PPP Loan Forgiveness Update

Pursuant to the new guidance, “[a]ny 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 in good faith.”

By Bob Barton

Earlier today, the SBA provided new guidance to clarify an area of uncertainty regarding the requisite “good-faith certifications” made by borrowers seeking loans under the Paycheck Protection Program (PPP) of the CARES (Coronavirus Aid, Relief, and Economic Security) Act.

The purpose of the PPP is to provide financial assistance to businesses with fewer than 500 employees to cover specific expenses including payroll, rent, utilities and interest on mortgage obligations over an eight-week period. PPP loans received are eligible for forgiveness, whether in whole or part, depending on the purposes for which the loans are used over the eight-week period. Click here for a full discussion of PPP loan forgiveness rules.

On April 23, 2020, in response to concerns that chunks of the stimulus package were being taken by large enterprises with seemingly adequate capital to withstand the economic crisis, the SBA updated its FAQs to explain that PPP loan applicants must certify, in good faith, that their PPP loan is “necessary” to support the applicant’s ongoing business operations. When making these good-faith certifications, the SBA cautioned that borrowers must “tak[e] 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.” See FAQ No. 31. The full guidance is located in the United States Treasury’s latest update to its Frequently Asked Questions (FAQs) document on the PPP loans.

As an example of the type of business that could not make the requisite certification in good faith, the SBA stated 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, and such a company should be prepared to demonstrate to SBA, on request, the basis for its certification.”

In light of this updated guidance, the SBA explained that any borrower that applied for and received a PPP loan prior to the issuance of this new guidance could repay the loan in full by May 14, 2020 (the “safe harbor deadline”) and be deemed by the SBA to have made the certification in good faith. But for many business owners, this updated guidance actually created more uncertainty, as the terms of the good-faith certification — including “necessary,” “other sources of liquidity,” and “[n]ot significantly detrimental to the business” — are not clearly defined. And for these businesses that, in retrospect, may not be sure whether their circumstances were adequate to support the updated good-faith certification requirements, returning money loaned under the PPP in advance of the safe harbor deadline may be impossible where that money has already been used to fund payroll and other expenses.

Thus, with the safe harbor deadline looming, and in hopes of “promoting economic certainty,” the SBA issued additional guidance today providing that “[a]ny 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 in good faith.” See FAQ No. 46. According to the SBA, “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.” The new safe harbor is also expected to enable the SBA to conserve its limited audit resources to focus its reviews on larger loans.

The SBA clarified, however, that this new safe harbor does not preclude a borrower with a loan greater than $2 million from claiming that it had an adequate basis for making the required good-faith certification “based on [its] individual circumstances in light of the language of the certification and SBA guidance.” These loans will be subject to review by the SBA for compliance with the program requirements as set forth in the PPP Interim Final Rules and in the Borrower Application Form. But if the SBA finds during its review that a borrower lacked an adequate basis for making the required certification, SBA will seek repayment of the borrower’s outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.

While this new safe harbor may come as a sigh of relief to many small businesses, questions regarding how the SBA will interpret its own guidance when analyzing the adequacy of a business’s good-faith certification still abound for those businesses that have obtained loans in excess of the $2 million safe harbor. To this end, the SBA and U.S. Department of the Treasury have indicated that further guidance is forthcoming.

Taylor Porter attorneys continue to closely monitor the developments of the SBA loan programs and the CARES Act. Visit the Taylor Porter Coronavirus – Legal News and Business Resources website for updated legislation, news, and legal developments pertaining to COVID-19.

About Bob Barton: Taylor Porter Managing Partner Bob Barton, practicing law since 1994, represents local and national businesses in matters involving commercial litigation and transactions, regulatory and compliance matters, and general litigation. He is the co-chair of the firm’s Business and Commercial Litigation practice. Bob has been selected for inclusion in both Louisiana Super Lawyers and Best Lawyers in Business Litigation.