Crucial PPP Update Before May 14 Safe Harbor Deadline

Thoughtware Alert May 13, 2020
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The U.S. Small Business Administration (SBA) updated key details of the Paycheck Protection Program (PPP) in advance of the impending May 14, 2020, safe harbor deadline for PPP repayment. 

  • For loans with an original principal amount under $2 million, the SBA created a safe harbor that such borrowers are deemed to have made certification on the necessity of the loan in good faith. 
  • For loans greater than $2 million, if the SBA’s review indicates a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, the SBA will seek repayment and notify the lender that the borrower is ineligible for loan forgiveness. If the borrower repays the loan after receiving this SBA notification, the SBA will not pursue administrative enforcement or referrals to other agencies.
  • A borrower that repays the PPP loan by the May 14 safe harbor deadline will be eligible for the employee retention credit if the employer is otherwise an eligible employer for the purposes of the credit.

The second $310 billion round of PPP funding came with an announcement that the SBA would review all loans in excess of $2 million—in addition to other loans as appropriate—at the time of the borrower’s loan forgiveness application. A FAQ and subsequent interim rule clarified the borrower’s certification as follows:

“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, 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 “current 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 ability to access other sources of liquidity sufficient to support 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.”

On May 13, 2020, a FAQ update clarified the SBA loan review process of a borrower’s good-faith certification concerning the necessity of a loan request.

Any borrower that, together with its affiliates, 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.

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. If the 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, the 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 the SBA, the SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning the necessity of the loan request. The SBA’s determination concerning the certification regarding the necessity of the loan request will not affect the SBA’s loan guarantee.

Some of the sworn certifications required to obtain these loans remain ambiguous. We recommend prospective applicants seek legal counsel with any questions about eligibility for the program or repayment.

While a lending institution may incorrectly approve an ineligible PPP loan application, the borrower bears the ultimate responsibility to demonstrate financial need, eligibility and use of the proceeds.

Conclusion 
While the new SBA guidance provides welcome relief for borrowers with loans under $2 million, there is still considerable uncertainty on what factors the SBA will consider in making its determination on whether loans greater than $2 million meet the adequate basis requirement. BKD will continue to follow this developing situation. As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. Visit BKD’s COVID-19 Resource Center to learn more. If you have questions about these changes, contact your BKD Trusted Advisor™ today.

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