Clarification of the new SBA FAQ about PPP loan forgiveness

On May 13, the Small Business Administration (SBA) issued a new 17-page Frequently Asked Question (FAQ) document about the Paycheck Protection Program (PPP). This FAQ item dealing with loan forgiveness can be found as item 46 (page 16) at https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf, as follows:

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, 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.

Jeffrey W. King, the legal counsel for the World Floor Covering Association, clarified the meaning in this FAQ.

He said, “The SBA issued new Frequent Asked Questions (FAQs) today, which are designed to provide guidance on the PPP loan. The new FAQs include the quoted language in the email. This does not mean a PPP  loan under $2 million will automatically be forgiven. Rather, the borrower must still meet the three requirements (75% on payroll costs, same average number of FTEs, and same pay within 25%).  

“This new FAQ (No# 46) addresses the requirement that the borrower certify that the ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,'” he said. “The SBA has previously provided (FAQ item # 31) that to satisfy this certification, a borrower had to show that it did not have the ‘ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.’ If a borrower cannot meet that requirement, it must pay back the full loan amount must be paid back with none of it forgiven. The new FAQ #46 means that for loans under $2 million the certification will be deemed to be made in good faith and these smaller borrowers will not have to show it did not have access to other funds such as a line of credit. 

“The SBA has previously announced that all PPP loans of $2 million or more will automatically be audited, including proof that it needed the loan and did not have ‘other sources of liquidity,’” he concluded. “Loans under $2 million will be subject random audits to prove how they spent the load proceeds and whether they can show they met the three standards to have the loan forgiven. Under the new FQA, they will not have to show they had access to other funds. “