan over $2 million. Loans below that amount could also be audited depending on the facts. Regardless, the enforcement provisions of the CARES Act provide for multiple agencies to investigate and exercise enforcement involving civil penalties and criminal investigations and prosecutions.
On April 23, 2020, the SBA and Treasury released FAQ 31 advising businesses to review affiliation rules and whether their certifications for accuracy. Specifically, the certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA and the Treasury told businesses to consider their current business activity and the “ability to access other sources of liquidity” in assessing the certification. FAQ 31 also allows businesses to “repay the loan” if the new guidance gives them concern and it “will be deemed by SBA to have made the certification in good faith.” The deadline to repay loan amounts, previously May 7th, is now extended to May 14th pursuant to newly released FAQ 43.
If you have a PPP loan, here are some things to consider when deciding whether to repay your PPP loan on or before May 14th:
- Documentation. If your PPP loan is $2 million or more it appears that an audit is inevitable. Even if less than that amount you may face an audit on your eligibility. Many businesses were in a rush to apply before funding was gone and may not have taken great steps to document their eligibility. Now is the time to gather data from the time of application regarding calculations for loan amounts and need for the funds “to support ongoing operations.” Also, with the addition of guidance under FAQ 31, it is wise to document the specific need for the funds following that advice as you consider repayment. All of this documentation will be needed if you decide to keep the funds and face inquiry. 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 at the time and following new guidance after application.
- Consider Additional Sources of Liquidity. FAQ 31 specifically asks businesses to consider other sources of liquidity outside of PPP loans. There is an active debate regarding whether this should be a requirement and if it conflicts with the language and intent of the statute. Regardless, if a business has any “access to other sources of liquidity” it would also be wise to document why those funds are not readily available or why they were not used instead of PPP loan proceeds. If questioned, businesses will be required to present evidence and explain why the PPP loans were necessary and other funds were otherwise unavailable or otherwise needed.
- Don’t Ignore Future Business Risks. The safest course for reducing or removing audit risk is, of course, repaying the loan by the deadline. However, returning the money may have real financial consequences for a business who made decisions to maintain payroll at the expense of financial viability beyond the 8-week period covered by the forgiveness period. Recently, in the case of Zumasys, et al. v. SBA, et al., Civ. No. 8:20-00851 (USDC C.D. Ca.), three companies sued in federal court to block guidance regarding returning PPP funds claiming they didn’t furlough or terminate employees and covering those costs after-the-fact will financially harm the business. The same is likely true for other businesses who made business decisions based on a belief that they could use PPP loans to survive the designated 8-week period and then decide on future responses if the pandemic consequences continued beyond that point. Businesses must weigh the risk of surviving an audit without negative consequences against the financial risk of operating without or absorbing the costs of repaying PPP loan amounts.
- Consider Obtaining Legal Advice. Because of time and/or cost constraints, many businesses may have decided to forego legal advice during the application process. With the threat of civil or criminal investigation and penalties, now may be the time to get an attorney involved. Guidance on PPP loans comes out daily and keeping up with all the changes across multiple agencies is almost a full-time job. Rest assured, if the government conducts and audit all mistakes will be highlighted and all nuanced interpretations will be discussed and argued. Obtaining legal advice, especially if you are considering retaining the PPP loan amounts, will allow businesses to assess risk and prepare documentation and arguments for any potential or expected government inquiry. If the PPP loan amount is over $2 million then an audit has been promised by Treasury and legal advice and/or representation will allow you to respond quickly and may avoid a prolonged dispute.
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.