SBA Provides Safe Harbor for Paycheck Protection Program Loans Less Than $2 Million

When a borrower applies for a Paycheck Protection Program (PPP) loan, they are required to certify in good faith that current economic uncertainty makes the loan request necessary to support ongoing business operations. There was significant public outcry when several high-profile companies, such as Shake Shack and Ruth’s Chris Steakhouse, received PPP loans. In response, the Small Business Administration (SBA) indicated that it may audit PPP loan recipients to ensure the ‘necessity certification’ was accurate and the loan was actually necessary.

This statement caused considerable concern among millions of small businesses who fear an audit by the SBA to prove the loan was, in fact, necessary.On May 13, the SBA and the Treasury Department released an updated FAQ addressing how the SBA will review the required certifications required for the Paycheck Protection Program loans, and provided a ‘safe harbor’ for PPP loans less than $2 million dollars.

Specifically, question 46 explains that any borrower (together with its affiliates) that has received a PPP loan of $2 million or less “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” As a result, PPP borrowers with loans less than this amount will not be subject to audits based on the certification of the necessity of the loan. Borrowers will still have to be eligible for the PPP loan by meeting the definition of being a small business, meaning 500 or less employees or as defined by the SBA NAICS size standard.

This move allows the SBA to focus its ‘finite audit resources’ on loans larger than $2 million. It is believed that fewer borrowers actually fulfilled the loan necessity certification when loan totals were above this amount. The SBA noted that borrowers receiving loans of more than $2 million may still have an adequate basis for making the required certification based on the borrower’s “individual circumstances.” However, pursuant to prior rules and regulations released by the SBA, all PPP loans of more than $2 million will be audited.

It is likely that the SBA may take action against any borrower it determines lacked an adequate basis for the certification of necessity for a PPP loan. If it makes such a determination, the SBA will seek repayment of the PPP loan balance and inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the PPP loan upon receiving such notification, the SBA indicated that it will not pursue “administrative enforcement or referrals to other agencies.” This could limit legal exposure of the borrower. However, it is not clear how this statement affects enforcement of other laws, including the False Claims Act, that a borrower is subject to per the PPP loan application.

The necessity certification was just one of two major pieces of guidance that borrowers were seeking. The second piece is the ‘forgiveness’ of the loans. The initial rounds of PPP loans will be expiring in late May, and it is likely the SBA will issue guidance regarding the forgiveness of these loans prior to the end of the month. As a reminder, the PPP loans were an 8-week loan intended to provide working capital to small businesses so that they can keep paying their employees during the economic shutdown. The loan was to be forgiven if it was spent on authorized uses. For example, the 75/25 rule required that at least 75% of the PPP loan must be used for payroll costs, and 25% or less may be used for other authorized purposes, such as rent and utilities. At the end of the 8-week period, the borrower must submit a request to its lender to request forgiveness of the loan, and include documents that verify the number of employees on the payroll, as well as payments on eligible mortgage, lease and utility obligations. Upon receipt, the bank then has up to 60 days to make a decision regarding forgiveness of the loan. However, neither the SBA or Treasury has provided specific guidance on the application process as of May 14. Clarification on the loan forgiveness is expected to be provided soon by the SBA.