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Type: Law Bulletins
Date: 05/13/2020

SBA Part Eleven: SBA Issues Further Guidance on PPP Loan Necessity Certification

On May 13, 2020 the Small Business Administration (SBA) issued additional guidance related to the need certification noted in previously issued FAQs number 31 and number 37. See SBA Part Nine and Part Ten. Below are important highlights from the SBA and Department of Treasury’s evolving FAQ document.

The important take-a-ways are:

  1. Borrowers who, together with their affiliates, received PPP loans in an amount less than $2 million will be deemed to have made the certification in good faith. Borrowers receiving less than $2 million in PPP loans should nevertheless maintain accurate and complete records for loan forgiveness purposes and are still subject to a random audit of such loans for a period of up to ten years.
  2. A borrower who, together with its affiliates, received a PPP loan greater than $2 million will be required to show an adequate basis for its good faith determination. Accordingly, it is important for these PPP borrowers to complete a thorough needs analysis because these loans will be audited when the borrower applies for loan forgiveness. Furthermore, there is a possibility of additional audit by the Department of Justice, or The Pandemic Response Accountability Committee or Office of Special Inspector General for Pandemic Recovery for up to ten years after the loan application date. See SBA Part Eight and Enforcement by the DOJ Related to PPP Loans for additional information.

The pertinent FAQ states:

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.

For further information, please contact any member of Taft’s SBA Task Force.

Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.

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