Safe Harbor for PPP Good Faith Certifications is Good News for Borrowers

Update: Late on May 13, Treasury extended the deadline for repaying a PPP loan without review from May 14 to May 18.

On May 13, 2020, the Treasury and the SBA issued Q & A # 46, addressing their procedures for reviewing Paycheck Protection Program borrowers' good faith certifications. It's good news for borrowers and should alleviate much undue stress prior statements had imposed upon many conscientious borrowers suddenly questioning their worthiness for the loan.

The guidance, reprinted in full below, states that borrowers receiving PPP loans with a principal amount of less than $2 million will be deemed to have made the required certification in good faith. This, the agencies determined, was appropriate because borrowers of loans this size are less likely to have access to "adequate sources of liquidity in the current economic environment." The agencies also state that the safe harbor will promote economic certainty and encourage these employers to retain and rehire employees (which was, after all, the intent of the whole program). The agencies state that the safe harbor will also enable the SBA to conserve its limited audit resources to review larger loans, where compliance efforts will yield bigger returns.

As for the audits of larger loans, the guidance also clarifies that "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." In other words, the agencies appear to have realized that their prior statements scared away many of the very borrowers the law was intended to assist. Although loans greater than $2 million (and others "as appropriate") will be reviewed by SBA, the guidance is not heavy handed with respect to the consequences of loans determined to lack an "adequate basis."

If upon audit the SBA determines that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, the guidance states that 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. Furthermore, the determination will not affect the SBA’s loan guarantee.

Although helpful to many, this guidance provides little consolation to those who unnecessarily returned their loans.

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.