By: Scott Borsack
Less than an hour ago the SBA released “guidance” on the eligibility issue. Originally borrowers were given until May 7, 2020 to satisfy themselves that they met the standard that “current economic uncertainly makes this loan request necessary to support current operations…” SBA then extended the deadline to return funds with no questions asked to May 14, 2020, which is tomorrow and proposed to provide further guidance. The further guidance however is good news and bad news. First, the good. If your loan, together with the loans of affiliated entities, is under $2 million you will be presumed to have met the standard. SBA says that they cannot possibly audit everyone. As for those over $2 million there is no further guidance. But what the SBA did provide is that there will be no penalty for keeping the loan and if SBA determines that the borrower was not eligible, the loan will have to be repaid and there will be no forgiveness. If the loan is repaid there will be no administrative enforcement or referrals to other agencies. So no penalties for retaining the funds that should not have been loaned in the first place, in the opinion of the SBA.
The new guidance 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,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. (emphasis added)
Stay tuned. More to follow.
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Scott Borsack is a partner with Szaferman Lakind and chair of the Business Department. To contact Scott please email him at firstname.lastname@example.org or call 609.275.0400.