By: Courtney Williams
Certification in PPP Loan Application
In the rush to apply for Paycheck Protection Program (PPP) loan, you might have overlooked that in applying for the loan you were certifying that current economic uncertainty made the “loan requests necessary to support the ongoing operations.” The importance of that certification is now becoming more clear.
Abuse and Fund Exhaustion Draws Scrutiny
Press coverage revealed that several publicly traded companies received large PPP loans. Other news stories exposed the difficulties many of small businesses had in securing PPP loans when the initial funds ran out. The Small Business Administration (SBA) took action to address the situation.
First, the SBA warned that “all borrowers should carefully review the required certification [and] must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” Second, the SBA gave borrowers until May 7, 2020 to repay the loans, if they discovered that they applied for a PPP loan without meeting this requirement. The SBA announced that it was going to review applications on all loans in excess of $2,000,000. It also announced it would review some other loan applications as appropriate.
Further Guidance and a New Deadline to Repay
This SBA came without other detail. SBA issued it after most borrowers had already made the required certification and received their loan proceeds. With good reason, borrowers began to worry that the SBA was going to audit their loans months or years later and claim that the borrowers did not really need the loans. Hindsight is 20/20. And an after the fact review might not take into account the economic uncertainty borrowers faced when they applied. On May 5, 2020, the SBA issued another FAQ that extended the deadline to repay the loan until May 14, 2020 and stated that the SBA would issue additional guidance on how it will review the certification prior to May 14, 2020.
Today, the SBA issued a safe harbor rule that provides “[a]ny borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2,000,000 will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” The SBA’s reasoning for this safe harbor is that “borrowers with loans below this threshold are generally less likely to have access to adequate sources of liquidity in the current economic environment. . . .” Borrowers with loans greater than $2,000,000 may still have a basis for making the certification based on their individual circumstances. If the SBA review determines that a borrower lacked an adequate basis for the certification in the loan application for a loan over $2,000,000, the SBA will seek repayment of the PPP loan. Additionally, the borrower will not be eligible for loan forgiveness. If the borrower repays the loan after notification from the SBA, the SBA will not pursue administrative enforcement or referrals to other agencies.
This is good news and provides certainty for borrowers with loans less than $2,000,000. It also provides comfort for borrowers with loans greater than $2,000,000. The SBA will not pursue administrative enforcement in cases of improper certification, if the borrower repays the loan.