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Breaking news: SBA issues guidance on Paycheck Protection Program eligibility and forgiveness

The Small Business Administration (SBA) issued additional guidance today that addresses several significant questions and concerns over Paycheck Protection Program (PPP) eligibility and forgiveness. The SBA released an updated frequently asked questions (FAQ) list, May 13, 2020, adding question 46.

“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, 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.”

In short, the SBA states that for loans of $2 million or less, the borrower certification will be deemed to have been made in good faith. The guidance also suggests that potential audit and review processes will be reserved for loans over the $2 million threshold. For those borrowers who borrowed over $2 million, the loans may be subject to review, and if the SBA determines that the borrower “lacked adequate basis for the certification,” the loan will not be forgivable; it must be paid back. If the loan proceeds are paid back, the SBA “will not pursue administrative enforcement or referrals to other agencies.” In other words, we interpret this to state that the penalty for a lack of “necessity” will be to pay the money back. As long as that is done, there would be no other action taken by the SBA.  

We believe that this additional guidance, while not entirely comprehensive, helps ease the most common issues raised by both borrowers and lenders (the SBA guarantee stands regardless of the “necessity” determination).

We will continue to monitor issues regarding the May 14, 2020, date to return the PPP loan. If you need further assistance or wish to discuss specific issues related to the PPP, please feel free to reach out to any Chuhak & Tecson attorney. 

Client alert authored by Francisco E. Connell (312) 201 3403, Principal and Banking group leader. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.
Chuhak & Tecson's attorneys, paralegals and staff remain committed to staying at the forefront of changes in the law and contributing to the success of our clients and colleagues.

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