On the eve of the Small Business Association’s (SBA) May 14 deadline for businesses to return Paycheck Protection Program (PPP) funds — if they remain uncomfortable with the Uncertainty Certification1 they made when applying for a PPP loan — the SBA updated its PPP loan FAQs to add FAQ 46. Wisely, in our opinion, this latest FAQ eschews guidance about how a PPP borrower should assess whether its access to capital is sufficient to enable it to cope with the risk that pandemic-induced economic uncertainty will cause it substantial hardship. Instead of guiding borrowers on the criteria for making that uncertainty certification, FAQ 46 implicitly recognizes the difficulties of making that assessment and therefore limits the downside risk of making an honest mistake.
There are three key takeaways from FAQ 46:
Here is the exact language of FAQ 46 — with bold, italicized emphasis added and footnotes omitted:
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.
In FAQ 39, the SBA effectively announced a policy of reduced scrutiny of the uncertainty certification of borrowers who received PPP loans of less than $2 million by subjecting PPP loans in excess of $2 million to automatic review. In FAQ 46, the SBA expands this to a policy of complete protection from the uncertainty certification for PPP loans under $2 million (i.e., a safe harbor). The SBA’s articulated reason for deeming the uncertainty certification to have been made in good faith is (the highly questionable factual predicate) that (i) borrowers in this category are less likely to have access to adequate sources of liquidity than borrowers that obtained larger loans, (ii) the safe harbor will promote economic certainty as these borrowers work to retain and rehire employees, and (iii) the SBA has finite audit resources.
Obviously this articulated rationale reflects a political decision because there is no factual reason to presume that just because the borrower has lower payroll costs it automatically has less access to capital. Nevertheless, this safe harbor is welcome news to borrowers on this end of the PPP loan spectrum. It is important to note however, that:
The SBA specifically states that the lack of a safe harbor for PPP loan of $2 million or more does not cast suspicion on these loans. Indeed, FAQ 46 acknowledges that such borrowers may have an adequate basis for making the uncertainty certification in good faith “based on their individual circumstances in light of the language of the certification and SBA guidance.” Unfortunately, FAQ 46 does not provide additional color with respect to the contours of the uncertainty certification or what factors the SBA may ultimately determine to be material in examining the basis for such certification.
Accordingly, our prior position about the need to undertake due diligence about the uncertainty certification and memorialize this due diligence remains the same. We have written an article and published a slide deck about these steps, including the recommended documentation necessary to establish a borrower’s good faith.
There has been significant concern about the potential penalties — both civil and criminal — a PPP loan borrower could face if the SBA determined that the borrower did not make the uncertainty certification in good faith. FAQ 46 significantly reduces these risk (but does not remove them) by limiting the downside exposure should the SBA successfully challenge a borrower’s position. As explained in FAQ 46, if the SBA determines a borrower lacked an “adequate basis” for the uncertainty certification, it will request that the borrower repay the PPP loan, with none of the loan forgiven. If the borrower repays the PPP loan, the SBA will not pursue administrative enforcement or referrals to other agencies based on its determination.
FAQ 46 provides all PPP borrowers some degree of comfort with respect to taking and using PPP loans in a manner consistent with the CARES Act and applicable guidance. However, it does not eliminate all legal risk related to the uncertainty certification. For example, it only discusses actions the SBA will not pursue. Other risks remain, such as the risk arising from a whistleblower complaint under the federal False Claims Act.
What about borrowers who returned their PPP funds because they felt uncomfortable with the certification risk but now take comfort in FAQ 46? Those borrowers should contact their lenders immediately to determine whether the repayment has been processed; hopefully the lender has been too busy to handle the repayment paperwork with the SBA so the lender can accommodate the request.
But if the lender has already processed the repayment with the SBA, then it is unclear whether the borrower can regain the funds. One of the other PPP provisions is that borrowers can only obtain one PPP loan, and there is no guidance yet as to whether a borrower that repaid its first PPP loan can request a new one.
1 The “uncertainty certification” is that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Applicants must make this certification in good faith.
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