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By: Landon G. Van Winkle

Every borrower that received a loan under the new Paycheck Protection Program certified to the Small Business Administration that the funds were “necessary to support the ongoing operations” of the borrower, but under new SBA guidance, only some borrowers will have to prove it.

In the days and weeks following implementation of the Paycheck Protection Program (the “PPP”), part of the mammoth $3.1 trillion Coronavirus Aid, Relief, and Economic Security Act” or “CARES Act,” Pub. L. No. 116-136 (2020), eligible borrowers scrambled to submit applications to receive a portion of the $349 billion allocated by the CARES Act to the PPP. Loans under the PPP, which were capped at $10 million, provided borrowers with funds to use for covered payroll costs, utilities, rent expenses, and principal on mortgage obligations. While the initial rush to get a piece of the pie has subsided (in part thanks to a second round of funding for PPP loans), borrowers who received a PPP Loan are now faced with a new uncertainty: Will my PPP Loan be forgiven?

In the weeks following the implementation of the PPP, news outlets reported on the public and political outcry over publicly traded companies with purportedly strong cash positions which had received PPP loans for the maximum amount, $10 million. While many of these recipients opted to return the funds to the Small Business Administration (“SBA”), the perceived abuse highlighted a shortcoming in the rollout and implementation of the PPP as a whole: the SBA rushed to promulgate final regulations implementing the PPP, and its initial rulemaking efforts were focused on getting the money out the door, not on the finer details of whether the loans would ultimately be eligible for forgiveness.

Every borrower receiving a PPP Loan was required to certify, in good faith and as part of the application process, that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Unfortunately, the terms “economic uncertainty” and “necessary” were not defined by the CARES Act or implementing regulations promulgated by the SBA, leaving many borrowers concerned that they could face investigation by the SBA or even referral to other enforcement agencies if they were determined to have made this certification without an adequate basis. This concern was escalated on May 8, 2020, when the SBA announced a safe harbor date of May 14, 2020, promising borrowers that they would be deemed to have made the “necessary to support ongoing operations” certification in good faith if they returned their PPP funds before that date. On May 13, 2020, the SBA updated its Frequently Asked Questions (“FAQs”) document for the PPP, which extended this “safe harbor” deadline to May 18, 2020. The full FAQs document is available here.

More importantly, however, for the vast majority of the borrowers under the PPP, the FAQs also clarified that any borrower which, together with its affiliates, received PPP loans with an original principal amount of less than $2 million would be “deemed to have made the required certification concerning the necessity of the loan request in good faith.” On the other hand, borrowers which received more than $2 million in PPP funds 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.” FAQs No. 46.

This clarification is sure to bring a sigh of relief to many small businesses concerned by their prospects of qualifying for PPP loan forgiveness. Of course, being deemed to have made the “necessity” certification in good faith is necessary, but not sufficient, to qualify for forgiveness of all or part of a PPP loan—the borrower must also ensure the funds are used for covered expenses and spent within the covered period. We previously reviewed the general PPP loan forgiveness guidelines here.

The SBA has justified this approach based on its conclusion that “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.” FAQs No. 46. Additionally, the SBA notes that this approach will “promote economic certainty” and “enable SBA to conserve its finite audit resources and focus its reviews on larger loans . . . .” Id. Indeed, had the SBA sought to audit every PPP borrower, it would have faced a herculean task, which is borne out by the numbers now available from the SBA on the number and amounts of PPP loans approved through May 8, 2020, which exceed 4.2 million loans.

The numbers set forth on the table below have been compiled from data published by the SBA for the first round and second round of the PPP loan program:

PPP Loans Approved Through May 8, 2020, by Loan Amount
  Total Loans Loan Amount (in USD)
  >$5M $2M – $5M $1M – $2M $150K – $1M <$150K
Round 1 1,661,367 4,412 21,566 41,238 364,258 1,229,893
Round 2 2,571,167 1,548 6,352 14,130 209,248 2,339,889
 Total 4,232,534 5,960 27,918 55,368 573,506 3,569,782

Round 1 covers loans from the inception of the PPP through April 16, 2020. Round 2 covers loans from April 27, 2020 through May 8, 2020.

As illustrated above, of the 4,232,534 PPP loans approved through May 8, 2020, only 33,878 were for amounts in excess of $2 million, or approximately eight-tenths of one percent (0.8%) of all PPP loans. On the other hand, PPP loans for $150,000 or less constituted over eighty-four percent (84%) of all PPP loans issued during the same period.

By limiting its administrative review to loans in excess of $2 million, the SBA appears to have given a pass, at least for now, to 99% of borrowers under the PPP (at least with respect to the “necessity” certification). Of course, this does not mean that the SBA will not institute spot check reviews of smaller loans for compliance with other PPP requirements, nor does it provide a panacea for borrowers concerned with whether their PPP loans will ultimately be forgiven. It does, however, provide most borrowers with some much-needed clarity on a program certification that has been plagued by uncertainty.

This article provides general information only; it is not intended to provide legal advice and should not be relied upon as such. Transmission of this article does not create, nor is it intended to create, an attorney-client relationship. You should consult with a licensed attorney before taking any action in reliance on information provided in this article.

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