Last Minute FAQ Creates Some Relief on Necessity Certification

May 13, 2020

By: Allan Grauberd and Lindsay R. Kaplan

On May 13, 2020, the SBA issued a new FAQ 46, the effect of which appears to provide a safe harbor with respect to the economic necessity certification made in the PPP loan application for borrowers who (with their affiliates) received loans under $2 million. Under the new FAQ, the certification of economic necessity submitted by borrowers of such loans shall be deemed to have been made in good faith. Moreover, the FAQ provides that if the SBA challenges the economic necessity certification of a borrower with loans in excess of $ 2 million, the SBA will not pursue administrative enforcement or referrals to other agencies if the borrower returns the funds upon notification by SBA. It remains unclear whether the SBA’s position as expressed in this FAQ will preclude actions by other agencies.

There has been much written in the past two weeks about the ambiguity and liability concerns brought about by FAQ 31, which we wrote about in our April 29, 2020 alert A Curveball by the SBA Unsettles the Application Process for the PPP Program. FAQ 46 provides welcome comfort for certain borrowers who were uncertain about whether to return their PPP funds by the May 14* safe harbor date due to questions surrounding the economic necessity certification. While the new FAQ appears to calm some of those concerns for smaller borrowers, its publication only one day before the safe harbor expires comes too late for borrowers who may have already returned funds out of an abundance of caution or a simple inability to assess their position given the ambiguity of the guidance.    

* Several Hours after this article was published, the SBA released FAQ 47, extending the safe harbor date to return loans from May 14, 2020 to May 18, 2020

The text of FAQ 46 appears below:

46. Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates,1 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.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor 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. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked 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. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.2

This article is current as of May 13, 2020 and reflects the state of the relevant laws, regulations, and guidance to that point.  Any subsequently issued, legislation, rules, and guidance by Congress, the United States Treasury, the Small Business Administration and other various government agencies may change the information contained herein.  While this article is meant as a useful resource concerning matters arising under the Paycheck Protection Program, it should not be considered legal advice for any specific situation.

1 For purposes of this safe harbor, a borrower must include its affiliates to the extent required under the interim final rule on affiliates, 85 FR 20817 (April 15, 2020).

2 Question 46 published May 13, 2020