Article written by:
Rebekah Smith, CPA, CVA, MAFF, CFF

Director of Forensic & Dispute Advisory Services

Article originally published May 13, 2020
Last updated May 14, 2020 

Note: After the publication of this article, on May 13, 2020, the Small Business Administration issued FAQ #47 which extended the safe harbor deadline to May 18, 2020. We have updated this article accordingly. 

After media coverage of the first round of Paycheck Protection Program (PPP) loans identified several public companies receiving PPP loans, the Treasury issued Frequently Asked Questions (FAQ) #31 and #37 regarding which companies qualify for PPP loans (see GBQ’s analysis of FAQs #31 and #37 here). Treasury also indicated that PPP borrowers have until May 18, 2020, to return their loan proceeds without penalty if the company decided it could not certify in good faith that the PPP loan was “necessary” and promised additional guidance on this topic before May 18, 2020.

This morning, that additional guidance arrived in the form of FAQ #46 that asks, “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”  The answer depends on the size of the loan.

For borrowers of less than $2 million the answer to FAQ #46 states (emphasis added):

“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.”

In other words, loans of less than $2 million are deemed to be “necessary to support the ongoing operations” of the business as the certification required. We interpret this answer to mean recipients of loans less than $2 million do not need to return their loans because of concerns regarding their certification.

For borrowers of more than $2 million (it is not clear from the way the rule is written which rule applies to loans of exactly $2 million) the answer to FAQ #46 states (emphasis added):

“…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.”

This guidance does not seem to change much for these borrowers – they will still have to provide an “adequate basis” for their certification. It is our view that these borrowers would be wise to develop and document their “adequate basis,” including by taking the potential steps we described in our previous article on this issue.

But there is some good news for these businesses, too, in the form of reduced consequences for failing to prove the “necessity” of their PPP loan. FAQ #46 goes on to state (emphasis added):

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 the necessity of the loan request.”

While the borrower will not receive forgiveness and will have to re-pay the loan, the potential exposure to other penalties – such as those for violating the False Claims Act – appears to have been eliminated by this additional guidance.

If you have questions, please reach out to your GBQ advisor or attorney on how best to approach your PPP loan certification.

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