column—entitled “Guidance on Certification for Payroll Protection Program Loans-Repayment Rather Than Penalties”—addresses the SBA's provisions of FAQ #46, regarding good faith certification of the necessity of a Payroll Protection Program loan.
The Small Business Administration previously issued a safe harbor for Payroll Protection Program loans that may not have been “necessary”; if repaid before May 7 (extended to May 14), such loans would be considered made in good faith, and all loans of $2 million or more will be reviewed. The extension was to permit the SBA to issue further guidance. This morning, the SBA published a welcome new FAQ #46. The guidance did not reference the repayment safe harbor or return of PPP loans (which therefore remains in effect), but provided a new safe harbor that PPP loans less than $2 million would be deemed made in good faith (presumably subject to review for other abuses) and then, more importantly, addressed the review of PPP loans and its consequences.
We expected guidance regarding what constitutes “other sources of liquidity” as required by FAQ #31, and for borrowers to have to analyze availability of other funding. Instead, the SBA merely reiterated that it will review PPP loans of $2 million or greater for compliance with the PPP loan application and the program requirements in the Interim Final Rules. If a borrower lacks an “adequate basis for the required certification concerning the necessity of the loan”, then the SBA will request that the loan be repaid at that time and such loan will not be eligible for any loan forgiveness. If the PPP loan is repaid, then the SBA will not pursue enforcement of the potential penalties stated in the PPP loan application (which require knowingly making false statements, which should be different than a good faith certification of necessity) or refer the matter to other agencies. None of this will affect the SBA’s guarantee of the loan to the applicable lender.
It is therefore vital that borrowers document at this time the necessity of the PPP loan and the basis for their good faith certification, taking into consideration that the CARES Act does not require an inability to borrow from other sources and that the primary purpose of PPP loans is to fund current payroll. Also, borrowers should still take into account current activity, the ability to access other sources of liquidity, and whether using such other sources would result in significant detriment to the business of the borrower.
When the SBA first gave notice of this review via FAQ #31, it followed with a new Interim Final Rule published several days later. We expect another such Interim Final Rule to formally document this matter, which may or may not expand on the provisions of FAQ #46.
For further information on the Paycheck Protection Program, click on the link below.