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SBA FAQ Addresses “Good Faith Certification” by PPP Loan Applicants

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On April 23, 2020, the U.S. Small Business Administration (“SBA”) added a new Question/Answer to their Frequently Asked Questions (FAQs) about the Paycheck Protection Program (“PPP”). This document is intended to provide timely additional guidance to address questions from borrowers and lenders. This is the 31st FAQ added to this list of questions/answers, and it provides significant new guidance for borrowers, specifically businesses with other adequate sources of financing, who have applied for, or have already been approved for a PPP loan.

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.

This FAQ comes at a time when there has been number of news reports and debate about large and/or publicly-traded companies receiving PPP loans even though they have the ability to access other sources of liquidity or have access to capital markets. Several large restaurant chains have even reportedly returned or paid back their PPP loans due to public pressure. Prior to this, borrowers applying for PPP loans had to make a “good faith certification” that the loan was necessary – that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Now, in addition to assessing their current business activity, borrowers should take into account their ability to access other sources of liquidity (i.e., cash in bank accounts, short-term funds, managing cash flow, investments, loans) that can be used to support ongoing operations, in a manner that does significantly affect the business.

The SBA also indicates that any borrower that applied for, and received a PPP loan prior to the issuance of this guidance, that then repays the loan in full by May 7, 2020, will be deemed to have made the above certification in good faith. Essentially, SBA is giving businesses the opportunity to reconsider whether their loan request was necessary, given their ability to access other sources of liquidity, before they require the business to provide information documenting their “good faith certification” regarding their need for these funds.

During an interview that aired on Fox Business Network last week, U.S Treasury Secretary Mnuchin warned that companies that received relief funds intended for small businesses could be investigated if it appears they did not really need the money. Mnuchin said it was “questionable” whether some larger companies qualified for the Paycheck Protection Program, based on a self-certification step in the loan process. He said businesses need to look carefully at their applications to be sure they can certify that the forgivable loans of up to $10 million are necessary. He is additionally quoted saying: “I think a lot of these big companies, it’s questionable whether they can make that certification; I think they should review it.” Companies that apply and later decide they cannot certify their need for funds should “pay back the money quickly,” Mnuchin said. “There will be no liability to Treasury and the SBA. … If they don’t, then they could be subject to investigation.”

[su_youtube url=”https://www.youtube.com/watch?v=jlhvNywTvLk” width=”500″ height=”300″ title=”US Treasury Secretary Mnuchin on Small Business Funding”]

According to SBA’s report on loan approvals through April 16, 2020, there were 4,412 loans approved, where the size of the loan was in excess of $5 million. The overall average PPP loan size is $206,000 according to this report. One can assume that SBA will start with reviews of these high-dollar loans to determine if the borrower can make the required certification about needing the loan.

To further clarify their position on certification, SBA issued the following guidance about a “Limited Safe Harbor with Respect to Certification Concerning Need for PPP Loan Request” in their latest Interim Final Rule on Requirements for Promissory Notes, Authorizations, Affiliation, and Eligibility posted on April 24, 2020.

Consistent with section 1102 of the CARES Act, the Borrower Application Form requires PPP applicants to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Any borrower that applied for a PPP loan prior to the issuance of this regulation 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 Administrator, in consultation with the Secretary, determined that this safe harbor is necessary and appropriate to ensure that borrowers promptly repay PPP loan funds that the borrower obtained based on a misunderstanding or misapplication of the required certification standard.

If businesses have access to other sources of liquidity or capital markets, they should reconsider whether their PPP loan is critical to supporting their ongoing operations, given that the U.S Treasury and SBA may review whether they made the required certification in good faith. Based on quotes from the U.S. Treasury Secretary and the new guidance issued by SBA, businesses may need to repay their loan in full, prior to May 7, 2020 if they cannot make this certification, to avoid a possible investigation or other repercussions. Businesses should consider these new provisions before applying for a PPP loan when the next round of applications can start to be submitted on Monday, April 27, 2020, as these eligibility changes have clearly been made to ensure that actual small businesses have the opportunity to access these loans.

UPDATES

SBA has added a number of new Question/Answers to their Frequently Asked Questions about the PPP that are related to FAQ #31.

37. Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: See response to FAQ #31

39. Question: Will SBA review individual PPP loan files?

Answer: Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming.
The outcome of SBA’s review of loan files will not affect SBA’s guarantee of any loan for which the lender complied with the lender obligations set forth in paragraphs III.3.b(i)-(iii) of the Paycheck Protection Program Rule (April 2, 2020) and further explained in FAQ #1.

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.

45. Question: Is an employer that repays its PPP loan by the safe harbor deadline (May 14, 2020) eligible for the Employee Retention Credit?

Answer: Yes. An employer that applied for a PPP loan, received payment, and repays the loan by the safe harbor deadline (May 14, 2020) will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit if the employer is otherwise an eligible employer for purposes of the credit.

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For additional information on the Paycheck Protection Program, as well as other Federal, state and local relief measures, please visit our COVID-19 Resource Center on our website. If you have any questions, please contact your Tronconi Segarra & Associates advisor or a member of our response team at covid19team@tsacpa.com