SBA Provides Good Faith Safe Harbor Certification To Support Loans
the Paycheque Protection Program provided under CARES Law provided the necessary funding for small businesses affected by the COVID-19 pandemic. However, it also raised uncertainties, if not concerns, about the eligibility for the cancellation of PPP loans and the proper use of PPP funds.
The crux of this question is the lack of clarity in the certification of difficulties required by the loan request. For more on this topic, see my previous articles on Forbes.com with advice from former federal prosecutors on whether to apply for the loan and how to avoid problems later, and small business lawyers on what to do when you get the loan.
Now the Small Business Administration (SBA) of the United States, in a new FAQ # 46, provided a clear and necessary test on good faith certification regarding the loan application, with a safe harbor that automatically takes care of your need for funds.
Certification of difficulties in applying for a PPP loan
Shortly after the PPP loan application came out, I drew attention to the vagueness of the wording of its hardship certification. As I noted, it was difficult to interpret unless your business was closed directly or indirectly by a government decree relating to pandemic mitigation (see Free Money for Small Business? Beware of the Legal Risks of the Paycheck Protection Loan Program until further guidance is issued). The arduousness certificate states: “The current economic uncertainty makes this loan application necessary to support the applicant’s ongoing operations.
As nearly all businesses experience “economic uncertainty” under the unprecedented circumstances of the COVID-19 pandemic, the wording of this hardship or necessity certification has left a substantial gray area. It also contributed to the initial rush of PPP loans during the program’s first funding cycle. Unfortunately, in the rush for loans, some small businesses that urgently needed help in a crisis have been forced out.
For small businesses and their legal and accounting advisors, checking SBA guidance FAQs has become as common as checking scores in the NBA. In FAQ # 31, released April 23, the SBA attempted to clarify what the full wording of this certification means, at least for large companies with cash flow (see my previous article).
But this has only increased uncertainty as to whether the guidelines apply to any business with cash. FAQ # 39 added more concern to this when it stated that the that the SBA will review all loans over $ 2 million, in addition to other loans, if any, after the lender submits the borrower’s loan forgiveness request. This formalized a statement made by US Secretary of the Treasury Steven Mnuchin.
Now, in FAQ # 46 (reproduced in its entirety below), the SBA has finally provided a safe harbor, at least with regard to its own audits (some in bold for emphasis):
46. Question: How will the SBA review the good faith certification required of borrowers regarding the necessity of their loan application
Reply: When submitting a PPP application, all borrowers must certify in good faith that “[c]The current economic uncertainty makes this loan application necessary to support the applicant’s ongoing operations. The SBA, in consultation with the Treasury Department, has determined that The following safe harbor will apply to the SBA’s review of PPP loans regarding this matter: Any borrower who, together with its affiliates, has received PPP loans with an initial principal amount of less than $ 2 million will be deemed to have provided the required certification regarding the necessity of the bona fide loan application.
The SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have access to adequate sources of liquidity in the current economic environment than borrowers who have obtained loans. more important. This safe harbor will also promote economic security, as PPP borrowers with more limited resources will strive to retain and rehire their employees. Additionally, given the large volume of PPP loans, this approach will allow the SBA to keep its limited audit resources and focus its reviews on larger loans, where the compliance effort can generate higher returns.
It is important to note that borrowers with loans greater than $ 2 million who do not meet this Safe Harbor may still have an adequate basis for performing the required good faith certification, depending on their individual circumstances. in light of the language of certification and SBA guidelines. The SBA has previously stated that all PPP loans over $ 2 million, and other PPP loans, if applicable, will be subject to review by the SBA to verify their compliance with the program requirements set out in the interim final rules. of the PPP and in the borrower’s application form. If the SBA determines during its examination that a borrower did not have an adequate basis for the required certification regarding the necessity of the loan application, the SBA will request repayment of the outstanding balance of the PPP loan and notify the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving the notification from the SBA, the SBA will not pursue administrative execution or referrals to other agencies based on its determination regarding the certification regarding the necessity of the loan application. . The SBA’s decision regarding certification regarding the necessity of the loan application will not affect the SBA loan guarantee.
What This SBA Text Block Means
Below are some thoughts on the new SBA guidelines:
1. Access to liquidity appears to be the determining factor for eligibility for PPP loans.
2. Businesses requesting amounts less than $ 2 million are automatically considered to meet the loan necessity standard even if they To have significant savings, good banking relationships or access to new investment capital. One possible reason for this is that the pace of PPP loan applications and the use of funds by small businesses has slowed due to fear of eligibility complications.
3. Businesses with loan amounts less than $ 2 million will not be audited by the SBA for certification of necessity. But this is not a free pass for a government investigation for loan fraud or misuse of loan funds. More watchdogs than the SBA monitor PPP loans. As pointed out in my recent article Paycheck Protection Program Loans and Government Investigation Risk: Advice from Former Federal Prosecutors, a suspicion of PPP loan fraud or embezzlement is likely to prompt a separate investigation by the Special Inspector General for Recovery in the Event of a Pandemic (“SIGPR”), the local United States attorney (and the Department of Justice if separate), or committees of Congress.
For example, according to a declaration from the US Department of Justice (DOJ), the DOJ is prosecuting two men in New England for alleged fraud in obtaining a PPP loan of less than $ 2 million ($ 543,881). According to the allegation, the two men claimed that they had “dozens of paid employees in four different business entities when in fact no employee worked for any of the companies.”
4. The SBA will focus its audit resources on larger loans. If a business has borrowed more than $ 2 million and an SBA audit concludes that the business does not deserve the PPP loan, repayment of the loan means that the SBA will not pursue the case or refer it. to other agencies for investigation. However, as noted above, other agencies can still do this on their own initiative.
Needless to say, if the media reports the SBA’s determination, the business risks negative publicity. Keep in mind that Shake Shack voluntarily returned their PPP loan funds, even without any intervention from the SBA, but still faced criticism from the court of public opinion. (see my article Paycheck Protection Loan Backlash: How to Defend Your Business’ Reputation and Avoid Shaking Yourself.)
5. The SBA’s loan guarantee is not affected by its decision as to whether your business needs the loan.
Law Firm Opinions Welcome SBA Clarification
In one Covid19 alert, the Morse law firm in the Boston area interprets the new SBA FAQs as a sign that the US Treasury, in matters of administrative policy, do not subject a PPP borrower with a loan amount of less than $ 2 million to an audit on their good faith certification of “economic necessity” in the loan application. Morse observes that the SBA’s position “is significantly different from previous guidelines on the subject.”
David A. Laurent, an attorney for the Detroit-area law firm Couzens Lansky, also interprets this as a “substantial relaxation” of the SBA’s position on the good faith certification required for PPP loans. “This is great news for small borrowers who were concerned about the SBA’s past (threatening) guidelines on the need for the loan,” he told me. “In addition, this is also great news for borrowers with loans over $ 2 million; If the SBA later determines that the borrower did not have a good faith basis for certification of the necessity, the SBA will give the borrower the option of repaying the loan before pursuing penalties. He also reminds clients that the deadline to repay a PPP loan and avoid the problem is now May 18, 2020.
My other articles on PPP loans on Forbes.com