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Important Update: SBA Eases Certification Requirements for PPP Loan
In a welcome move, the Small Business Administration ("SBA") issued a new FAQ protecting a borrower under a Paycheck Protection Program (“PPP”) loan from draconian government enforcement if the SBA finds the borrower’s “necessary” certification to be invalid after loan review.
On its PPP loan application, a Paycheck Protection Program (“PPP”) loan applicant must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” (the “Necessary Certification”). In a series of administrative pronouncements over the past several weeks, the Small Business Administration (“SBA”) has progressively raised the evidentiary bar for a properly made Necessary Certification. Given its retroactive effect, the additional guidance allows a borrower to repay a PPP loan without penalty by May 14 (Q&A-43) if the borrower determines that it can no longer sustain its Necessary Certification in light of the raised bar. Since the additional guidance came out, many PPP loan borrowers have agonized over whether they should keep their PPP loans or repay them by May 14 to avoid potentially draconian civil and criminal penalties.
In another major course correction, the SBA added new Q&A-46 to its constantly evolving FAQs, providing substantial relief on the Necessary Certification:
- If a borrower and its affiliates have PPP loans with an original aggregate principal amount of less than $2 million (the “Principal Cap”), the borrower is deemed automatically to have made the Necessary Certification in good faith.
- If a borrower and its affiliates exceed the Principal Cap and the SBA determines upon its loan review (as part of the forgiveness process) the borrower’s Necessary Certification is invalid, the SBA will require repayment of the PPP loan but only after the SBA’s notification to the borrower upon completion of the loan review.
- If a borrower promptly repays its PPP loan in accordance with point 2, the SBA will not pursue administrative enforcement or referrals to other agencies, implying that no federal agency will take any additional criminal or civil action (other than loan repayment).
So, in light of new Q&A-46, the May 14 repayment date (under Q&A-43) is a dead letter for purposes of the Necessary Certification (although May 14 remains relevant for borrowers that want to repay a PPP loan and instead claim the employee retention tax credit). A borrower with a PPP loan over the Principal Cap can wait until the SBA’s loan review to see if it has made a proper Necessary Certification. And then, upon notification from the SBA, the borrower can repay the PPP loan without concern about any potential federal government action for fraud or other wrongdoing. However, it is not clear if and to what extent repayment of a PPP loan in accordance with new Q&A-46 protects a borrower against a whistleblower or similar action by a private person, even if the borrower does not exceed the Principal Cap.
In applying new Q&A-46, borrowers should keep a couple of points in mind. Because the Principal Cap applies to the original principal amount, borrowers cannot partially repay a PPP loan and shrink under the Principal Cap. In addition, borrowers benefiting from loosened affiliation rules under the CARES Act (e.g., businesses that fall within NAICS Code 72) can take advantage of the loosened affiliation rules in calculating the Principal Cap.
Olshan lawyers from multiple practice groups are working together with clients to address COVID‑19-related matters, including the CARES Act stimulus programs (i.e., the PPP and EIDL) and other corporate matters, including contractual analysis and financing, tax, restructuring, employee benefits and employment practices, insurance coverage, and litigation. Click here to access additional materials addressing issues raised by COVID‑19.
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