UPDATE: Late on May 13, 2020 the SBA added Question 47 to its FAQs which extends the deadline to pay back the PPP loan to May 18, 2020.
47. Question: An SBA interim final rule posted on May 8, 2020 provided that any borrower who applied for a PPP loan and repays the loan in full by May 14, 2020 will be deemed by SBA to have made the required certification concerning the necessity of the loan request in good faith. Is it possible for a borrower to obtain an extension of the May 14, 2020 repayment date?
Answer: Yes, SBA is extending the repayment date for this safe harbor to May 18, 2020, to give borrowers an opportunity to review and consider FAQ #46. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor.
UPDATE: On May 13, 2020 the SBA issued revised FAQs to provide guidance on the needs certification. Importantly, the deadline of May 14, 2020 has not changed, but affiliated borrowers with loans of less than $2 million are deemed to have made the certification in good faith. Also, for loans of $2 million or more, the SBA will not pursue administrative enforcement or referrals to other agencies if it later determines the certification was not met.
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,20 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.
20 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).
UPDATE: On May 5, 2020 the SBA added Question 43 to its FAQs. Importantly, this extends the safe harbor relating to the needs certification to May 14, 2020.
43. Question: FAQ #31 reminded borrowers to review carefully the required certification on the Borrower Application Form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. Is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date?
Answer: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
ORIGINAL ADVISORY: April 23, 2020
Following extensive publicity regarding large or publicly-traded businesses that have received loans under the Paycheck Protection Program (PPP), on April 23, 2020 the SBA added a new question and answer to its Frequently Asked Questions relating to the PPP. Recipients of PPP funds should carefully review the newly-added Question 31 as detailed below.
31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.
Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
The answer applies to all borrowers. Even though the example applies to public companies, all borrowers are required to take into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.
We expect that the forgiveness portion of the loan will include an audit of the loan amount, eligibility and now necessity for the loan. It is unclear how the SBA will interpret “access to other sources of liquidity” and “not significantly detrimental to the business.” Taking an aggressive position, the SBA could interpret these terms to require borrowers to draw on lines of credit or obtain funds from liquid parents before applying for a PPP.
Importantly, Question 31 allows a borrower that has obtained a PPP loan prior to today’s date to repay the loan by May 7, 2020.
Please contact your Varnum attorney if you have questions on how this new guidance impacts your business.
Additional PPP Advisories
SBA Issues Final Rules for PPP Loan Forgiveness and Loan Review Procedures
Public Finance Advisory, May 27, 2020
SBA Issues PPP Forgiveness Application and New Interim Rule on Eligibility
Public Finance Advisory, May 18, 2020
SBA Issues Interim Rules on and Final Application for the $349 Billion Paycheck Protection Program
Public Finance Advisory, April 3, 2020
Paycheck Protection Program, a SBA Loan Program Expanded in CARES ACT
Public Finance Advisory, March 27, 2020