Risk Consideration of Applying for the Paycheck Protection Program (PPP)

Please note that additional updates and extensions have been issued by the SBA. Please see our updated post published on May 15, 2020, and always refer to SBA.gov for the latest information.

Updated May 14, 2020

On May 13, 2020, the SBA updated its FAQ to add #46, which provides safe harbor for PPP loans below $2 million:

46. 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.

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Updated May 6, 2020

This article was originally published on April 28, 2020. Please note that on May 5, 2020, the SBA extended the May 7, 2020 deadline for repayment of loans to May 14, 2020, per the newly added FAQ that reads:

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.

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Last week’s news was riddled with stories of organizations that initially received PPP loans and, amongst a public outcry, returned their loans in full. 

These organizations came under scrutiny as many small businesses did not receive a loan or even have the chance to apply when the initial $349 billion funding of the Small Business Administration’s (SBA) Paycheck Protection Program ran out in less than two weeks. The PPP eligibility of some organizations also came into question, as the program is intended to provide organizations with immediate relief if they believe that the “current economic uncertainty” of the COVID-19 pandemic makes such a loan “necessary to support their current operations”. However, the initial guidance from the SBA did not provide any definition or specifics regarding the nature or extent of the required impact to operations or the current economic uncertainty” that would make a PPP loan request “necessary to support ongoing operations.” 

Organizations that still seek the relief of a PPP loan received some good news when an additional $310 billion of funding for the program was signed by President Trump on Friday, April 24.

Furthermore, additional clarity regarding program qualifications also came last Thursday, April 23, as the SBA updated its Frequently Asked Questions Document, to add FAQ 31*. This FAQ addresses organizations with access to other sources of liquidity to support their ongoing operations. Any organization that received a PPP loan prior to the issuance of this new guidance and that now believes that they do NOT demonstrate the necessity for the loan can repay the loan in full by May 7, 2020. Any organization that does so, will be deemed by the SBA to have made the required good faith certification on their PPP loan application.

As such, we want to make you aware of the potential risks of receiving funds as these loans will be subject to regulatory and public scrutiny. Loan recipients will not remain anonymous; EINs will be made public. We anticipate heightened government scrutiny will be forthcoming to investigate potential fraud and abuse. Organizations that have received PPP loans and are later found to have not qualified under the eligibility rules and/or do not use the funding in accordance with the terms of the program could be subject to significant legal or regulatory consequences. Further, organizations may experience reputational damage for having pursued these loans. 

If you have applied for a PPP loan or are considering doing so, we encourage you, your organization’s management, and board of directors to carefully review your organization’s financial situation and reassess based on new information published by the SBA whether the organization complies and is within the spirit and intent of this economic relief program.

Additionally, should you receive funds, it is critical that you maintain complete and accurate documentation to support, among other things, your eligibility for funding received (if any), the specific use of these funds, as well as your qualifications for forgiveness under the terms of the program. This documentation will be crucial in the event your organization is audited. This defensive documentation will minimize your potential exposure to allegations of fraud and abuse related to your participation in the PPP.

Many of the factors influencing whether you qualify or should apply for these loans are organization-specific; however, the SBA may provide further updates and clarifications. We encourage you to consult with legal counsel if you have questions regarding your organization’s eligibility to receive funds. 

We recognize that these are challenging times for many organizations.  If we can support you and your organization in any way, especially during these coming weeks and months, please contact us

This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.

*From the SBA’s FAQ: #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 “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 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.

Johnson Lambert
Johnson Lambert | Author