CARES Act: Paycheck Protection Program Loans

In guidance issued in late April, after many Paycheck Protection Program (“PPP”) loans had already been funded and the proceeds were being spent, the SBA said borrowers needed to assess their need for the loan – even if they had already certified in “good faith” that the cash is necessary to support ongoing operations. The guidance retrospectively honed the scope of loan eligibility, imperiling some loan recipients. Although the CARES Act expressly waives the SBA’s normal “credit elsewhere” inquiry for purposes of the PPP, the SBA newly said that the good faith certification could only be sustained if program participants considered both their current business activity and their ability to access other sources of liquidity to support their operations. The SBA also suggested it would put out more guidance – which could further impact loan eligibility.

Suddenly, PPP recipients who had confidently certified in good faith that the loan was necessary in the face of the pandemic were caused to reconsider their eligibility.[1] Heightening the significance of this uncertainly, the SBA also declared that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. 

Wielding this uncertainty and the potential likelihood of enforcement audits to prompt the return of unwarranted loan proceeds, the SBA established a “safe harbor,” providing that any borrower who applied for a PPP loan prior to April 24, 2020 but who repaid the loan in full by May 7, 2020, would be deemed by SBA to have made the required certification in good faith. This date for repayment was then extended to May 14, 2020.

Yesterday, on the eve of the May 14, 2020 “safe harbor” deadline, SBA issued new guidance (“FAQ#46”) explaining how the SBA would review borrowers’ required good-faith certifications concerning the necessity of their loan requests and establishing a new role for the $2 million threshold. The SBA has now declared that any borrower who 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.

The SBA also reaffirmed in FAQ #46 that loans of $2 million or more will be subject to review for compliance with program requirements. The guidance says that it is “important” to acknowledge that “such borrowers 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.” But, for those borrowers found to be lacking 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.”

Late last night, the SBA issued FAQ #47 which again extended the repayment “safe harbor” deadline from May 14 to May 18, 2020, giving borrowers the opportunity to “review and consider” FAQ #46.

SBA’s attention to enforcement review with respect to eligibility may be a precursor of things to come as all of this eligibility guidance has been promoted before promised SBA guidance on loan forgiveness. The PPP rules are still evolving, even retrospectively, and the changing loan landscape requires attention to careful corporate compliance. Business owners concerned about their eligibility, especially those who received loans of $2 million or more, should have documentation within the company evidencing a discussion of “good faith,” the examination of access to other sources of liquidity to support their operations, and the determination that the PPP loan is necessary to support ongoing operations.

Those loan recipients who believe they are no longer eligible and now seek a “safe harbor” to avoid any risks of enforcement should immediately contact their lender, as the deadline to return the loan proceeds is May 18, 2020.

[1] It still remains unclear what level of alternative liquidity may jeopardize the certification and program eligibility.

Related Practice Areas

Business Law Commercial Lending