SBA Issues FAQ Guidance on Good-Faith Certifications

Brings Relief from Anxiety for Many PPP Borrowers

May 13, 2020

Mike Batts, CPA

 

Today, the Small Business Administration (SBA) issued new guidance related to Paycheck Protection Program (PPP) loans in the form of a new FAQ (FAQ #46).  The new guidance, which addresses how the SBA will review borrowers’ good-faith certifications concerning the necessity of their loan request, will serve as a source of great relief for many PPP borrowers.

First, the guidance provides the following new safe harbor:  “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.”

Additionally, the guidance states that the SBA will review loans greater than $2 million…and while loans of that size may not qualify for the new safe harbor, such borrowers “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.”

Perhaps most notably, the guidance addresses the course of action that will apply if the SBA reviews a loan and determines that the borrower lacked an adequate basis for the required certification.   In such cases, the guidance states that the 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.”

This new guidance should allay the concerns of PPP borrowers who were unsure about both the standards the SBA would use for reviewing the basis for an organization’s good-faith certification about loan necessity as well as the repercussions of a finding by the SBA that a borrower’s certification was unacceptable.  In previous public commentary and guidance, the SBA and Treasury officials have alluded to the possibility of penalties and even criminal prosecution.

While the new FAQ sheds no new light on the standards the SBA will use to review certifications for loans in excess of $2 million, it does state that the repercussions of failing to meet the standards will consist of having to repay the loan (i.e., not being eligible for forgiveness).  The guidance includes assurance that the SBA will not pursue “administrative enforcement or referrals to other agencies” in such cases, presumably meaning, among other things, that such borrowers will not be referred for criminal prosecution.

Some borrowers have previously returned their PPP loan funds out of concern about the uncertainty surrounding the SBA’s previously issued guidance and statements on the issues addressed in this new FAQ.  It is likely that some of those borrowers will regret having done so prior to the safe harbor dates previously set by the SBA (May 7, then extended to May 14).  It is unclear whether a borrower who returned loan funds may reapply for a PPP loan or otherwise attempt to reacquire PPP loan funds.

We still await guidance on the many unanswered questions surrounding the loan forgiveness process, and we remain hopeful that it will be issued soon.

A complete copy of the new FAQ related to good-faith certifications is provided below (without footnote references).  For the full FAQ document, click here.

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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