PPP Loan Question # 46: “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?
To our clients and friends,
Over the last two weeks we have seen a significant drop off in the demand for the SBA PPP loan. This drop in demand is in part, caused by a combination of several factors:
- The media and political comments regarding certain companies getting the PPP loans where the company’s need for the loan is being challenged.
- The fear that the rules will change based on the political winds and the SBA will scrutinize each loan and based on their subjective opinion, determine if the loan was needed.
- The magnitude of the penalty that could be assessed if it is determined that the applicant did not need the loan.
The issue is the “certification” that each borrower signs attesting to their need and qualification. In addition to the commitment to use the funds to meet payroll and certain qualifying non-payroll costs, it also includes the following language.
“Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant”.
This paragraph is extremely subjective with no “bright line” tests to provide guidance. Clearly, if your business is growing, and has a product or service that is in greater demand during the COVID-19 period, you probably may not be able to certify to this paragraph. However, most of us do not fall into that camp and what we do not know is “what we don’t know”. We have no idea as to the length of the shutdowns or what happens if we get a significant spike in the severity of COVID-19 and need to shut down again.
As a firm we have relied on that uncertainty clause to give clients guidance as to whether they meet the definition of “economic uncertainty”. In most cases, the clients that we have helped with the PPP loans meet this test.
Here is the guidance we just received in “Question “46”:
Question #46: 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 “current 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 many of our clients this is important guidance. It should bring some comfort knowing that the SBA focus for compliance will be on loans more than $2,000,000. In addition, if a smaller loan is challenged you will have the opportunity to repay and remove yourself from exposure to penalties.
We are still waiting for additional SBA guidance on “loan forgiveness” and would expect that guidance to be forthcoming in the next week. We will provide an update as soon as the SBA provides the long-waited forgiveness guidance.
In addition, there is a “political wind” that may result in some changes to the current SBA and IRS guidance. This may include such items as:
- Extending the 8-week period in which PPP loan proceeds can be used
- Eliminating the 75% payroll cost requirement to allow companies to include a larger amount of non-payroll costs.
- Extending the rehire date past June 30th for purposes of determining the adjustment based on change in full-time equivalents during the 8-week measurement period.
- Allowing the deductibility of costs that were used for purposes of determining the PPP loan forgiveness.
We have no comfort in saying these changes will be made but clearly, the SBA PPP loan program has flaws and inequities that the SBA, Treasury & Congress are trying to mitigate to create fairness.
All we can say is stay tuned and hope this update helps!
Amy, Linda, Rod, and the AHS team: Angela, Bethe, Bob, Jonel, Juli, Katie, Mary, Eric, Eileen, Phil, Rick, Spencer, Tracey, Chantel, Angie, Bobbi, Janet, John, Dave & Dan