On May 13, 2020, the Small Business Administration (SBA) provided guidance to Paycheck Protection Program (“PPP”) borrowers regarding the implications for eligibility certifications that were made in the borrower’s application (FAQ #46). The SBA clarified that borrowers with loan sizes under $2 million will be deemed to have made certification for eligibility in good faith.
For borrowers with loan sizes in excess of $2 million, SBA reiterated that it will conduct a review of the borrower’s application to determine its good faith certification of need at the time of application. (Read GHJ’s past blog on the loan eligibility and forgiveness process here.)
While the FAQ does not provide guidance as to how it will make such determination, it alerted borrowers that if the SBA deems that the borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, the SBA will seek repayment of the outstanding balance and inform the lender that the borrower is not eligible for forgiveness. If the borrower repays the “outstanding balance” of the loan after notice from SBA, no administrative enforcement or referrals to other agencies will be pursued.
This provides new and important considerations for borrowers that were considering returning funds by May 14, 2020 (updated to May 20, 2020). Most importantly, these new guidelines provide an opportunity for borrowers to have SBA review their applications before returning funds without penalty. This has the practical impact of postponing the safe harbor date based on the outcome of the certification review by the SBA. This is not an exemption or relaxation of the certification requirement for any borrower and should not be viewed as such, regardless of loan size.Borrowers that returned funds prior to this FAQ based on revisiting eligibility certification or out of caution, could potentially have avoided returning funds until SBA’s review. It is not clear if there is an ability to revisit this process with the lender or if a new application for a PPP loan could be made.
Furthermore, GHJ notes that there is nothing in this FAQ that describes what will happen should repayment not be made after notification. Two possible outcomes (and there may be others):
While borrowers that are ultimately denied would not face SBA directed administrative action or referrals to other agencies, they might face scrutiny from congressional or other agency investigations.
- Administrative enforcement will be conducted or referrals to other agencies will be made (as from above); and
- The borrower will receive no forgiveness and be required to repay the loan under the terms of the Promissory Note executed at the time of funding.
There is also a question regarding what the “outstanding balance” to be repaid will mean. While it could mean the remaining balance of funding not yet spent on payroll costs or other allowable expenses, it could also mean the amount borrowed and not yet repaid to the lender, which might be less than the amount borrowed, depending on the length of time it takes SBA to conduct its review.
Borrowers that are unsure if they will satisfy the SBA’s review of the eligibility certification, should ensure continued access to sufficient liquidity to immediately repay the full amount of the loan, if requested by the SBA. As noted in GHJ’s previous blogs, it is important for borrowers to document all actions, discussions and analyses that were undertaken when the application was made and to continue to revisit their eligibility certification.
GHJ is constantly monitoring the situation and will provide more insights and guidance as soon as relevant information is released by the SBA. Please reach out to GHJ’s COVID-19 Resource Team if you have any questions specific to your businesses on the PPP loan, CARES Act or any other COVID-19-related legislation or issues.