Some PPP Borrowers Taking a Closer Look at Good Faith Certification

May 5, 2020 | Kristine A. Tidgren

Update: On May 13, 2020, SBA and Treasury issued additional guidance providing a safe harbor and extending the deadline for returning a loan to May 18.

Update: After this article was posted on May 5, 2020, Treasury issued new FAQ # 43 extending the repayment date for the safe harbor to 5/14/2020. The guidance states, "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." Stay tuned!!

Recent guidance has caused some recipients of Paycheck Protection Program loans to reconsider the certification they made when they signed up for the loan:

“Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This certification is a slight paraphrase of the statute’s good faith certification requirement, “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”

Recent Guidance Prompted Concern

Given the well-documented impact of COVID-19 on the agricultural sector, this certification has not seemed difficult for most producers, no matter their region.[i] A December 2019 ISU study revealed that 44 percent of Iowa producers, for example, were already struggling to cover costs before the new crisis hit.[ii] Even so, recent Treasury guidance, triggered by well-publicized cases of publicly-traded companies receiving large loans, has many taking a closer look at their good faith affirmations.

The heightened scrutiny was prompted by FAQs added to the Treasury’s PPP guidance in the wake of news that large public companies such as Shake Shack and Ruth’s Chris had obtained large PPP loans. The loans were allowed because Congress had stated in the law that the 500 or fewer employee limitation would apply on a location-by-location basis for hospitality companies. Even so, the bad press led the outed companies to immediately repay their loans and others followed suit.

On April 23, the Treasury issued guidance to prevent other large companies from taking loans that had appeared authorized under the law. The guidance provides a “safe harbor,” allowing those who no longer believe they meet the requirements to repay the loan by May 7 to avoid scrutiny (and implied penalties) for their earlier “good faith” certification.

Seemingly directed at “large companies,” this Q & A raised some eyebrows for its stern tone coupled with lack of additional clarity. The Q & A failed to provide any more real detail about the standard for the good faith certification. According to this guidance, to determine whether a loan is “necessary,” borrowers are to take 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.” This must be read in combination with the statutory language waiving the typical SBA loan requirement that a borrower is unable to obtain credit elsewhere. The Q & A asserts that “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.”

On April 28, the Treasury expanded its guidance to apply to “businesses owned by private companies.”


The same day, Treasury Secretary Mnuchin and SBA Administrator Carranza issued a joint statement:

We have noted the large number of companies that have appropriately reevaluated their need for PPP loans and promptly repaid loan funds in response to SBA guidance reminding all borrowers of an important certification required to obtain a PPP loan.  To further ensure PPP loans are limited to eligible borrowers, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.  Regulatory guidance implementing this procedure will be forthcoming.

Audit of Loans Greater than $2 Million

This statement was followed by FAQ # 39 on April 29:

In other words, those borrowers who obtained loans in excess of $2 million will be automatically subject to audit. These borrowers, in particular, must ensure that they have adequately documented their need for the loan (as best they can in light of the ambiguity in the requirements). But, particularly in light of the increased scrutiny, all borrowers should conduct this due diligence.

Possible Penalties

Just what are the penalites? The interim final rule includes an additional certification not included in the text of the law. It is a general certification required of all SBA borrowers:

I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 U.S.C. 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 U.S.C. 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 U.S.C. 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.

These horrific penalties are intended to apply in situations such as applying for a loan with a false identity or fraudulently failing to include affiliates in employee counts. In fact, the Department of Justice is already tracking down and arresting these types of offenders (and it sounds like there could have been many). It is difficult to see, however, how these penalties, or even less onerous civil penalties, could apply to unwitting borrowers later found to have breached subjective, unclear guidelines that proved to be a moving target.

Should Borrowers Be Concerned?

While the required “good faith” certification must be taken seriously and answered honestly, it is not there to prevent small businesses facing limited liquidity, economic uncertainty, and financial detriment caused by COVID-19 from accessing a program intended to help them through this crisis. The agencies' concern has been directed toward large companies that snagged unnecessary loans, thereby depriving borrowers with fewer resources from receiving important aid. Worthy borrowers do not need another hurdle. Borrowers with concerns should discuss this issue with their trusted advisors. The deadline for returning funds without scrutiny is May 7.